The New York banking house of Ladenburg, Thalman & Co. worked directly with Stephenson. Any leakage of information could place an agent or an army in peril. Deals had to be made on a personal basis, Donovan stepping into the picture when necessary. On one occasion, a fortune in American dollars was required for operations so secret that Donovan himself could not be told their purpose. A cold-eyed official of the U.S. Treasury came unwittingly close to sabotaging the transaction, which involved large guerrilla forces. The money was transferred in large denominations, in a series of maneuvers known only to Stephenson, a Baker Street paymaster, Donovan, and two of his top men. The President and the Prime Minister were aware only that secret funds were being handled on a very large scale. A BSC report summarized the difficulties: “The dollars will be used in occupied Europe and must fall into German hands eventually, which the U.S. Treasury and the Federal Reserve Bank both disallow. The dollar notes cannot be purchased from the U.S. Treasury by the British Treasury against a check, because the telltale check will go through the American financial machine, leaking its tale of conspiracy.”
Donovan drew an initial three million dollars from the U.S. Treasury in large notes. The bigger denominations, handiest in German zones, were sent to London. In time, the money would come back in the small bills still rustled up in Britain. Small notes required an enormous number of bags to carry them. This meant a lot of cargo space when space was at a premium. So the repayments were delayed. Donovan tried to draw another two million dollars. The U.S. Treasury inquired when he planned to pay back the earlier amount. There was no quick answer. Yet Baker Street was pressing Stephenson for the next shipment before the winter’s last lunar period, during which aircraft could exploit long hours of darkness to make the dangerous “paymaster” flights into the Third Reich.
Stephenson had to draw on his own reserves of cash and good will. He gave his word that the debt would be covered, and told the President the gist of the problem. FDR discussed it with Henry Morgenthau, Jr., the Secretary of the Treasury. Another two million dollars were released. This particular sum was flown to a field prepared by the Polish secret army, the RAF Moon Squadron STS Mosquito landing at the center of a triangle made by three hooded lanterns.
Nobody anticipated a statistical problem. A million in hundred-dollar bills fitted inside a single bag and could be flown eastward over the Atlantic. The small bills coming back from Britain filled, for the initial five million, nearly 200 bags. They did arrive, after an agonizing pause that prompted more embarrassing questions from Treasury watchdogs. The final shipment was almost sabotaged by Donovan’s own financial man. He wondered, in the politest way, if Donovan could tell him how the money was being spent. Or was it being hoarded? Donovan replied that “U.S. 100 and 50 dollar bills were needed in large quantities by those secret armies built up by Baker Street and that the guerrilla chiefs in the field depended upon London revealing nothing. The huge sums were required to finance preparations for the final uprising against Hitler.”
The American financial genius needed to help Stephenson out of these embarrassments was Henry Morgenthau, Jr. Hitler, back in the spring of 1939, had said “Roosevelt and his Jewish treasurer, Morgenthau,” were so fully absorbed in domestic politics that Germany could always count on a seven months’ time lag before American industry could be mobilized or an expeditionary force launched. To maintain this period of grace, Hitler ordered propagandists to show moderation in supporting American isolationists. But the success of the first blitzkrieg, the conquest of Poland, went to Nazi heads. The archives of the Polish Foreign Ministry were rifled and the contents falsifed to show how prominent Americans had conspired against the Reich along with “Jews and sinister ambassadors.” In New York, the German Library released documents that told in revolting detail of Polish atrocities against Germans. Photographs “too horrible for public dissemination” might be viewed in the privacy of the Library’s premises at 17 Battery Place. “Murder, mutilation and scenes of mass killing and rape” were offered, in which the Germans appeared as victims.
Morgenthau’s personal outrage was widely shared. As the war in Europe spread, he campaigned quietly on Britain’s behalf. His influence with the President often resulted in his getting blamed for inconvenient military situations. When the U.S. Army found that the rounds of ammunition fired by recruits had been cut by forty percent to release supplies to Britain, it blamed Morgenthau.
By 1942, even gentle Henry Morgenthau had ventured a long way into clandestine operations. Fake as well as real money was being used by guerrillas in Europe. The counterfeit currency was purchased by the U.S. government on Britain’s behalf. “The law forbade its manufacture on American soil,” said Ernest Cuneo. “So we had BSC manufacture the stuff through private commercial printing-works specializing in this sort of thing. These were British firms geared for maximum security. In peacetime they manufactured the currencies of foreign governments, so they were trained in special protective measures. We had to pay them a hell of a price—about sixty percent of the real value. So I said Christ Almighty—how about us paying you off in phoney British pounds?
“And they said, thanks, we’ve got all the fake pounds we need.”
These technical breaches of the law became less amusing after Hoover began trying to suppress BSC activities. It became necessary to call a Western Hemisphere Intelligence Conference in April 1942. Stephenson wanted to impress on Hoover and U.S. service chiefs the consequences of losing BSC’s co-operation. American suspicion persisted, nonetheless, that BSC was no less efficient in manipulating the White House than it was the Axis. Stephenson replied with examples of the ghastly results of separate efforts in the field.
British policy was to guard against the enemy guessing that his secret radio traffic was being read. The British would not make available to their own SIS representatives in Latin America the deciphered versions of this German traffic, in case of leaks that could endanger Bletchley.
American procedure, however, was to distribute transcripts of monitored traffic in all directions. The State Department’s own monitor reports might go to the American Ambassador in Uruguay, for instance; the War Department’s product to the military attaché in Venezuela; the Navy’s to naval observers in Brazil. Even the Associated Press filed material leaked to it by the American Embassy in Rio, based on deciphered material, and once used a complete sentence from the original transcript.
Things had come to a head when the Brazilian police rounded up dozens of Germans in March 1942. All were known to Stephenson as members of separate espionage rings. Their identification had been made through British analysis of deciphered German signals. To preserve the secret, and to continue listening to these enemy spies, the British had taken no action. Yet Brazil clearly received a summary of BSC investigations. Nobody under Stephenson’s direction had provided it. That left, as suspects, the recipients of BSC reports in Washington. Once again, Stephenson went to the White House. He had staked his personal reputation, his credibility in London, upon his trust in American judiciousness; but an incident of this kind would make it harder than ever to argue with Churchill’s intelligence chiefs that information should be freely shared. FDR agreed, pressed for an inquiry, and had to confess that the innocent culprit was his own Ambassador in Brazil, who had presented a note requesting the arrest of German agents. His list of names and supporting quotations from intercepted messages were placed in the hands of the Brazilian police, who quoted them during legal proceedings. Only luck prevented Berlin from receiving word of the broken ciphers.
Stephenson’s aim at the conference—attended by representatives of BSC, the FBI, the State Department, and the U.S. armed forces—was to heal wounds and bring about the smoothest possible working partnership. He was up against Hoover’s legalistic mind, however, when he tried again to preach the double-cross system of letting enemy agents continue their work if this would expose others. Hoover did not take kindly to suppression of evidence. Stephenson wanted to dela
y justice until the suspect’s sources, his paymaster and accomplices and communications had all been disinterred. He quoted the case of an intercepted letter from a German agent in Colombia: “The German wrote that his radio receiver had been confiscated by the Ministry of Communications. The identity of the writer was hidden under a false name but the Colombian government obligingly consulted the records and found that only two Germans had been required to surrender their radios. It was easy from this to pin down the agent. A skilled spy had slipped up while composing a letter. But by leaving him in place, a great deal more was learned about shipments of platinum badly needed for aircraft-engine magnetos in Germany. Agents were paying from three to ten times the official American market price for platinum and then smuggling it either through Italian LATI airliners or by sea to Lisbon. This led to new operations against supplies from Latin America to Germany.”
The penalties of secrecy were evident in the simultaneous discussions in Washington between U.S. and British representatives on routine communications intelligence. Their knowledge of BSC operations was scanty. Few realized how much ULTRA information had been disclosed to the White House. “Cryptographic liaison with the United States,” reported the BSC Papers, “had previously been restricted and sub rosa. It could now become open and complete in regard to both operational and diplomatic codes and ciphers.”
This optimistic observation glossed over the frictions between U.S. services. “Amity between the U.S. War and Navy Departments,” BSC conceded discreetly, “was not at that time remarkable. The Office of Naval Communications regarded itself as a professional agency, able to perform its duties without outside help. The Army Signal Corps, faced with a program of vast and rapid expansion, was both conscious of its own temporary shortcomings and resentful of the professed self-sufficiency of the Navy.”
Fascinating questions were discussed finally; for instance, the technique of “radio finger-printing,” by which individual telegraphists could be identified. A smooth exchange of radio intelligence between the Allies was the goal. As the talks progressed, the service delegates showed an increasing, though grudging, respect for each other.
BSC was vaguely known to senior officers as an amateur organization. The British Admiralty representative was warned, before he left London, that Stephenson was “out of bounds . . . off limits” because of the sensitive role he was playing on U.S. soil. But it was impossible to conceal INTREPID’S communications system. It carried more and more inter-Allied service traffic on an informal and temporary basis that became formal and permanent.
It seemed incredible that one group of intelligence specialists could be often unaware of the work conducted by another group. But BSC had been born in a period when its presence had to be kept utterly secret. Its relations with U.S. agencies may have seemed casual. They resulted from long and careful diplomacy. In this situation, the normal compartmentalization of secret agencies could only add to the general ignorance of BSC’s purpose. This, of course, was the most persuasive reason for keeping on good terms with the FBI and Hoover.
When Hoover and Stephenson worked in tandem, operations often went smoothly indeed—inevitably to the annoyance of some State Department officials guarding national sovereignty. Each case presented Stephenson with a difficult choice: to tread on someone’s corns or to let the real enemy slip out of reach.
The case of double agent William Sebold created a scandal, disclosed the loss of major military secrets to Germany, put thirty-three members of a Nazi spy ring in an American court, and established Hoover’s authority in intelligence operations—at least in the public mind, though not in that of the State Department. But it made possible the open transfer of a secret weapon to the RAF when Washington was embarrassed to discover that the blueprints had been smuggled out to the Nazis while the British were refused it on grounds of security.
Sebold was a naturalized American of German birth. German intelligence trained him in 1939 in code and cipher work, the use of secret radio transmitters, and microphotography. He reported all this to the American authorities. Under FBI instruction, he established his German intelligence headquarters under cover of the Deisel Research Company in the Knickerbocker Building on 42nd Street in Manhattan, and a radio transmitter at Centerport, Long Island. He was put in touch with other German agents. When the FBI felt that his usefulness was ending, he was instructed to fold up. When he next appeared, it was to give evidence for the prosecution against other German-Americans who betrayed secrets, including the Norden bombsight.
The bombsight was described as “this country’s most jealously guarded air defense weapon” by the prosecuting attorney at the subsequent trial. Stephenson had petitioned FDR for it. Now it could be acknowledged that Germany had been provided with vital bits of information on the bombsight back in 1938, enabling the Germans to reconstruct a model like the original.
What was never revealed, at the trial or later, was that secret transmissions to Germany had been intercepted and decoded more than a year earlier by the British. Stephenson had gone to the White House with evidence that the Norden and Sperry navigation and bomb aids had been betrayed already to the Germans. He said, three decades later: “The President ruled that the vital units should be released to the RAF during the Battle of Britain—a brave and lonely decision, unrecognized to this day.”
By using Sebold’s transmitter, and continuing to work the German intelligence channel, the FBI solved the mystery of another new Nazi microdot system. As early as November 1941, Bermuda had been warned to test for microdots in intercepted mail. In the following months, ironically the period when Hoover was personally still feuding with the British, twenty-one letters sprinkled with the deadly dots were picked up from mail traveling to and from Mexico.
By staying in the background but throwing all BSC’s resources behind the FBI investigations that followed, Stephenson convinced Hoover again that he stood to lose by closing down British operations. BSC’s man in Mexico persuaded the local police to arrest several “undesirable aliens,” all Germans. All were to be repatriated by way of the United States. Thus they could be scrutinized at leisure by the FBI. The State Department, scrupulous about international law, had agreed to give them safe conduct to the repatriation ship in New York. Before the ship sailed, one of the Germans was found to be carrying microfilms on U.S. war production concealed in his shoes. The German, Georg Nicolaus, was thereupon interned.
More microdots were later detected in a letter intercepted by Bermuda. This one contained thirty dots addressed to Guseck/Berlin from Y2983. An investigation of Nicolaus’s accounts in Mexico showed payments to a certain Y2983. Perhaps Nicolaus could be questioned in his place of internment?
But the State Department honored its word to the Mexicans that Nicolaus would be treated as an alien. Thus he remained safely out of reach behind the wired fence. The one person who would know the real identity of Y2983 was guarded against his FBI enemies by the U.S. State Department.
Seven more dotted letters were intercepted from Y2983. By this time, the United States was at war. U.S. service censors refused to release the letters, because nobody knew the code used in the dotted material.
“But by holding them,” Stephenson argued, “you will warn the Germans that Y2983 is under observation.”
A few letters were released after the dots were smudged and made indecipherable. Then Bermuda stumbled across a letter from Europe to a Mexico City post box. Hidden in the letter were instructions in microdots. SIS/Mexico rummaged through the suburban post office and came up with the name Joachim Ruge. The FBI found that a letter written by someone called Joachim Ruge had been posted in Honolulu more than two years earlier. The letter was addressed to Clara Ruge, Schaefer-strasse 22, Wannsee, Berlin, and began, “My dear Mother.” The Y2983 letters already indicated that the writer knew Clara at Schaeferstrasse 22. Old street directories were consulted in London. The address was identified as a boardinghouse run by Clara Ruge, who had a son named Joachim.
Y2983 had been unmasked. The original Mexican spy ring had transmitted messages to New York for relay to Hamburg. The relay was operated by Sebold, the double agent. Once the Sebold connection was uncovered, the rest was simple. All the relevant information was passed to Stephenson’s willing ally, the Mexican Prosecutor-General. With this, and a forty-seven-page FBI report, the Mexicans cleaned up. The FBI checked back through old messages and sent copies to BSC. Some referred to the mysterious company of Franco, Saunders and Fernandez. Fernandez was the new cover name for a resurrected German agent, Edgar Hilgert, who had come by way of Japan. Rereading the old messages, the examiners realized that the FBI had mistranslated after decoding the material recovered from Sebold, their double agent. The spy ring that everyone thought had been smashed was still operating, with new code names for the survivors. In fact, German agents never ceased to be a problem in Mexico, despite the claim of one resounding and finalizing success from Hoover’s publicity machine.
“He lived by publicity,” commented BSC’s Herbert Rowland. “Stephenson avoided publicity at all costs. Inevitably, the FBI got the credit. We never minded this. The FBI, in day-to-day working relations, were always superbly helpful. Hoover only began ordering his department heads to cut us off after he saw Roosevelt had bought Stephenson’s arguments for an independent and co-ordinated intelligence agency.”
The tension was made worse by skepticism about some British claims that the Second Front was established behind enemy lines because the secret armies already tied down German forces. Churchill told both the Russians and Roosevelt that in 1942 the choice of a conventional cross-Channel target was restricted to the few areas where the RAF could provide cover. Plans were being studied for landing successive waves of assault troops to bring about air battles that would result in the virtual destruction of enemy air power over Europe and further relief for the Russians. But, Churchill insisted, these plans must not be allowed to go off at half-cock.
A Man Called Intrepid Page 45
