IBM and the Holocaust (32 page)

For IBM, the question was not how deeply Dehomag would control all Hollerith activity in Czechoslovakia, but once again, who would share in the profit. In the first days of 1939, after Germany's takeover of the Sudetenland, and at the height of the Reich's threats to take over the rest of Czechoslovakia, IBM worried about the bonus question with Heidinger, Rottke, and Hummel.

On January 11, 1939, Watson's personal emissary, Harrison Chauncey, drafted a letter for European Manager Holt in Geneva, reviewing how the oral arrangement with Dehomag for "new territories" might work once Czechoslovakia was included. So there was no mistake, Chauncey recited the language from the oral arrangement. " 'In case the IBM should voluntarily transfer the working of territories outside of Germany to the Dehomag,' " Chauncey quoted, " 'we also agree that, upon the request of the IBM, we can be totally or partly excluded from the results of the business transactions . . . as they have been agreed upon in the form of a bonus in the loan agreements.' "
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Then Chauncey posited the question: "In the case of Austria and Czechoslovakia, should determination be made whether or not at this time as to whether Rottke and Hummel should receive the benefits from any business within these two countries."
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In an effort to create deniability about the decision, Chauncey added, "under present circumstances it might be unwise for the IBM to make the determination." Written by hand, the sentence appended, "but Dehomag should when time is proper." Thus, IBM NY could claim that Czech activity was undertaken at Dehomag's sole decision—even though no such activity could take place without Watson's permission.
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Addressing the time constraints, Chauncey wrote, "You might consider whether Dehomag should have an understanding immediately, because, of course, there will also be involved a transfer of the assets in Austria and Czechoslovakia."
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Chauncey's letter did not refer to "the Sudetenland," which had already been swept into the Reich, but "
Czechoslovakia
"; although Czechoslovakia was being daily threatened with forcible annexation, Germany was still weeks away from its invasion.

A senior IBM executive, John G. Phillips, scribbled on the draft, "have Chauncey see me." On January 17, 1939, the heavily edited letter to Holt was formally typed on letterhead and again submitted to senior executives for review. Still maintaining deniability, the revised version suggested, "Under present circumstances, we wonder whether it would be unwise for IBM to make the determination relating to territory and products. We might consider whether it would be more proper to have Rottke and Hummel write Dehomag setting forth substantially the same thing as in the letter to Mr. Gubelman. . . . You might consider whether Dehomag should have an understanding immediately, because, of course, there will also be involved a transfer of the assets in Austria and Czechoslovakia."
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But Chauncey's letter still seemed too sensitive for senior IBM executives. Newspaper headlines and newsreels were blasting Germany daily for the Czech situation. After ten days, the letter was still not approved, and finally on January 27, Chauncey was instructed by Phillips, "suggest we hold on this for the present."
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Dehomag lost no time in proceeding in Czechoslovakia—with or without settling the question of bonuses for Czech activity. But even if Rottke and Hummel were willing to wait for a decision on bonuses, Heidinger was not. As Germany prepared to launch an invasion against Czechoslovakia, Heidinger unleashed his own battle plan to secure a share in the profit the IBM organization expected in newly conquered territories.

GERMANY WAS
facing economic collapse and began clamping down on taxpayers and profiteers. Watson had refused to declare a profit since 1934, despite record multi-million mark earnings. Tax authorities reviewed RM 180,000 in IBM advances and loans to Heidinger in lieu of actual profit dividends. Heidinger's money was declared a bonus no matter how it was disguised—and he was ordered to pay RM 90,000 in taxes. On January 20, 1938, Heidinger wrote to IBM's Holt in Geneva complaining that no matter what IBM called it, "The German government considers it as a dividend and I have to pay the [income] taxes." The levy was in addition to his normal income taxes. "That is impossible for me," he conceded. "I would have to burden my properties with a mortgage or to change my standard of life."
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Heidinger offered IBM an ultimatum: either declare a bona fide profit and pay a dividend for prior years that would net him RM 250,000—or he would exercise an option requiring IBM to buy back his shares in the company. For now, he was offering just one of his ten shares. He would still retain 9 percent. "Find out which . . . Mr. Watson would prefer," Heidinger asked.
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Alarms went off in Geneva, Paris, and New York. IBM had no objection to a stock buy-back. But everyone understood that if Heidinger reduced his holdings below 10 percent that might cause Nazi authorities to re-examine the Aryan nature of Dehomag. The company could lose the ability to use
"Deutsche"
in its name, and might even be taken over by
kommissars.
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Moreover, in Germany's current state of war preparedness, punch card technology overseers in the Ministry of War could even decree a takeover.

Letters flew across the Atlantic as IBM tried to plan its next move. IBM's Geneva Controller J. C. Milner coolly informed Rottke that the company had no difficulty declaring a dividend, but German law limited such distributions to 6 or 8 percent—and that amount would not be much more than monies already advanced. As for Heidinger selling back his stock, Milner curtly wrote, "we can take no decision on this." Rottke wrote back, encouraging New York to pay Heidinger. Stalling for time, Milner replied, "it will not be possible to come to a final decision . . . until such time as I receive a reply from Head Office."
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Rottke's reply was explicit: "I would gather . . . the IBM does not wish to purchase this interest [Heidinger's stock] . . . inasmuch as a change of German interests into foreign hands would be a disadvantage at the present time. However, something will have to be done, because Heidinger needs money and can or will obtain it by other means; nobody will be able to legally prevent him from selling."
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Throughout spring 1938, more letters, conferences, and debates streamed between IBM offices on both sides of the ocean. Watson personally called for written recommendations and proposed agreements from special advisors, accountants, and attorneys both in and out of Germany. In some cases, one translation wasn't enough for Watson. The whole dispute was all coming at a difficult time in view of Dehomag's expansion plans. Austria had just been annexed, and Germany was openly planning the takeover of Czecho slovakia. Even as Watson was battling Heidinger's demand for bonuses, he was cautiously negotiating the nature and bonuses of Dehomag's expansion into "new territories," such as Austria and Czechoslovakia.
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Watson compromised—in a way. With his consent, Dehomag adopted a shareholder resolution for "an eventual dividend to be declared for the years 1935, 1936 and 1937." When it was, Heidinger would be paid his long awaited bonus, less all his advances, of course. In the meantime, Watson's many outside advisors would provide the written opinions about how much profit was legally permissible to declare under existing German law without incurring confiscatory taxes and mandatory loans to the Reich. To assuage a nervous Heidinger, Watson agreed to provide yet more advances, RM 7,000 monthly for the remainder of 1938.
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But Heidinger was impatient. While he had appealed the tax decision, he did not expect to prevail. Soon, Heidinger would have to pay a huge assessment. Dehomag's books reflected one multi-million mark record after another—1938 alone would yield RM 2.39 million in conceded profits even after IBM applied various intra-company devices.
¹⁰⁸
Yet Watson still delayed any decision on declaring a profit.

Finally, in late November 1938, just days after
Kristallnacht,
a furious exchange of correspondence between New York and Berlin escalated into a stubborn standoff over dividing the money.

The squabbling culminated with Heidinger implying that Watson was involved in defrauding the Reich tax authorities. In a long, rambling and sarcastic five-page letter to one of Watson's Berlin attorneys, Heidinger openly conceded his stock was a sham. Referring to his so-called "preferred shares in Dehomag," Heidinger declared, "My company shares are no real preferred shares, if for instance the Tabulating Division would yield no net profit, while the remaining divisions would earn a net profit of say five percent, on my shares, I would not obtain anything and the remaining five percent are therefore not preferred in that case but disadvantaged."
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Heidinger's letter repeatedly insisted the bogus share arrangement might be viewed by the authorities as a scheme "flatly to evade paragraph 3 of the law." He invoked strong words, uncharacteristic of IBM's usual ambiguity. At one point, he referred to "a tax liability evaded by abnormal measures." The word "evade" was used repeatedly, as in "tax evasion." Heidinger even added an unsubtle hint of criminality, writing, "But by no means must we expose the Dehomag to the risk of a penal prosecution." As was his style, he flamboyantly concluded his pejorative missive "with renewed hearty thanks."
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Watson sought help from Price Waterhouse. But the prestigious accountancy firm could only conclude Dehomag's finances were in supremely profitable condition and that Heidinger deserved his bonus. In its lengthy thirteen-page single-spaced analysis, dated December 30, 1938, Price Waterhouse declared: the only question is when and how much to pay Heidinger. Moreover, warned Price Waterhouse, if Heidinger insisted on selling his shares, the value of that stock—real or not—was far greater than when the original merger took place in 1934. Using rigid principles of valuation, Price Waterhouse examined the pluses and minuses of the German political and tax environment, and the problem of blocked bank accounts. The firm concluded that each share of Dehomag was actually "worth more to a purchaser in Germany, than to a resident abroad." The report underlined the words "in Germany."
¹¹¹
For Watson, this meant that his shares were now actually less valuable than Heidinger's.

Indeed, Price Waterhouse asserted, Dehomag by any measure had only become more valuable. The net worth of the company had essentially doubled from its RM 7.7 million total investment in 1934 to more than RM 14 million. Annual earnings were about RM 2.3 million, a 16 percent return on net assets.
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At the same time, more bad news came. Dehomag was supplying machinery and spare parts to IBM for resale throughout Europe. IBM in turn merely credited Dehomag's loan balance account. Frustrated and defiant, Dehomag managers in mid-December 1938 unilaterally began terming those shipments "exports." This triggered the Reich's rule requiring actual foreign currency payment, which Dehomag obtained by debiting IBM's precious few dollar accounts in Germany.
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On January 3, 1939, IBM's Geneva Controller J. C. Milner mailed Watson a long, detailed letter explicating the adverse Price Waterhouse report, searching for silver linings, parsing Heidinger's contract language, and ultimately trying to construct loopholes around the inevitability of either paying Heidinger dividends or buying part of his stock. Milner conceded that buying just one of Heidinger's shares would expose the subsidiary as American-controlled.
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Milner explored all the possibilities. "If he [Heidinger] died and the stock was offered to IBM, in accordance with his contract, the higher book value combined with the earnings of the company would probably force a high valuation of the stock," asserted Milner. Maybe the company could pay the elderly Heidinger in ten annual installments? Could Dehomag purchase Heidinger's stock with blocked marks as an internal obligation? Milner offered a range of options, none of them promising.
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It seemed to be a no-win dilemma for IBM. Purchase of Heidinger's stock was out of the question, asserted Milner, because no one could predict what the Reich economic and taxing authorities would do. On the other hand, once dividends on the 1935-1937 period were formally paid to Heidinger, he would next ask for dividends for 1938. It would continue annually even as the company's value escalated.
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