The Tango War

by Mary Jo McConahay

  But Lázaro Cárdenas never forgot what he saw. Brutal company militias, the infamous guardias blancas (white guards), kept order. “In how many of the villages bordering on the oil fields is there a hospital, or school or social center, or a sanitary water supply, or an athletic field, or even an electric plant fed by the millions of cubic meters of natural gas allowed to go to waste?” he asked the nation years later, with the authority of one who had seen with his own eyes.

  Out of the turmoil of the revolution—as many as 3.5 million persons died between 1910 and 1921—came a remarkable constitution that incorporated social rights, mandated land reform, and established the right to collective bargaining for workers. The document’s famous Article 27 carried tectonic implications for the oil industry: the government might grant limited concessions, but from now on, rights to substances found underground, such as oil, gold, copper, and silver, belonged to the nation.

  The international oil companies reacted with umbrage—possessing a concession, they said, meant that what was under the earth belonged to them, period. The executives seemed to agree with American oilman J. Paul Getty’s famous words: “The meek shall inherit the Earth, but not its mineral rights.”

  The oil companies and their governments did not want to give in to the new law for reasons that went beyond Mexico: a snowball effect might reach holdings in Peru, Colombia, Venezuela, and Bolivia. Mexico had to be stopped.

  * * *

  When General Plutarco Calles, a veteran of the revolution, became president in 1924 and tried to implement Article 27, the U.S. ambassador called him a “communist.” (He wasn’t; indeed, Calles was an admirer of Mussolini, but it did not help appearances that Mexico had been the first country in the Americas to host a Soviet embassy.) The oil companies urged Washington to repeal an embargo on arms sales so that Calles’s enemies could topple him. To cool tensions and find a compromise, President Coolidge named a classmate of his from Amherst College as ambassador to Mexico City, a banker named Dwight Morrow. The appointment turned out to be enlightened.

  Dwight Morrow was a patrician-looking J.P. Morgan Company executive who had served as the chief civilian aide to General John J. Pershing in France during World War I. As soon as he arrived in the Mexican capital, Morrow changed the name of the diplomatic headquarters from “American Embassy” to “United States Embassy,” defusing long-standing ire from Mexicans who said the word “American” belonged to Latin countries as well.

  At J.P. Morgan, Morrow had been the financial advisor to Charles Lindbergh, the first aviator to fly alone across the Atlantic, and he invited the pilot to Mexico on a goodwill tour. Adoring crowds received the world’s most famous man. One hundred thousand workers paraded in his honor. The visit had romantic consequences, too. Lindbergh met the ambassador’s daughter, Anne, and married her in 1929.

  In nearby Cuernavaca, where Morrow and his wife built a weekend home, the ambassador expressed respect for the national culture by commissioning the muralist Diego Rivera to paint a massive narrative fresco in a palace off the central square, once the home of Hernán Cortés. The resulting panorama is one of the artist’s most magnificent works, an image of the Conquest by a revolutionary: metal-clad Spanish invaders mounted on fine horses fight indigenous warriors who struggle in combat on the ground without shoes.

  Years before President Roosevelt introduced the Good Neighbor policy in 1933, Dwight Morrow seemed to sense the end of the Big Stick. Since 1823, U.S. relations with countries south of the border had been ruled by what would come to be called the Monroe Doctrine, a declaration to Europe and the rest of the world that Latin America fell within the U.S. sphere of influence. For a hundred years thereafter, Washington imposed its will on Latin countries, often by force, frequently on behalf of U.S. businesses. Morrow instead represented dialogue, partnership.

  He also anticipated Nelson Rockefeller’s program of Goodwill Ambassadors that would bring Hollywood stars and notable intellectuals to South America during the war, a propaganda offensive aimed both north and south. Morrow invited the wildly popular humorist Will Rogers to travel around the country with him and President Calles and send favorable dispatches about Mexico and its president back to the United States.

  In 1928, the Calles-Morrow Agreement alleviated strains by introducing a kind of grandfather clause into the oil crisis, reaffirming the rights of foreign companies in the tracts they worked prior to the 1917 Constitution. The agreement said future disputes would be resolved by Mexican courts.

  * * *

  Even Dwight Morrow’s diplomatic presence, however, could not put a lid on the roiling activism of oil industry workers. And members of the nationalistic middle class, who had supported the revolution as a way of subordinating foreign capital, knew foreign companies lost little in the 1927 pact, even though Shell and Standard continued complaining about even minor changes to the status quo.

  Meanwhile, Germany, Italy, and Japan were beginning to explore ways to stockpile oil as they prepared for war. This was the situation faced by Lázaro Cárdenas, Mexico’s greatest twentieth-century president.

  Tall, part Tarascan Indian, with thoughtful dark eyes, Cárdenas was elected in 1934 on the pledge to carry out the reforms—finally—that had been promised by the long and bloody revolution. The son of a shopkeeper from Michoacan, he fought with such skill and ambition during the revolution that he rose to the rank of brigadier general by the time he turned twenty-five. Cárdenas’s national project—expanded federal government, liberal social programs, and a policy of controlling natural resources to serve the public interest—had much in common with that of his colleague in the north, Franklin Roosevelt. Indeed, Lázaro Cárdenas had his own kind of New Deal.

  The new president was bent on fundamental change. His reputation for personal incorruptibility gave him moral authority. But the reforms also placed Mexico on a collision course with the world’s most powerful nations, the United States and Great Britain, over oil.

  Workers sparked the dispute. Before the 1930s, the oil industry’s organized labor sector was relatively weak. When faced with strikes, companies typically threatened to cut production and jobs, and the government reluctantly went along with the companies, fearing a domino effect from work stoppages that could upset the entire national economy. Refinery employees, engineers, and workers in the field were among the best-paid laborers in Mexico, but the disparity between their compensation and that of foreign employees, often for the same jobs, was an affront to dignity and respect.

  In a way, the pay and benefits gap was a symbol of what rankled Mexicans overall about foreign control of their oil: the nonrenewable national resource was dwindling toward depletion even as the wealth it produced flew into pockets abroad. “The government or individual that delivers natural resources to foreign enterprises betrays the fatherland,” Cárdenas would write at the end of his life.

  On August 15, 1935, ten thousand oil workers united their nineteen disparate unions. They joined the fast-growing Confederation of Mexican Workers, effectively the ruling party’s labor sector, demanding wage increases and benefits. They drafted the industry’s first collective bargaining contract and submitted it to companies in 1936. The die was cast.

  Some companies had amicable relations with their workers and accepted the contract, but seventeen American and European firms that produced most of the oil did not, saying they could not afford to comply. They included the giants—Royal Dutch Shell and the Rockefellers’ Standard Oil. The Mexican Board of Conciliation and Arbitration, set up in the Constitution to resolve intractable labor-management disputes, wrote a twenty-seven-hundred-page report deciding in favor of the unions. Companies appealed to the Mexican Supreme Court, which sustained the board’s decision.

  In March 1938, Cárdenas’s control of the country was under threat from two sides: from the fascist-supported political right that opposed his wide reforms and from Mexican labor and the public who demanded he confront Big Oil. Events in Europe were reaching a bo
iling point. Hitler triumphantly entered Vienna with tens of thousands of troops. Out of more than sixty countries in the League of Nations, only Mexico protested the Anschluss, Hitler’s invasion of Austria. French commanders ordered troops on the Maginot Line to stand by; the British home secretary called for a million air raid volunteers; Spanish troops loyal to the elected Republican government were fleeing before Generalissimo Francisco Franco’s legions, supported by Nazi arms and planes.

  Cárdenas had to make the most momentous decision in the nation’s history since independence—whether to nationalize the country’s petroleum—while keeping in mind Mexico’s geographical reality, “so close to the United States.” He had two cards in his favor: oil would be the lifeblood of the coming world conflict, required by all sides; and Roosevelt had pledged, at inter-American conferences in 1933 and 1936, that the U.S. military would never again invade Latin countries. Cárdenas reckoned that the American president could not go back on his word for the purpose of securing Mexican oil, even if he wanted to. War was on the way, and Roosevelt would be risking the allegiance of all Latin American nations with such rash action.

  Cárdenas held face-to-face talks with the dissenting firms, offering compromises they did not accept. “Even in today’s terms, the arrogance of the oil negotiators toward President Cárdenas himself and the symbolic power of his office is surprising,” wrote historian Friedrich Schuler.

  At 10:00 p.m. on March 18, 1938, Mexicans gathered around their radios to hear the president, whose voice sounded husky and firm. “It is the sovereignty of the nation which is thwarted through the maneuvers of foreign capitalists who, forgetting that they have formed themselves into Mexican companies, now attempt to elude the mandates and avoid the obligations placed upon them by the authorities of this country.”

  The morning newspaper El Nacional ran the headline “OIL COMPANIES REFUSE TO ABIDE BY SUPREME COURT DECISION, THE GOVERNMENT WILL FOLLOW THE PATH OF THE LAW.”

  Cárdenas offered compensation, but the companies turned it down. They launched a crippling international boycott of the new Mexican state oil company, PETROMEX, later called Pemex. They deprived Pemex of tankers to carry its oil and cut off its supply of tetraethyl lead, a compound necessary to turn crude into sellable high-octane gasoline. Working together, the State Department and the companies dissuaded Latin American customers from buying Mexican oil. The companies organized secondary boycotts to prevent sales of machinery that Pemex needed, sometimes resorting to threatening to withhold their business from suppliers. A press campaign orchestrated by the companies pictured Mexicans in racist caricatures.

  Big Oil argued to Washington that the Mexican expropriation was a dangerous precedent, that losing control over the Southern Hemisphere’s petroleum was a threat to the vital interests of the United States. Secretary of State Cordell Hull agreed. Labor costs had been kept low in the Latin oil fields. What would happen if other nations followed and companies lost their ability to procure cheap oil all over Latin America? In 1932 it cost US$1.90 to produce a barrel of oil in the United States, but only US$1.60 in Colombia, Ecuador, and Peru; US$1.41 in Mexico; and just US$0.87 in Venezuela.

  Maintaining the position of the oil business into the future was conflated with maintaining the U.S. sphere of control in Latin America. In June 1938, an advisor warned Hull and Roosevelt, “Should the government of Venezuela follow the government of Mexico and expropriate the foreign owned oil properties … without adequate payment therefor, the proper interpretation of the Monroe Doctrine will become the gravest problem the State Department will have to face.”

  The peso fell and Mexicans suffered a 20 percent rise in prices, but the public supported the nationalization across class lines. Cárdenas believed oil had a social function, and Mexicans agreed that its value for the nation transcended money: expropriation was an economic Declaration of Independence. Cárdenas pledged that despite the circumstances, “Mexico will honor her foreign debt,” and a call went out for public donations. “State governors, high Church officials, patriotic grand dames, peasants, students—all the numberless and picturesque types of Mexicans—pitched in what they had, including money, jewels, even homely domestic objects, chickens, turkeys and pigs,” wrote a historian.

  But donations of jewelry and pigs would neither meet the Mexican budget nor pay off the national debt, nor would they cover social programs to modernize the nation. With Mexico’s traditional markets blocked, Cárdenas had to look elsewhere to sell oil. Germany, Italy, and Japan were at the door.

  Cárdenas was by conviction a democrat; his political opponents were supported by Mexican fascist organizations and Franco’s Spanish Falange. But he would make his decisions about where to send oil based on what was best for Mexico.

  ENTER THE MYSTERY MAN

  William Rhodes Davis, a larger-than-life international trader who made and lost entire fortunes by the time he was in his forties, could not have chosen a better moment to appear on the scene. In 1941, the New York Times referred to Davis as “the mystery man” of international wartime politics. A natural salesman with a magnetic personality and contacts that ranged from Roosevelt to Hitler, Davis gave Cárdenas what he needed to make nationalization work: a secure market for Mexico’s oil. At the same time, the American entrepreneur also assured Nazi Germany of the fuel it needed to start the war.

  Born in Montgomery, Alabama, William Rhodes Davis always said he traced his ancestry to the British empire-builder Cecil Rhodes and to Jefferson Davis, president of the Confederate States of America—forbears possibly more aspirational than factual. He learned the oil business from the bottom up in Oklahoma, beginning by doing dirty work on oil rigs, starting his first wildcat company at age twenty-four. Over the years he made the transition to dressing in elegant suits, smoking a cigarette European-style, held between thumb and forefinger, cultivating the air of a worldly entrepreneur. Inveterately optimistic, Davis was also a hard-fisted businessman who possessed a chameleonlike capacity to switch his persona as the occasion demanded, from that of a poorly spoken hick to a smooth, cultured gentleman. Not physically imposing, with a slight limp from an injury suffered during service in World War I, Davis was always the man with the biggest plans in the room.

  In 1933, attracted by the possibility of selling oil to Germany as the National Socialists came into power, Davis dispatched a company officer to Berlin. After a few weeks, his envoy reported there was no chance for their small, independent company to succeed against Standard and Shell, which had a stranglehold on the market. That iron wall of Big Oil had stood in the way of Davis’s plans more than once—he deeply resented the giant companies and called them “the international combine.”

  Undeterred, Davis got financing from his perennial stand-by partner, the Bank of Boston, and went to Germany himself. He acquired an oil storage company in Hamburg, drew up a plan for a massive refinery, and, with his trademark confidence, peddled his proposal to German banks. When a banker introduced him to aristocratic twin brothers Karl and Werner von Clemm, Davis befriended them, and his star began to rise in Berlin.

  The von Clemms, through a web of wives, mistresses, and blood kin, were related to influential Germans and Americans whom Davis might not have met on his own: Rudolf Diels, head of the Gestapo; top diplomat Joachim von Ribbentrop, Hitler’s foreign minister after 1938; and Harry T. S. Green, a vice president of National City Bank of New York (today, Citibank). Werner von Clemm arranged a reception for Davis to meet corporate leaders, including the chairman of IG Farben, the powerful cartel of chemical and pharmaceutical companies that had poured more money than any other donor into Hitler’s election campaign and would be among the war’s biggest profiteers. Davis made a calculated but terrific first impression: he entered the banquet room giving the Nazi salute. The businessmen eased his introductions to government officials.

  But Davis knew his project would never proceed without the approval of the Fuehrer himself. He sent a copy of the plan for the huge refinery oper
ation, to be called Eurotank, directly to Hitler. A few days later, Davis was presenting his plan to a table of skeptical directors at the Reichsbank, feeling their resistance, when Hitler walked through the door. The men shot to their feet.

  “Gentlemen, I have reviewed Mr. Davis’ proposition and it sounds feasible, and I want the bank to finance it,” Hitler said.

  The Fuehrer raised his arm in the Nazi salute, turned on his heel, and was gone. Eurotank got its financing without a single dissenting vote.

  Davis hired Winkler-Koch Engineering, a construction and design firm from Wichita, Kansas, to repurpose the Hamburg oil storage facility. For Davis, it was a wise choice. Fred Koch, the firm’s owner, traveled to Germany often in the 1930s on oil business and knew how to get things done in the Reich. Father of the Koch brothers Charles and David, who would become billionaire forces in radical-right politics in the United States, Fred Koch had turned Davis’s facility into one of the largest oil refineries in the world by 1935.

  Eurotank refined a thousand tons of crude per day, and was one of the few refineries in Germany that could produce the high-octane gasoline demanded by fighter planes. Eurotank fueled the Luftwaffe. The business owned by Davis and built by Koch became “a key unit of the Nazi rearmament campaign.”

  Whether Hitler favored Davis because of his impressive Berlin connections or whether he gave the Reich’s business to the independent American because he thought he could control him more effectively than he could manage Shell or Standard, Davis became a principal conduit for Germany’s oil. Clearly Berlin saw his U.S. citizenship as an advantage in North and South America. Hermann Goering, one of the most powerful members of the Nazi party, said later in reference to Davis that “at the time of the American depression I was desperately looking for someone who would [be] useful to me in America in exploiting the economic situation.”

  William Davis needed a steady supply of oil to feed Eurotank. From 1934 to 1938 he bought small Mexican concessions, set up his company in Tampico, and developed a sales and political network that threw him into the kind of competition with Big Oil he had always dreamed about. He met with Mussolini and sold fuel to Italy for its war in Ethiopia (1935–40), helping to boost Il Duce to his apex of popularity at home. He met with Hitler six times after the Fuehrer’s surprise appearance at the Reichsbank. In Washington, through labor leader John L. Lewis, he met with President Roosevelt to propose a complicated three-way barter deal: the Bank of Boston would buy U.S. surplus cotton and send it to Germany in exchange for railroad equipment, which the bank would then trade to the Mexican government for oil, which the bank would resell to Davis, who would refine it at Eurotank and sell it on the world market.