You might have better luck asking on /r/medicine.

It might have been human growth hormone treatment. Those started in the late 50's after HGH was discovered in 1956. It was made from pituitary glands of the deceased, but they stopped after some cases of Creuzfeldt Jacob (mad cow) disease occurred. Given she was sent to a camp to gain weight, she could have been HGH deficient.

Was she a tiny woman?

Source: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3183530/

And HGH can be applied in ointment form.

/r/translator have an excellent group of people if you need help translating. It sounds mighty suspicious to me whatever it was.

One thing that occurs to me is that it might have been progesterone.

Here's my reasoning. Keep in mind that it's just a guess, so don't take it too seriously.

There is really no reason to apply any medication to the nipples unless you are actually treating local conditions of the nipples, such as cracked or sore nipples. This is obviously ruled out by the fact that it was given to all the girls, and all of them couldn't have had problems with their nipples.

So what does that leave? If it's not being used for a local condition, then applying any medication to the nipple basically reduces to transdermal administration -- you're giving a medicine with the intention that it'll be absorbed via the skin. Same principle as any medication given through a skin patch. It's a non-invasive way to bypass the digestive system and hepatic (liver) circulation, since many medications are ineffective orally because either they are broken down in the gut, or the liver destroys them after they are absorbed.

However, there is no particular need to apply an ointment or skin patch to the nipples when there is so much other skin that will do just as well. Note that when I say "nipple", I mean the nipple and areola, and perhaps including some surrounding skin of the breast as well. A young kid may well remember it as "nipple" when in fact the ointment was spread on and around the nipple.

So, back to the question - is there any advantage to applying the ointment here rather than say on the arm? Well, there may be. Generally, you want to put it on skin which has very good blood flow. This is typically the "blush area" - the area that reddens when people blush, because it contains a lot of superficial blood vessels that can quickly dilate. The blush area includes the face, breasts, upper chest. It's understandable that they may want to avoid the face, but that still leaves more convenient spots like the upper chest. So again, why the nipple/breast?

This is why I think it may have been progesterone. Progesterone in the form of ointments or creams is commonly known as "breast cream" even today. A lot of women use it. The common reasons are either to enhance the breasts (make them grow larger) or for "hormone balance", which basically means to counter the effect of too much estrogen.

Progesterone breast cream is a transdermal medication like any other, and there is no particular reason to apply it to the breasts rather than the arms or abdomen or whatever. But a lot of women do in fact apply it to the breasts. Perhaps it's because of the association "makes the breasts grow," therefore apply it to the breasts. Or just the fact that it's called "breast cream". In any case, it works well when applied to the breasts, because the breasts are part of the blush zone and have good skin circulation, and because they have a lot of fatty tissue, which is excellent for fat-soluble hormones like progesterone.

So by the process of exclusion, asking "what's a medication that isn't used for local nipple problems, but is still often preferentially applied to the breasts rather than skin elsewhere", I'm guessing it may have been progesterone.

As for why anyone would apply progesterone to a bunch of 10 year old girls en masse, I have no clue. Like I said, the two common reasons are to increase breast size and for hormone balance. I think the first use is unlikely. Progesterone does increase breast size in pill form. I don't know if there are any studies that show if it increases breast size when used transdermally, but at least a plausible biological argument could be made that it might. But the way progesterone increases breast size is by increasing the number of milk glands - the milk producing cells. Why would someone give this to pre-teen girls? Unless your grandma is misremembering her age when this happened - perhaps she was closer to 12-13 rather than 10? - I doubt that this was the intended purpose.

The second purpose is hormone balance, usually to counter estrogen. Unless a girl has some clear symptoms of excess estrogen, a modern doctor would not prescribe progesterone. But this was in the 50's, and people sometimes did weird things in the 50's. I can think of a couple reasons why it might have occurred to someone to dose a whole group of schoolgirls with it - one being that estrogen causes bone loss, and the other that it lowers the age of puberty. In a group of undernourished girls who may have weak bones due to deficiencies and malnutrition, it might be useful to suppress estrogen to mitigate against bone loss and to delay puberty so as to focus energy on building up body reserves before going through puberty.

Like I said, modern doctors wouldn't do that routinely. But back in the 50's someone may have started an experimental program in the hopes that it would help. Progesterone has next to no bad side effects, so they may have thought it justified.