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As a result, the description of I.G.’s cloaking campaign in the indictment was limited to a few obscure paragraphs of uncertain accuracy, less a reflection on the adequacy of the prosecution than on I.G.’s skill. In any event, the indictment charged that beginning in 1937 I.G. embarked upon an intensive program to camouflage and cloak its foreign holdings to protect them from seizure in the coming wars by enemy custodians.
These measures not only served the interests of I.G. but enabled its foreign empire to carry out the greatly intensified efforts of the Nazi government to strengthen Germany at the expense of other nations. When war appeared to be a reasonable certainty just before the capitulation of Chamberlain at Munich in September 1938, the indictment continued,
To illustrate the device of a neutral front to conceal I.G.’s ownership from enemy custodians, the indictment singled out the case of the General Aniline and Film Company, I.G.’s most valuable American property. I.G. used its Swiss holding company, I.G. Chemie, as a cloak for its prime American asset. The camouflage of General Aniline was a consummate example of I.G.’s corporate deception and by all odds its most successful one.
In this case I.G. weaved a corporate tangle with such craft that not only were the Nuremberg prosecutors and judges unable to follow the threads but for years thereafter a series of U.S. officials were unable to unravel it. Before the General Aniline case had run its course through the United States government bureaucracy and the courts, it left a trail of corruption and scandal; no place seemed too high to remain untainted.
He was driven by a predisposition to distrust outsiders, a penchant for secrecy, and a talent for dissimulation. He rarely sought and never won popularity. Most of his peers regarded Schmitz with distaste coupled with fear. But none ever questioned his skill at corporate legerdemain or his curious practice of keeping the most complicated transactions and involved financial details in his head without committing them to paper. There were times when Schmitz did not even confide in his intimate associates about such matters.
However, there was more to Schmitz than the two-dimensional portrait of cunning and deviousness drawn by the Nuremberg prosecution. The fact that Bosch chose him as his successor is an accolade not easily dismissed. Moreover, Schmitz was an intimate of many of the great and powerful of his time, who respected him for his broad knowledge of foreign affairs and his ability to cope with the most complex economic problems.
Schmitz’s advice and support was eagerly sought by the powerful of his day. Chancellor Bruening offered him a position in his cabinet as economic minister. When Schmitz refused, Bruening persuaded him to serve as an unofficial adviser and took him along to meetings around the world with heads of state, including President Herbert Hoover at the White House. When the world-respected Frankfurter Zeitung, the great German liberal newspaper, was in financial difficulty, Schmitz probably saved it with a sizable investment.
Later, during the Nazi period, as the excesses against the Jews mounted, Schmitz personally found places for high Jewish I.G. officials and lesser staff members in I.G.’s foreign offices. Some of these émigrés have insisted that Schmitz’s long and repeated support for Hitler’s internal repression and foreign expansion was a matter of necessity and opportunism rather than commitment. One instance in the summer of 1938 may be revealing on this score. An I.G. lawyer informed Schmitz that according to the newly enacted Reich citizenship laws, I.G. was legally a Jewish company.
Like the Southern miscegenation laws of the United States whereby a single drop of Negro blood was sufficient to declare a person a Negro, under the new Nazi law a single Jewish director was enough to classify a corporation as Jewish. Schmitz replied to his shaking subordinate, “Have you anything against working in a Jewish company?” 2 The astounded lawyer retold this story in an affidavit prepared for Schmitz’s defense at Nuremberg.
The American Metal Company, a highly profitable and important Merton outpost in the United States, was of special interest to Schmitz. He made frequent trips across the Atlantic to check on the progress of this American asset. And since he was a skilled observer, Schmitz became Merton’s expert on the nature and habits of American politics and industry.
Schmitz was assigned the problem, and he promptly proved his worth. He suggested the creation of a separate holding company in Switzerland as a repository for a substantial portion of the firm’s foreign funds. The Swiss enforcement of its financial secrecy laws would keep these funds out of the reach of the German tax authorities. Merton was convinced.
The result was the formation of a Merton-owned holding company incorporated in Zurich under the German name Schweizerische Gesellschaft fuer Metallwerte and the French, Société Suisse pour Valeurs de Métaux (“Swiss Company for Precious Metals”). This was Schmitz’s first venture into corporate camouflage.
Although its initial purpose was to conceal Metallgesellschaft’s holdings from the German government, later the Schmitz mechanism of a neutral cloak would conceal its holdings from enemy governments. This period also marked the beginning of Schmitz’s love affair with Switzerland, a land of sound currency and useful financial secrecy laws.
Although the United States had not yet entered the war, Merton, probably on the advice of Schmitz, decided to conceal the German control of the American Metal Company. The forty-nine percent recorded ownership thereupon was placed in the names of a few trusted members of the American Metal Company management, all of them American citizens. Beneficial ownership, however, remained with the Mertons. When the United States entered the war in 1917, Congress passed the Trading with the Enemy Act, which required disclosure of enemy-held assets in the United States.
The Custodian thereupon seized the cloaked American Metal Company stock. Merton, however, did not surrender easily.
Despite the state of war between the United States and Germany he began to search for ways to sell the vested shares to the American management and recoup as much of the value of the seized property as possible. When the U.S. War Trade Board—to the amazement of all concerned—gave permission for two officers of the American Metal Company to visit Switzerland and negotiate the purchase of these controlling shares with Richard Merton, the project appeared on the verge of success. An agreement was actually reached to pay the Mertons $7 million for the vested shares. 4
When the chief investigator of the Alien Property Custodian Office, Francis P. Garvan (who later became its head), learned of the War Trade Board’s action, he entered a strong objection to American citizens’ negotiating with the enemy about seized property. He forced the War Trade Board to rescind its permission, and the deal collapsed.
Carl Bosch was present as an expert representing the chemical industry. Aside from their personal compatibility, the three men were bound by a common interest, to reacquire their company’s properties seized by the American Alien Property Custodian during the war. Merton and Schmitz were most concerned about the vested shares of the American Metal Company; Bosch’s interest centered on the scores of valuable BASF patents vested by the American Alien Property Custodian, including those covering the Haber-Bosch process, as well as the assets of the Kuttroff & Pickhardt Company, BASF’s American selling agent.
At Versailles, the three men used their official positions to advance their cause. Bosch and Merton managed to secure places on the committees involving their particular interests; Merton even entered an official inquiry about the status of the seized American Metal Company shares. It was the kind of activity that infuriated the German delegation’s commissioner in chief, Walter Simons. He complained bitterly of the difficulty of collaborating with the “fifty or more experts who have been saddled upon us.
For each of them, apparently, the welfare of Germany depended upon safeguarding of his particular interest, and it was treason to expect sacrifices from him.” 6 Bosch, Merton, and Schmitz’s efforts at Versailles to include in the peace treaty a provision for the return of the confiscated properties, however, did not succeed.
The rationale behind Merton’s action was that Société Suisse was a national of neutral Switzerland, and the United States had no legal right to look behind the corporate veil for Merton’s enemy interest because of the Swiss secrecy laws. Thus the vehicle which Schmilz organized to hide Melallgesellschaft’s profits from the German tax authorities was now to be used as a camouflage to conceal the enemy interest in the American Metal Company.
It did not appear very realistic of Merlon to expect the United Stales to recognize the validity of the relatively transparent scheme he had cooked up. Yet Merlon was neither a fool nor an unsophisticated in business and politics. Ways to convince the United States, which he did not care to reveal to Dulles, may have already been churning around in his mind.
In the opinion of the Department of Justice, Société Suisse’s purchase of the American Metal stock in November 1919 was two and a half years too late; the only claims of this nature that the Alien Property Custodian could consider would be those involving assets acquired by neutrals before the United States severed diplomatic relations with Germany in March 1917--certainly not assets acquired after the declaration of war in April.
King was not a lawyer, but it was commonly known that he wielded great influence with the Harding administration and especially with Harding’s new attorney general, Harry M. Daugherty. Throughout the Justice Department King was treated as a member of the attorney general’s official family although he had no official position. Merton learned from King that the new Alien Property Custodian had little regard for Dulles. Miller’s distaste for the New York lawyer apparently had begun when both men were at the Versailles conference.
After a number of false starts while Merton was learning the facts of political life in the new administration, he finally struck a deal with King. He paid him a nonreturnable fee of $50,000 in cash and agreed in addition to pay five percent of the amount recovered, provided the claim was approved within two and a half months after filing or two and one-half percent if approved within three and a half months.
King promptly put things in motion by splitting the $50,000 cash payment with Jesse Smith, Daugherty’s “bag man.” The first bribe involving the Harding administration had now been paid. These formalities completed, Merton was briefed by an Alien Property Custodian official on how to prepare the claim. He needed properly sworn documents “proving” that Société Suisse had received beneficial title to the seized American Metal shares before April 1917 by means of an oral contract from Metallgesellschaft and Metallbank, its banking affiliate. Merton was cautioned that the claim and the supporting documents had to be sworn to before an official authorized by law to administer oaths; an ordinary notary was not enough.
A week later, on September 30, Merton, King, Smith, and Miller celebrated at a plush champagne dinner at the Ritz Carlton Hotel in New York. King, politically an ardent prohibitionist, supplied the champagne. Merton, who paid for the rest of the feast, presented each of the guests with a $200 gold cigarette case. To cap the affair, Miller ceremoniously handed Merton $6.5 million in U.S. Treasury checks and $514,000 worth of Liberty Bonds. 11
Merton deposited $123,000 with Eduard Greutert, a Merton banking partner. Next he fulfilled his contract with King, presenting the intermediary with Liberty Bonds in the face amount of $391,000. (Because the market for Liberty Bonds was below par at the time, King demanded enough bonds to yield the $350,000 agreed upon.)
Before long, the suspicions about corruption in the Harding administration became a raging issue in the press and in the Congress. On August 22, 1923, as the disclosures were reaching their peak, President Harding died. The new president, Calvin Coolidge, appointed Harlan F. Stone to replace Attorney General Daugherty, whose involvement appeared greater with each disclosure. Under the pressure of the mounting scandal, Stone appointed a special prosecutor, Hiram C. Todd, to head a criminal investigation of Miller’s conduct of the American Metal case.
On October 30, 1925, a grand jury indicted Miller, Richard and Alfred Merton, Metallgesellschaft and its subsidiary, Metallbank, Société Suisse and its president, and the president of the prestigious Swiss Bank. John T. King was listed as a co-conspirator but not indicted; Jesse Smith had earlier committed suicide under very suspicious circumstances. The indictment set forth the details of the multimillion dollar payment to Richard Merton and his bribery of Miller through King and Smith.
It charged that the Mertons filed false papers with the alien property custodian to support the Société Suisse claim. It further charged that the papers supporting a “verbal transfer” were sworn to before an individual (Felix Iselin) who was not authorized to administer oaths and that the defendants knew the oaths were illegal.
As a matter of fact, Daugherty had appointed Todd a U.S. Attorney for the Northern District of New York early in the Harding administration. The stories of Todd’s failure to investigate Daugherty with vigor finally took their toll. The special prosecutor resigned, and Emory Buckner, the U.S. Attorney for the Southern District of New York, took over. Buckner soon suspected that Todd’s investigation was in fact a cover-up. He assigned an assistant, Kenneth Simpson, to investigate. When Simpson reported his findings, Buckner knew his suspicions were correct. He assigned ten men to dig further into the case.
Buckner remedied this oversight by summoning both Mal and Harry Daugherty before a new grand jury. Mal was asked for the records, which Buckner was convinced would show what happened to the bonds. Mal said Harry had destroyed them after Mal’s appearance before the previous grand jury.
Harry Daugherty was asked about the records, and his reply has become an American classic:
The accumulation of new evidence against Daugherty, together with his refusal to testify, led Buckner to revise his conception of the case. With Richard Merton out of reach in Germany and with little chance of the United States government’s ever recovering the $7 million, Buckner began to consider the possibility of trading Merton for Harry Daugherty as a defendant in return for his testimony.
As bait he was even willing to permit Merton to keep the $7 million.
Richard Merton appeared before the grand jury in New York, and the testimony he gave satisfied Buckner. On May 7, 1926, the grand jury returned with a new indictment that named both Harry Daugherty and John T. King, along with Miller, as defendants. Significantly omitted were Richard and Alfred Merton and all the other German and Swiss defendants indicted earlier. Buckner had kept his bargain with the Mertons.
King could not be reached for comment. He was now in deeper trouble with the law than the other defendants. Buckner had indicted him for perjury in his testimony to the grand jury. He had also been indicted for violating the Internal Revenue Act: he had not reported his share of the Merton Liberty Bonds on his 1921 tax return. Five days after his indictment King was diagnosed as critically ill with double pneumonia.
A day later he was dead. There was no autopsy. The trial of Daugherty and Miller began on September 7, 1926. For the first time in the history of the United States, a U.S. attorney general was being tried for bribery. The courtroom was jammed; many lawyers as well as the general public came to witness the contest that was about to take place between two giants of the legal profession, Max Steuer for Daugherty and Emory Buckner for the people.
Buckner had set for himself a delicate task. The New York Times speculated, considerable interest has been manifested as to how fully Mr. Merton will fulfill the expectations of the Government prosecutor.... His role is regarded as somewhat difficult because he will be asked to blacken his own success in the Société Suisse-American Metal “deal.” 15
During Buckner’s direct examination, Merton proved urbane, literate, and extremely loquacious. He did not hide his own eminence, referring several times to his position as a delegate at the Versailles conference as well as his standing in Germany’s financial and industrial community.
Throughout the questioning of Merton, Buckner hammered home the point that King was not a lawyer and had nothing to sell but his influence and his close relationship to the attorney general; that Merton had pulled together his claim after instruction and “coaching” from the Department of Justice; and that large amounts of money had been passed clandestinely to government officials. In recounting the facts that led to the approval of his claim and how much the settlement cost him, Merton was not an enthusiastic witness.
But he answered questions to the reasonable
satisfaction of prosecutor Buckner. However, Miller’s lawyer,
Colonel William S. Rand, grasped the opportunity during the
cross-examination of Merton to question the German witness about the
validity of the claim. When Rand put the specific query to him, “Did
the claim reflect utter good faith?” Merton answered with emphasis,
“Yes!” 16 The answer took Buckner by surprise, and he showed obvious
distress.
Buckner could not let this testimony stand unchallenged. He claimed that Merton’s answers on cross-examination took him by surprise. He submitted a memorandum of law to Judge Mack arguing that Rand had made Merton his own witness and therefore Buckner should have the right to subject him to cross-examination. Judge Mack granted Buckner’s motion.
Merton did not regard Dulles as much of a lawyer. This became clear when Merton went on to testify that Dulles had suggested that Metallgesellschaft declare bankruptcy so that Société Suisse would have a better chance to collect from the Custodian. He characterized the advice as asking “a man to cut off his nose to spite his face.” To Merton it made no sense for the giant Metallgesellschaft to declare bankruptcy to collect a mere $7 million claim.
The exchange between Merton and Buckner about the Dulles advice about the bankruptcy of Metallgesellschaft was not missed by Steuer. A few days later, Buckner called Dulles as a prosecution witness. Dulles startled everyone in the courtroom when he announced he was appearing for the prosecution under protest and pursuant to a subpoena: “However, as Mr. Merton has waived the question of professional privilege concerning my relations with him while he was my client, I suppose I must answer.” 18
Buckner then took Dulles through the substance of the hypothetical case presented to the Department of Justice. Dulles had not been informed of an “oral transfer” or in fact of any transfer before 1919 and he made no such representations to Justice. Dulles’s testimony was crucial in showing that a transfer in March 1917 never really took place; that this was a later concoction by Merton, upon the advice of officials in the alien property custodian’s office. Dulles also angrily denied that he advised Merton to place Metallgesellschaft in bankruptcy.
Steuer, with obvious contempt for Dulles’s answers, sought to unnerve the witness:
The New York Evening Post reported that at the end of the ninety minutes “Mr. Steuer sat down with the air of a man who had accomplished his purpose.” 19
On October 7, the time for summations arrived. The surprises were not yet over. In the course of presenting his defense of Daugherty to the jury, Steuer brought everyone in the courtroom to attention by the intensity of his attack on John Foster Dulles. “Do you recall the evidence Merton gave about his first attempt to collect the claim through Dulles before he turned it over to John T. King?” Steuer asked the jury.
Now I don’t want to besmirch any lawyer, but you take it from me, if John Foster Dulles wasn’t Lansing’s nephew and that gave him the privilege of going to the Peace Conference carrying a bag [to collect the bribe] and if he lived in Rivington Street [in the Jewish ghetto of New York] and if his client went on the stand as Merton did and testified, as Dulles advised him, to go into bankruptcy to collect the $7,000,000 claim, Rivington Street would be turned upside down and the Grievance Committee would not rest until that lawyer had been disbarred. John Foster Dulles, said Max Steuer, was a “scoundrel who should be disbarred.” 20
Not very often has a federal court in New York heard such an unbridled attack on so prominent and distinguished a lawyer.
On the night of October 8 at 9:43 P.M. the jury retired to deliberate. Sixty-five hours later it was hopelessly deadlocked. According to newspaper reports, the final vote on Daugherty was seven votes for conviction, five for acquittal; on Miller it was ten for conviction, two for acquittal. Up to that time no jury had deliberated so long in the Southern District of New York without coming to a verdict. Immediately after the trial was over Judge Mack told Steuer that his assault on Dulles was not justified, showed him portions of the transcript, and suggested that he take appropriate action to rectify matters. Steuer apologized to Dulles by letter on October 14, three days after the jury was dismissed.
Later Judge Knox was to state that “guilty or not, the evidence presented against Daugherty was not conclusive” and that he would have voted like the lone juror for acquittal. 24 Buckner and his staff, however, did little to conceal their feeling that the juror in question had been fixed.
(Years after the hung jury, Westbrook Pegler, a well-known columnist, ran into Daugherty in Florida. After the usual amenities, he asked Daugherty whether or not he had bribed that lone juror. Daugherty answered, “Take your pick, Peg, take your pick.”)
Société Suisse thereupon put in a claim for interest covering the period from 1919, when the American Metal Company stock was sold, to 1921, when Miller turned over the funds to Merton. Because of the fraud established in the conviction of Custodian Miller, the government rejected the application. Société Suisse thereupon filed suit against the attorney general as acting alien property custodian to recover the interest it claimed was due it.
The government grasped the opportunity to file a counterclaim seeking restitution for the amount fraudulently paid Merton plus interest, totaling roughly $15 million. For the next eight years the claim and counterclaim journeyed back and forth in the federal courts. Finally, on July 25, 1938, the litigation reached its end when the United States circuit court for the District of Columbia denied Merton’s claim and awarded the government its entire counterclaim of $15 million. 25
The United States, however, could find only about $60,000 worth of assets upon which to levy. 26 Long before, Merton had stripped Société Suisse: now it was a hollow shell. The government therefore proceeded against the Swiss Bank Corporation as a party to the original conspiracy to defraud the United States. Ultimately the United States claim was compromised, through the intervention of the Swiss minister, for $3,030,769. By this time World War II was under way, Switzerland was a friendly neutral, and Merton was a refugee from Hitler living in England and writing attacks on the Nazi regime.
Because of his instinct for behind-the-scenes manipulation, the extent of Schmitz’s involvement in this incident must remain a matter of conjecture. Nevertheless his position within BASF, his history, and his personality argue persuasively that there was little about Kuttroff & Pickhardt’s activities that Schmitz did not know or that was not reported to him. Relations with the Alien Property Custodian were clearly within his responsibility and his competence.
They included Adolf Kuttroff, Carl Pickhardt, and Ernest S. and Ernest K. Halbach (father and son), all longtime Vertrauensmaenner, or trusted agents of BASF. In keeping with their past history, these American shareholders of record, however, were nothing more than fronts for BASF. Each of them had signed a secret option agreement requiring them to return the shares to BASF upon request. Not only ultimate control but also actual control remained in BASF’s hands. Hiring, firing, salary increases, leasing of space, and even stationery purchases required BASF’s permission. 27
President Harding paid no attention to Garvan. Instead, on November 21, 1921, he wrote a remarkable letter to his own Office of the Alien Property Custodian directing swift return of the seized property of Kuttroff & Pickhardt. I have had my attention brought to the claim of Messrs. Adolf Kuttroff and Carl Pickhardt, for $440,500 Liberty Bonds seized by the Alien Property Custodian on March 19, 1919.
Quite apart from any official information or any representations by counsel, I happen to know of the thorough Americanism of these claimants and I think we are doing them a very great injustice by longer retaining their property in the hands of the Custodian. Inasmuch as Colonel Miller is absent from the City, I am writing to request you to proceed with the arrangements for the restoration of these bonds to their lawful owners. I do not mention the sum above as indicative of the exact detail. I am only writing to say that I would like to have this property restored to its proper and loyal American owners at the earliest possible day. 29
The instructions to the Alien Property Custodian were unambiguous and direct. Yet Custodian Miller chose to ignore the president’s order. Instead, upon Miller’s recommendations, Attorney General Daugherty delivered to President Harding an “opinion of disallowance.” There the matter rested until Harding died on August 2, 1923, when the “opinion of disallowance” inexplicably was found among his private papers in his personal desk instead of the official files of the White House. It would be a euphemism to say that the entire transaction emitted a strange odor.
Why did Miller and Daugherty refuse Harding’s request? Certainly these two officials of dubious virtue would hardly disobey a presidential order as a matter of principle. Only two months before, Daugherty’s “bag man,” Jesse Smith, and Miller attended the celebration at the Ritz Carlton Hotel where Merton received the $7 million in return for a $350,000 bribe. Equally curious was the failure of Kuttroff and Pickhardt to press their claims during Harding’s lifetime in spite of the president’s personal representation “I happen to know of the thorough Americanism of these claimants.”
Political scientists and historians may have been unaware of Harding’s letter, but not Kuttroff and Pickhardt. After Harding’s death, they renewed their claims with the new president, Calvin Coolidge, presenting Harding’s letter as evidence that the matter had already been decided in their favor. Coolidge then sought from the Department of Justice an explanation for the “opinion of disallowance” in face of the Harding letter.
As a matter of fact, the opinion of disallowance forwarded by your Department to President Harding in November or December 1921 was in President Harding’s personal desk and was found there after he died. A number of times between December 1921 and up to the time I last saw President Harding, he discussed this matter with me several times. It is submitted that this letter has no force and effect, when, for over a period of nineteen months after he wrote his letter of November 21, 1921, this matter was pending before the President, and the fact that he did not act in accordance with his expressions to Mr. Meekins would seem to indicate that he had changed the opinion so expressed in his letter. 30
Upon the advice of the Justice Department, Coolidge denied the claim and Kuttroff and Pickhardt took the matter to court. There Harding’s letter proved decisive and the judge ordered the Alien Property Custodian to return the seized assets. The Merton and Kuttroff & Pickhardt episodes would not have been wasted on Schmitz. They provided him with invaluable insight into some of the darker aspects of the conduct of government and business in the United States. As future events would prove, he learned well, very well indeed.
The scheme so intrigued Schmitz that he decided to use it to evade taxes on a number of other of I.G.’s profitable foreign properties as well. The most substantial of these were the General Aniline Works (composed basically of the prewar Bayer dyestuff plants) and the Agfa Ansco Company, a photographic concern second in size in the United States only to Eastman Kodak. In Schmitz’s calculations, the earnings of these I.G. assets in the United States represented a German tax liability worth evading.
The concealment of I.G. Farben’s foreign assets, however, was not Schmitz’s only aim in creating the holding companies. By 1929 the cost of Bosch’s ambitious program for converting coal into gasoline was getting out of hand. To keep the project moving forward, Schmitz planned to use the holding companies to raise capital in the booming Swiss and American money markets.
Schmitz proposed that I.G. back the project by guaranteeing the purchasers the same dividends as those received on I.G. Farben shares. In exchange, I.G. would retain control through an old and trusted device, an option to buy the assets of I.G. Chemie at any time at market value. As an inducement to vote for the dividend guarantee proposal, I.G. Farben stockholders would have the right to purchase I.G. Chemie shares at half price. Attracted by the chance to buy the Swiss company’s stock at a bargain price, the I.G. Farben stockholders overwhelmingly approved Schmitz’s plan.
To insure his personal influence in the Swiss holding company, Schmitz made himself president of I.G. Chemie and filled the board with established friends and trusted associates, including Eduard Greutert and Felix Iselin—both alumni of the Merton empire. Schmitz obviously regarded experience with the Mertons as valuable preparation for I.G. Farben’s new enterprise.
Moreover, he had had a hand in their training and they were personally loyal to him. Greutert and Iselin’s involvement in the alien property custodian scandals in the United States was clearly no impediment. For what he had in mind such experience was perhaps helpful. When the I.G. Chemie stock was offered to the public, the dividend guarantee by I.G. Farben worked its magic. The entire issue was sold almost the moment it was offered to the investing public. Once I.G. Chemie was successfully launched, the next step in Schmitz’s scheme was the creation of its U.S. counterpart, the American I.G. Chemical Company.
To inspire investor confidence, the board of directors of American I.G. included four impressive figures from American industry and finance:
I.G. Farben was represented by Carl Bosch and Hermann Schmitz, who were listed, respectively, as chairman and president of the new company.
Not a single voting share would be in the possession of the Americans who purchased the debentures. As soon as he could, Schmitz designated Greutert to hold the B shares.
Within Standard Oil the entire venture was viewed with nervousness if not suspicion. When objections were raised about the propriety of the company’s acting as a front for I.G. Farben, Teagle assumed the ownership personally. He was still in a state of euphoria over having purchased the hydrogenation rights from Bosch. He had no strong objection to performing such a small favor for I.G. Farben, which after all now owned two percent of the giant Standard Oil Company and next to the Rockefeller family was the largest single stockholder.
Later, in 1933, the shares in Teagle’s name as well as those held by Bosch, Schmitz, Greutert, I.G. Chemie, and some others were transferred to Mithras A.G., an obscure company in Zurich, with suspiciously close ties to Greutert. It was a company with no other assets operated by a single lawyer and his secretary from a tiny office. Mithras was obviously an I.G. dummy controlled by Greutert. Although he now was no longer a stockholder of record, Teagle continued to serve as a director of American I.G.
When Schmitz organized his scheme for camouflaging the ownership of American I.G. through a series of non-German fronts, he could not have anticipated the problems that he would face from such disparate systems as Hitler’s Third Reich and Roosevelt’s New Deal. These twin dangers for Schmitz arrived in 1933. The trouble with the Nazis began almost immediately. Soon after Hitler assumed power, the Nazis enacted a law with the ominous title of Treason against the Nation, which specified the death penalty for anyone violating foreign exchange regulations or concealing foreign currency. 34
Rather than risk the consequences of such a frightening law, I.G. reported to the German government for the first time that it had sold the world rights to hydrogenation (except for Germany) to Standard Oil for $35 million worth of stock. 35
As a result, the tax authorities in the Ministry of Finance began an in-depth investigation to determine the extent of I.G.’s concealed foreign holdings. Especially targeted for inquiry were I.G. Chemie and American I.G. since the control of I.G. Farben, I.G. Chemie, and American I.G. “all seem[ed] to meet in the person of Hermann Schmitz,” who at the time was the chief executive officer of all three concerns.
But when the tax officials demanded the records of Greutert & Company and I.G. Chemie, the Swiss bank secrecy laws stymied the investigation. Schmitz, who was not without influence among Nazi officials, apparently convinced them, after protracted and uncomfortable negotiations, that to inquire too deeply into the ownership and control of I.G. Chemie, American I.G., and Greutert & Company would endanger I.G.’s foreign “strong points” to the detriment of German interests. As a result, a compromise was reached in which I.G. paid $5 million in taxes on the Standard Oil stock and the investigation stopped. 36
But from then on I.G. was careful to pay taxes on its foreign earnings and on its camouflaged as well as admitted assets. In the United States a parallel problem developed for I.G. Farben. The 1934 Securities and Exchange Act required American I.G. to file a sworn application for the registration of its securities. In the course of completing the Securities and Exchange Commission form, American I.G. was confronted with the question of whether it had a corporate parent.
Failure to identify I.G. Farben as the ultimate power behind American I.G.’s policies and operations was to flirt with the penalties for perjury and making false statements. Nevertheless, the officials of American I.G. “bit the bullet” and during the years 1934-1936 repeatedly perjured themselves by answering “None.” It was a dangerous game. In 1936 an attempt was made to reduce the legal hazard for the American I.G. officials in the signing of future S.E.C. registration statements.
D. A. Schmitz, the brother of Hermann Schmitz and a naturalized United States citizen since 1909, became president of American I.G., and Hermann Schmitz took over the less active role of chairman of the board from Carl Bosch. As one German I.G. official noted, D. A. Schmitz as president would now have the duty of testifying on behalf of the company and yet as a newcomer he would be in a perfect position to plead ignorance to any potentially embarrassing questions.
It must have been a very nervous group of American I.G. executives who made the decision to reply “No” to all these questions. Sensing that this answer was less than the truth, the S.E.C. staff undertook an investigation in depth. They “requested” D. A. Schmitz, as president of A.I.G., and Walter Duisberg, as first vice-president and treasurer, to attend an S.E.C. conference in Washington to discuss the subject more fully.
The government investigators were not unmindful that D. A. Schmitz, although a naturalized U.S. citizen, was the brother of Hermann Schmitz, the head of I.G. Farben, and that Walter Duisberg, a U.S. citizen since 1933, was the son of Carl Duisberg, the founder of I.G. Farben. At the meeting, the S.E.C. officials inquired about the large American I.G. stockholders of record. They noted that although Chemo and Voorindu of Holland and Mithras of Switzerland were record owners of large controlling blocks of American I.G. stock, investigation revealed that they were totally unknown and their names could not be found in any of the trade manuals or usual sources that normally listed companies with such important assets.
Were they acting for I.G. Farben? Searching
questions were also asked about the sale to I.G. Chemie and Greutert
& Company. To all the inquiries, Schmitz and Duisberg exhibited a
general ignorance. They claimed that they just did not know who
owned American I.G.
This was clearly a false statement. The Greutert firm was more careful. It refused to provide any information, pleading the strict provisions of the Swiss bank secrecy law. I.G. Chemie refused to answer as “a matter of principle.”
Schmitz admitted upon questioning by David Schenker, S.E.C. counsel, that he had no idea who the beneficial stockholders of the company were. Duisberg testified that he did not know either. Duisberg even went so far as to deny that he was related to anyone in I.G. Farben despite the fact that his brother Carl served on I.G.’s supervisory board and his brother Curt worked in the pharmacy department at Leverkusen. He never even mentioned his father. However, it was Teagle, former president and now chairman of the largest oil company in the world, who commanded the most interest.
Though a director of American I.G. since the company’s founding, he testified that he had never known who were the principal owners. The S.E.C. counsel pressed the matter:
When Teagle’s extraordinary ignorance was headlined in the newspapers the next day, there was consternation at Standard Oil. An interoffice memo from a Standard executive assessed Teagle’s predicament.
Mr. Teagle as a director was placed in a most embarrassing position at the hearing and also in press releases because he did not know the beneficial ownership of any of the large blocks of American I.G. shares.
Frank Howard was determined to do something about the matter and he knew, even if Teagle seemed not to, exactly with whom to discuss it. In a letter to a Standard representative in Europe, he wrote,
Howard’s talk with Hermann Schmitz took place in Berlin a few weeks later, on March 11, 1938, the day Germany invaded Austria. After this meeting, Howard wrote to Teagle about Schmitz’s attitude toward the S.E.C. inquiry.
It is not known what Schmitz told Howard about resolving the American I.G. problem that could not be put down in writing. However, it is known that about three weeks later Hermann Schmitz was in Basel at a high level meeting of I.G. Chemie and I.G. Farben officials to discuss the S.E.C. probe. The solution was the de-Farbenization of I.G. Chemie so that it could be reported as American I.G.’s corporate parent.
As long as I.G. Farben maintained its option on the I.G. Chemie stock, its control of I.G. Chemie and therefore American I.G. was undeniable. In the event of war, American I.G. would be highly vulnerable. Any solution, of course, would have to be approved by the German government because of the strict foreign exchange regulations established by the Nazis. Kurt Krueger, Max Ilgner’s deputy, was assigned to start working out a plan. 43
Krueger soon found that securing permission to dissolve the I.G. Farben option on I.G. Chemie stock was a difficult matter. The Ministry of Economics official in charge of such matters, Gustav Schlotterer, posed no objections and in fact was favorably disposed to I.G.’s request. But the all-powerful foreign organization of the Nazi party, the Auslands-organization (A.O.), was another matter. It maintained a liaison man in the Ministry of Economics who had to be informed about major transactions involving the operation of German firms abroad. This proved a major obstacle to I.G.’s hopes. The A.O. had always opposed the cloaking of German foreign interests. It contended that cloaking was a pretext employed by big business, particularly I.G., to deprive German companies abroad of their German character. 44
Such actions smacked of “internationalism,” a very nasty word in the Nazi lexicon and a reminder of I.G.’s early troubles with the Nazis. Moreover, cloaking was a device inspired by defeatism. A victorious Germany had no need to cloak; this tactic was useful only in the event of defeat. As far as the Nazi A.O. was concerned, foreign subsidiaries and affiliates, instead of concealing their German ties, should flaunt them. That I.G. was now preparing to conceal the German control of its overseas operations only made the A.O. more suspicious of I.G.’s international Jewish flavor. Added to this, important members of the Ministry of Economics long suspected that I.G. was hiding foreign exchange in its overseas holdings.
In American I.G. some superficial cloaking steps were taken immediately. American I.G. changed its corporate name to General Aniline and Film Corporation (G.A.F.), eliminating the incriminating I.G. initials. The change, a public relations spokesman frankly explained, resulted from “a belief that German names caused business prejudice in this country.” 45 Hermann Schmitz and Carl Bosch resigned from the board. The Germanic complexion of the executive committee, however, remained: D. A. Schmitz, Rudolf Hutz, and Wilhelm H. vom Rath were all I.G. related figures.
But the de-Farbenization of G.A.F. could not proceed on any legally effective level until the damning I.G. Farben option on I.G. Chemie stock was removed. As long as this formal tie remained, I.G. Chemie could not be designated as American I.G.’s Swiss parent. Instead, I.G. Chemie’s Dutch dummy subsidiaries, Chemo and Voorindu, would remain the stockholders of record.
It was a dangerous consequence that Hermann Schmitz had failed to contemplate when setting up his elaborate scheme of camouflaging American I.G. From now on all financial transactions would have to be approved by the Treasury Department. To free General Aniline from the grip of the U.S. government, it became imperative to establish that G.A.F.’s corporate parent was not the Dutch dummy fronts but rather I.G. Chemie itself. But as long as the telltale dividend guarantee option was in effect, I.G. Chemie could not claim it had no connection with I.G. Farben.
For this approach to be ostensibly effective, the I.G. option on I.G. Chemie stock would be canceled and Hermann Schmitz would resign as chairman of I.G. Chemie. Krueger explained that I.G. had not embarked on this drastic course without long deliberation:
The problem was immediate and real. I.G.’s “American friends” were under increasing pressure from the Securities and Exchange Commission for disclosure of the parentage of G.A.F. The commission had set a deadline of May 30, 1940, for a definitive answer. It was now obvious, especially with the turn in world events, that no further delays would be tolerated. G.A.F. was no longer in a position to plead ignorance about control of the company. Yet, it dared not claim I.G. Chemie as its parent until the I.G. Farben tie was severed.
In the meantime G.A.F. was blocked as a Dutch asset of Chemo and Voorindu. Krueger wrote to the Ministry of Economics:
In private discussions with Schlotterer, Krueger gave assurances that “the ties between I.G. Farben and I.G. Chemie would not be completely severed but would continue to exist in other forms.” The German government, Krueger said, need have no fears; I.G. would continue to exert its influence in General Aniline and Film. In fact, it “had taken all necessary measures to insure that end.” 49
I.G. could not have been more specific in pointing out the consequences of the failure to approve its application to dissolve the option: “Do you want us to lose G.A.F. through its being seized because of claims that we did not make a separation after all?” 50
This time I.G.’s arguments and assurances were apparently enough for Schlotterer. He approved the application. The I.G. Chemie annual stockholders meeting was held at the end of June. The “revamping” measures approved by the German Ministry of Economics were overwhelmingly approved by the stockholders. Open “legal” ties between I.G. Chemie and I.G. Farben were formally severed. 51
To add credence that the decision taken at the stockholders meeting turned “I.G. Chemie... into a Swiss company,” Hermann Schmitz resigned as its president and was replaced by a Swiss citizen, Felix Iselin. To those with a sense of history, Iselin was an odd choice. He was, it will be recalled, the Société Suisse employee who administered the illegal oaths for the benefit of Merton in the American Metal Company case.
The S.E.C. was still not satisfied, however. In a report to Congress on its investigation of G.A.F. it stated: “During the course of the study, all attempts to ascertain the beneficial owners of the controlling shares have been unsuccessful.” 53 Of no less importance, the Department of Justice and the Treasury Department let it be known publicly that they regarded General Aniline and Film as a Nazi front. In view of the Nazi excesses reported daily in the American press, this identification became an increasingly intolerable burden to carry for the American-born directors.
Hugh Williamson, one of the American directors (and also secretary of the company), was beside himself looking for a way to change G.A.F.’s public image. With the support of the law firm Breed, Abbott & Morgan, the general counsel to G.A.F. from which he originally came to the company, Williamson decided that the only solution to that problem, as well as to his own vulnerability to prosecution by the United States government, was to find a purchaser with unassailable American bona fides.
The Treasury rejected the proposal almost as soon as it was made. Too much evidence already pointed to Gabler’s principal as a creature of I.G. Farben. The British took an active part in pressuring the United States to do something about General Aniline and Film. Hugh Dalton, the British minister of economic warfare, on May 1, 1940, issued a detailed public statement urging the United States to freeze Axis owned properties. 55
He warned that German interests, in anticipation of such an action, had already placed their assets in the names of neutral dummies. Dalton recommended that a system be instituted by which the neutral veil concealing Axis ownership would be torn aside. The most important German property concealed by a Swiss front, charged Dalton, was the General Aniline and Film Company, and he urged that something be done about this concern. Not long after Dalton’s plea, on June 14 President Roosevelt ordered that the assets of continental European nationals in the United States be frozen.
Roosevelt assigned the secretary of the treasury, Henry Morgenthau, Jr., the task of implementing the freezing order. The order required that by July 14, 1940, all property in the United States in which any foreign national had a direct or indirect interest must be reported. After the issuance of this order, there began what the New York Times described as “the greatest bit of detective-like ferreting this government has ever undertaken, since it is well known here that the Axis governments had long tried to conceal their American assets in anticipation of a move of this kind directed at them.” 56
By specifying every continental European country, Roosevelt caught the Swiss in his net. Switzerland’s ownership of $1.5 billion worth of assets in the United States was too suspicious a concentration to be ignored. General Aniline had already been blocked at the time of the invasion of Holland. Now, with Roosevelt’s action, the establishment of a de-Farbenized I.G. Chemie as the parent of G.A.F. would not result in the “unblocking” of General Aniline.
Because the Treasury Department had strong suspicions and reservations about Halbach’s history, General Dyestuff was also blocked after Roosevelt’s order. Henceforth the company’s activities were subject to Treasury licenses. All of these adverse developments prodded Williamson, the leader of the so-called American majority of the G.A.F. board, to push his plan to free G.A.F. from its present ugly difficulties even more vigorously.
He approached a number of companies, including Standard Oil (New Jersey), the Ford Motor Company, and International Telephone & Telegraph. Standard and Ford, having been burned during the S.E.C. inquiry of American I.G., manifested a short-lived interest. But I.T.T.’s interest was genuine.
According to a State Department memorandum, Colonel Behn reports that the German government has offered to exchange the ownership of the American [sic] Aniline and Film Company for the ownership of the German company owned by the I.T.&T., which manufactures telephone wire and other equipment. Mr. Page said that the value of each of the two companies was approximately the same, and the exchange would be of advantage to the I.T.&T. in that they would have their money transferred into an American asset. 57
D. A. Schmitz, the president of G.A.F., however, indicated more skepticism than enthusiasm. On July 3 the reasons for Schmitz’s attitude took on greater meaning for Williamson. The G.A.F. representative in Basel had just reported that I.G. Chemie had lost interest in making a deal with I.T.T. Williamson called Hans Sturzenegger, who had inherited Greutert’s position as the principal stockholder of record of I.G. Chemie, to check on what had caused the breakdown in negotiations.
When Sturzenegger asked why Halbach was unacceptable to the U.S. government, Williamson almost screamed, “His background, Hans, on the record, all in writing, is even worse than our own.” Halbach’s signature on some seven option agreements as an I.G. trusted agent was enough to doom him. But Sturzenegger pursued the issue of Halbach’s bona fides. William-son explained: “It’s just like selling to D. A. Schmitz.... It’s just inconceivable.”
At the end of the conversation, Williamson charged that in addition to everything else, Halbach was not in a financial position to buy G.A.F.: “He hasn’t anything like the money with which to do it... as a physical banking fact, he cannot do it.” 59
Convinced that I.G. Chemie was about to sell to Halbach, Williamson in desperation called Sturzenegger again that day. He acknowledged that under ordinary circumstances, I.G. Chemie in selling to Halbach “couldn’t ask for a better trustee—that’s just switching pennies from one pocket to another” and that Halbach was “our own hired man.” 60
The trouble was that the Treasury Department would take the same view. Williamson’s efforts proved futile. I.G. Chemie was determined to sell to Halbach. On July 14 the General Dyestuff Corporation (G.D.C.), now owned by Halbach, received a cable in code giving it an option to buy the controlling stock of G.A.F. in the possession of the U.S. Treasury Department. The price was $5,812,500. Upon receipt of the option agreement, G.D.C. filed an application with Treasury, requesting approval to purchase the G.A.F. shares. 61
Williamson continued his objections to Halbach, arguing that the entire project was pointless and would only result in the loss of valuable time because the U.S. government would never approve the sale. It would be much more productive to work at selling G.A.F. to a company with unquestioned American credentials. General Aniline’s general counsel, Breed, Abbott & Morgan, even prepared an opinion setting forth the reasons why the United States government would never approve Halbach as a purchaser of General Aniline and Film. I.G. Chemie was unmoved. It continued its all-out support for the sale to Halbach.
Ignoring both Williamson’s warning that precious time was being wasted and the Breed, Abbott & Morgan opinion on the unacceptability of Halbach, it waited for the Treasury’s approval of Halbach’s G.D.C. application. A bitter split was now developing among the G.A.F. directors. Felix Iselin demanded that the sale to Halbach go forward. D. A. Schmitz abandoned his seemingly noncommittal stand and sided openly with Iselin.
So did Ernst
Schwarz, formerly a high official of I.G. in Germany but now a
Jewish refugee in the United States. Schwarz was loyal to Hermann
Schmitz, who had found a place for him in G.A.F. Strongly opposing
this trio was the majority of board members—the American-born
directors, Hugh Williamson, William Breed, and Walter Bennett, and
the German-born American citizens, Wilhelm vom Rath, Hans Aikelin,
and Rudolf Hutz.
When Schmitz refused, the board took summary action and dismissed him as president, although he continued to remain as a director. Upon learning of this action, Felix Iselin struck back and sent a cable from Basel peremptorily demanding the resignations of all the American directors. The cable was ignored. Barely a week later, as Williamson predicted, on October 2 the Treasury rejected Halbach’s application to buy control of G.A.F. It gave no reason for the denial. The reason was obvious.
Later, when war seemed inevitable in Europe, Bullitt had been appointed to the critical post of ambassador to France. The majority directors, in a public statement, described Bullitt’s election to the board as “another step to place control... unmistakably in the hands of American interests.” 62
On December 7 the Japanese attacked the United States at Pearl Harbor. On December 10, Germany declared war on the United States. Within days Attorney General Francis Biddle moved to strike at I.G. Chemie’s control of General Aniline. He drafted an amendment to the Trading with the Enemy Act empowering the president to vest the property of any foreigner not just of enemy nations.
The Custodian, Leo Crowley, replaced all the past directors with his own appointees, who took over active operation of the company for the rest of the war. When the Nazi government received newspaper reports that the United States might be planning to liquidate the confiscated enemy properties, including G.A.F., it proposed to retaliate by liquidating United States assets in the Reich. The idea of retaliation was opposed by the Reichsbank and the Foreign Office.
By such an act they warned, “we would thereby furnish the Americans with a frank admission of what we have been so far trying to conceal by cloaking—i.e., that these actually exert German interests in the companies involved, and on a considerable scope.” 64
It was a damning admission, which surfaced among the captured German documents immediately after the end of the war.
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