Although the arrangement to expand Dehomag was handled through intermediaries, Watson micro-managed every detail. On August 2, 1938, Watson sent a letter to John Holt, IBM’s European general manager, confirming approval of both the loan additions to the employment contracts and the special letter about the expansion. “Mr. Gubelman has handed me the final draft of the proposed amendment to the Rottke-Hummel contracts,” wrote Watson, “and also the letter from Rottke-Hummel addressed to Mr. Gubelman as a Director, dated July 6, 1938…. You are authorized to sign for IBM.”52
The scene was set for Dehomag to immediately expand into every new Nazi-conquered nation, so long as IBM approved in advance. Austria was only the beginning, and IBM understood it well. On August 4, 1938, J.C. Milner, a Geneva-based IBM supervisor of Dehomag, wrote to J. T. Wilson, the manager of IBM NY’s so-called Foreign Division, explaining, “Rottke has made arrangements… which include equipment for seven or eight different countries to fill customers orders.” The letter added that Dehomag could not fill all the orders from its inventory, so “five or six sets of Valtat equipment… we shall have shipped [from the U.S.] to the freeport at Geneva.”53
A key mission for Dehomag machines was census in neighboring countries. “During 1940, the census will be taken in several countries,” Milner’s August 4 letter confirmed, “and we expect a number of orders.” He added, “One of the problems which confronts us is that of providing special machines for census work…. Since Endicott has discontinued manufacturing the Printing Counting Sorter, we do not seem to have any machine particularly adapted to census work. As you know, Germany does construct a Census Tabulator, and we have always figured on being able to get the machines from them for forthcoming work.” But production in Germany was backlogged and was becoming less economical because of Reich currency restrictions.54
So Milner wondered whether Endicott wanted to develop its own census tabulator capable of high-speed counting, continue to rely on the German version, or perhaps produce them in another European country and ship them on Dehomag’s behalf. “If Endicott does not propose to undertake such work,” he wrote in the August 4, 1938, letter, “it is quite possible that we shall have to look into the situation in France, and see whether they can economically construct a machine equivalent to the German Census Tabulator.”55 IBM NY now began viewing its various subsidiaries throughout Europe as coordinated to support Dehomag’s operation.
Moreover, IBM NY wanted to maintain strict controls on each and every Dehomag lease. Special rebates and discounts for Reich operations could not be extended unless approved by New York. J. T. Wilson sent a memo to IBM’s Europe headquarters on August 25, 1938, entitled “Shipment of German Machines Beyond Germany,” demanding to know whether corporate controllers in Geneva were “setting prices for machines shipped beyond the borders of Germany.” Wilson wanted to make sure the proper mark-up above cost was preserved. That same day he sent a second letter off to Harrison Chauncey, another IBM NY management troubleshooter in Europe, explaining, “Their costs are very much higher than our costs at Endicott. For instance, the cost of building a Sorter in Germany is $292, while the cost at Endicott is $220.”56
Holt replied to Wilson, “We have a fixed charge… and do not take into consideration whether it comes from the United States, or Germany, or another factory.” He added, however, that “in the case of special machines, such as [Dehomag’s] D-11, we have always set prices which are, we believe, somewhat higher than the United States would charge…. Since the German company has a schedule of rebates to its customers of which you are well aware, in taking a special German machine and placing it in a foreign country, we have always tried to approach the net German price, using the official rate of exchange.”57
Holt offered an example. “In other words,” he wrote, “should a machine be supplied to Holland, we would… add 25%, and [then] add a further 10%.” But Holt made unequivocally clear that IBM NY controlled pricing on all of Germany’s machines. “[I]n all cases, we set the prices, and Germany does not.”58
Complicating all IBM efforts to profit on Dehomag’s Europe-wide sales in fall 1938 was yet another Reich monetary decree. Germany was nearing bankruptcy. The anti-Nazi boycott had virtually crippled a once-thriving export-dependent Reich economy. Despite desperate cashless barter efforts to boost foreign sales and unverifiable trade statistics to the contrary, Germany’s currency-earning exports were down to the United States by as much as 95 percent for many commercial sectors. Schacht had confided as much to Watson at the 1937 ICC Congress.59 Without foreign exchange, Hitler could not rearm. So it was hardly a surprise to IBM when the Third Reich prohibited exports by German companies unless they earned actual cash. In other words, Dehomag could no longer ship Hollerith machines across its borders and then forward the sales income to IBM NY as so-called debt repayment.
“As you are aware,” IBM’s Milner in Geneva wrote Wilson in New York, in an early August 1938 letter, “for a number of years we have been able to charge such goods against the debts owing to IBM in New York, but this permission has now been withdrawn by the Government.” Milner added that the arrangement was a surprise even to IBM auditors. “Price Waterhouse people in Berlin… stated it was most unusual and they did not know of any other foreign concern who had the same privilege.”60
Nonetheless, “I’m sorry to tell you,” Milner lamented, “that we have just been advised by Mr. Rottke that from now on it will not be possible to ship tabulating equipment and other goods out of Germany to our various countries without the German company receiving payment for the goods.”61 Hence, profits would not only be trapped in German blocked mark accounts, other IBM subsidiaries in Europe acting as intermediaries for Dehomag would have to transfer foreign currency to Berlin to complete the transaction.
Moreover, Dehomag income in Europe, unless somehow shrouded, might now subject IBM profits to double taxation. Double taxation was a particular irritant to Watson, and he had worked for years to legislate a solution. IBM Geneva’s M. G. Connally, a key Dehomag auditor, revealed the company’s attitude to a U.S. State Department officer earlier in 1938. He let it slip that “some concerns have actually resorted to the fiction of royalties in order to avoid taxation,” but quickly added, that in the case of IBM, “no such fiction existed and that royalties are the result of clearly worded contracts.”62
More than just controlling which machines would be distributed throughout Europe, and at what price, IBM understood by fall 1938 that it was now an integral part of the Nazi war machine. Wilson circulated on August 25, 1938, a memo to senior management in the New York office, reviewing problems in exporting machines from Germany. “As you know,” Wilson informed, “both brass and copper and alloys play a big part in the mechanism of all of our machines and these metals are very scarce in Germany, at least, I am told they require them for war materials.”63
Indeed, by 1937, the Reich concluded that punch card technology was too important to its plan for Europe not to be strictly regulated. Henceforth, machines would be rationed only to those users approved by the military. In 1937, a secret unit was created within the Reich War Ministry’s Office of Military Economy. The department became known under the innocuous name Maschinelles Berichtwesen, or Office of Automated Reporting, and was dedicated to one main function: punch card technology. This agency went through several bureaucratic metamorphoses, chiefly through the Reich Ministry for Armaments and War Production. The Maschinelles Berichtwesen, also known as the MB, wielded complete control over the ordering, sale, use, reporting, and coordination of all Hollerith systems in Greater Germany. It worked in complete tandem with all aspects of Hitler’s campaigns in Europe, opening so-called “field offices” in conquered countries.64