How the Germans Spotted Our Ships

by JAMES STEWART MARTIN

1

AN economic war is an attack against the cconomy of a country. The idea is to throw the country’s productive system out of balance and introduce other maladjustments that place it at a disadvantage in meeting a future military crisis.

When World War II broke out we found that this country had been the victim of a relentless economic war, begun by the military and political planners of Germany long before there was any question of a shooting war. In that case the German planners had used German business firms and a chain of international business agreements to delay the production of critical materials in this country. But that is not necessarily the only way in which an enemy might gain the advantage over us on the economic side of an international power struggle. The United States is particularly vulnerable to an attack through economic channels because an enemy can always count on American firms to put up a stiff fight for “business as usual.” In that way, American business itself can be led wittingly or unwittingly to take an active part in rounding out the enemy strategy.

We had a dramatic illustration of this point early in the last war. We set up an Economic Warfare Section in the Department of Justice to trace the threads of Germany’s economic penetration and to help American agencies turn the economic war the other way around.

The case began as an antitrust complaint. Ernest Cunco brought in a client who was engaged in the fire and marine insurance business. This client claimed to be the victim of restrictive practices. In discussing his complaint with Joseph Borkin of the Antitrust Division in the summer of 1941, he charged that besides violating the antitrust laws in various ways, the regular course of business of the big companies had the amazing effect of supplying Germany with a full espionage service.

In 1940 and 1941 ships leaving American seaports were protected by security measures designed to keep their departure secret. Yet in case after case, he charged, every man on board had been marked before the captain opened his orders. The routine system of placing insurance had put precise information on their sailing date and destination in the hands of the Germans before the ship left port.

Insurers of large risks, such as ships, cargoes, and industrial plants, customarily spread the risk among other companies willing to take fractional shares. The big insurance and reinsurance companies in the United States which handle the largest risks have such treaties on an international basis, through arrangements with the Lloyd’s group in England, or with the Zurich group in Switzerland.

It had long been the custom of the American companies to place the reinsurance on ships and cargoes with the Zurich group by sending a radiogram containing the necessary information so that Zurich could accept responsibility for a share of the American insurer’s risk. The radioed information would include the name of the ship, the sailing date, the cargo carried, the destination, and the value of the insured property. One detail that should have raised someone’s eyebrow, but did not until the government stepped in, was the fact that the Zurich group in turn had a reinsurance treaty with the Munich reinsurance pool in Germany. The result was that during 1940 and early 1941, by the time a ship had cleared New York or Baltimore harbor headed for a European port, the German intelligence service already had the sailing data in hand.

Borkin turned the case over to several antitrust lawyers who called a conference of executives from the five or six big companies which were doing international reinsurance business. The company representatives agreed to stop sending shipping information by radio and there the matter rested. Apparently the government lawyers assumed that once the companies had their attention called to the inherent danger they would take all other necessary steps to avoid violations of the Espionage Act. None of the men detailed to handle the case, either for the government or for the companies, appeared to realize what an efficient pipeline the Germans had set up.

2

IN the spring of 1942, Cuneo’s client came back and reported that the problem was far from solved. The lawyers to whom the case had been assigned had not carried through. This time Borkin turned to the Economic Warfare Section, of which I was then chief, and we worked together to try to get the matter settled. We found that reinsurance information sheets, or bordereaux, were still going to Switzerland by mail. We also discovered that the reinsurance business, far from being confined to ships and cargoes, also covered industrial plants, and especially those large new plants built for war production, the ones with security guards at the gates to see that no unauthorized eyes got inside.

In the case of industrial plants, we found that the reinsurance bordereaux did not account for the full extent of the leakage. The usual reinsurance treaty on such risks provides that the reinsurance group has the right to demand copies of a full report by the insurance inspector. This includes blueprints of the installation, description of the fire hazards and risks, and inventory of the contents of the buildings, room by room. We found that, before 1938, the Zurich group had asked for llie full insurance inspector’s report in only 5 or 6 per cent of the cases. After 1938, the full report was requested with increasing frequency, until the percentage was close to 90.

It had seemed obvious to us that the government ought to stop this transmission of shipping and industrial information through Switzerland to the Reich. Unlike the United States, the German government as early as 1936 hud closed off such information about Germany. As soon as the Germans occupied France, Belgium, and Holland in 1940 they put a stop to all such transmissions from those countries. We proposed to have the Attorney General send a letter to each company warning that transmission of marine and industrial plant information of this type came within the scope of the Espionage Act. The letter we drafted said that the Espionage Act

. . . makes it illegal to receive or to aid another to receive information connected with the national defense with reason to believe that it is to be used to the injury of the United States or to the advantage of a foreign nation.

Under present conditions, information relating to cargoes, hulls, plants, supplies, equipment and the like, as well as to persons engaged in the war effort, can not be sent abroad in connection with insurance contracts without reason to believe that this information may be used to the injury of the United States or the advantage of a foreign nation. The dangers inherent in the transmission of this information are present even though such information may be destined only for neutral countries or those allied with us.

In spite of the simplicity and directness of this proposal, however, we ran into difficulties. Issuance of such a letter in the name of the Attorney General required approval by the Solicitor General, Charles Fahy. Mr. Fahy would not take this responsibility without consulting the other interested departments of the government.

At first, no one could believe that Americans were handing the German intelligence service information on a silver platter. At one of Mr. Fahy’s interdepartmental meetings, Joe Borkin slapped down on the table a stack of insurance inspectors’ reports on various prominent buildings. He had purchased these from sources open to anyone in the insurance business without any special “security” clearance. For fifty-five cents he had the plans of the White House, showing the location of fire extinguishers and other protective apparatus. For seventy-five cents he had the plans of a large new magnesium plant. One of the blueprints had an arrow pointing at a valve, with the legend: “Under no circumstances must this valve be closed while the plant is in operation, as an explosion would result.”

To complete our case, we had obtained from the Office of Censorship copies of insurance bordereaux photographed from the current week’s mail destined for Switzerland.

We got other evidence to show that German insurance companies were operating at a loss in Latin America, with the help of a German government subsidy, to capture a larger share of the international reinsurance business. At the same time, to show how informative inspection reports could be to an outsider, another of our men got from the files of American reinsurance firms similar data on important European plants, such as the N. V. Philips lamp and radio-tube factories at Eindhoven, Holland. Months later, the British Ministry of Economic Warfare thanked us profusely for copies of this report. They told us it had been used in planning the RAF raid on Eindhoven in December, 1942, and in assessing the bomb damage after the raid.

Still there were objections. Maritime Commission representatives argued that existing regulations required them to place insurance on all cargoes. If we put any brakes on the insurance companies, they might decline to accept the risks, and ship sailings would be delayed. Besides, enemy agents could get information on ship sailings and cargoes by going down to the docks and watching the ships load and depart.

The FBI resented the implication that enemy agents had the run of the waterfront. Nearly everyone agreed there was no sense in wrapping up marine and industrial information and handing it to the Germans. But the Maritime Commission was still worried about the possibility of not getting insurance placed before ships were ready to sail. Other agencies were bothered about industrial plant insurance. For months they urged us to look for a solution that would permit the insurance business to be carried on as usual. Why not set up an interdepartmental committee of qualified economists and experts to sit in consultation with members of the insurance industry? They could pass upon specific items of information, deciding in each case whether the release of the information would substantially harm the war effort or give help to the enemy.

We stuck to our guns and insisted that the simplest thing to do was to tell the insurance companies that this particular practice had to stop. Let the people in the business, who were already familiar with conditions in their industry, figure out how they could adjust themselves to the new circumstances. We felt that government, wherever possible, should operate through laws, not by setting up more and more administrative tribunals to command or forbid particular acts. We pointed out that the Lloyd’s group had solved a similar problem by sending over from England a resident representative with power of attorney to make commitments on behalf of the British companies without sending information out of the United States.

Our stand for a government of laws, not men, got no support from the Solicitor General. Mr. Fahy overruled us again, and discussions continued on how to set up an interdepartmental screening committee. After several months of this, even men from the insurance business began to ask the Attorney General to send his letter so that they could get the bureaucrats out of their hair. The letter was finally sent out on January 7, 1943, nearly a year and a half after the leakage had first been brought to the attention of an agency of the government, and over nine months after the Economic Warfare Section had taken up the case and pointed out what uses the Germans could be making of the information.

Actually the Germans made plenty of use of it. Nearly three years later, in the summer of 1945, in the files of the Munich Reinsurance Company and the German intelligence service, we were to find bundles of photographs, blueprints, and detailed descriptions of whole industrial developments in the United States, many of them obtained through insurance channels. Together they made up the vital statistics of our war economy.

Nothing was ever done to restrict the circulation of insurance inspectors’ reports within the industry inside the United States. A few weeks after Joe Borkin made his dramatic purchases, an FBI agent appeared at Borkin’s office in the Justice building and demanded to know why Joe, who is not in the insurance business, had been buying up this type of information. The FBI, with its attention focused on security of information about war plants, had seen nothing unusual until someone outside the insurance field showed an interest in information that was freely accessible to anyone in the business. Like the characters in the Chesterton story who failed to suspect the mailman, even the G-men had a blind spot for “security leaks” that occur in what is regarded as the normal course of business.