Commentary / History

Creating New Industries from Scratch

The following is part 3 of a series on Lessons for a Recovery: The WWII Economic Mobilization. Part 2 appeared June 19. Part 1 was published May 18.

By Stuart Rosenblatt

Thanks to the foresight and efforts of President Roosevelt, Jesse Jones, and others, the United States was already in a state of advanced military production when the Japanese bombed Pearl Harbor, and the United States officially entered the war. A growing industrial mobilization had been underway for 18 months, building on the infrastructure base established during the New Deal. Without this build-up, the Allies would have lacked their major advantage against the Axis, an unprecedentedly powerful and productive economic machine prepared to out-produce the Nazi threat.

The methods the Federal government used to finance and build that machine provide valuable lessons for those seeking to create a genuine economic recovery today.

This installation will describe the final phase of this pre-war mobilization, including the creation of brand new industries such as synthetic rubber and modern fighter aircraft.

Meeting the Demand for Rubber

Rubber was essential for most areas of the economy, war and civilian usage.  It was needed to belts, hoses, tubes, and tires—to name just a few applications.  “A single armored tank contained one half ton of rubber.  Jeeps need tires.  Battleships had 20,000 rubber parts!  Electric wire was covered by rubber.  Airplanes required massive rubber tires.” (Fenberg, p. 362).  Unlike oil, a crucial resource of which the U.S. had large and defined sources of oil, and an already immense domestic industry, rubber was a commodity for which the U.S. was dependent on insecure suppliers halfway across the world.

Synthetic rubber production underway.

Both rubber and oil were widely utilized in the civilian economy, with the auto industry in the forefront.  75% of all rubber in the country was used to make tires. But rubber and oil were also crucial components of airplanes and all the other military equipment so desperately needed for the war effort.

The United States’ supply of rubber came primarily from places where it was naturally available, Southeast Asia (Singapore, the Dutch East Indies, Malaya, etc) and Brazil.  With the Japanese threatening war against the United States and much of Asia, this supply was very much in question.  In the short term the nation had to purchase and store natural rubber, and then it had to rapidly develop synthetic rubber, which was still on the drawing boards in 1940.  The key ingredient in synthetic rubber was oil, in its derivative forms.

Germany had been working on synthetic rubber for several years and had developed two compounds, which were offshoots of oil:  Buna-N and Buna-S, which were derived from butadiene. Jersey Standard Oil had been working in this area, including with the Germans, in hopes of developing a synthetic substance to replace rubber.  Four of the major rubber companies were working on synthetic substitutions, and several large chemical companies were doing the same.  These included  DuPont, Dow, Monsanto, Koppers, and Standard Oil.  Standard Oil and Du Pont would go on to develop neoprene, a rubber substitute for the manufacture of tubes and balloons, but the industry was in its infancy, and no reliable methods existed in 1939-40.

There was much dithering around on this crucial matter.  The major rubber companies were slow to collaborate on developing a substitute, and nobody had the financial wherewithal to orchestrate a major stockpiling effort.  At this point, the RFC was required to step in to address the problem.

On June 25, 1940, the RFC created the Rubber Reserve Corporation (RRC).  It was mandated to stockpile rubber, and began accumulating rubber in the fall of 1940. It had to negotiate with a major Dutch-British rubber cartel in Asia to gather much of its supply, but by December it had stockpiled 533,000 tons.  This was a prodigious amount, but well below the 648,000 tons consumed in 1940. With a war buildup well underway, that 533,000 tons would be consumed in no time, so a search for a synthetic alternative had to be ramped up.

A synthetic rubber plant built during World War II

Unfortunately, this process was delayed well into late 1941.  Each of the major rubber companies and chemical firms were engaged in their own secretive laboratory experiments and nobody would share or collaborate. But on June 14, 1940, there was a breakthrough of sorts when executives from Jersey Standard and several other companies testified before Congress and urged the immediate production of 100 tons of synthetic rubber per day from the existing test plants.  Edward Stettinius, chairman of the War Resources Board, and Bill Batt, Vice Chairman of the War Production Board, took up their proposal, went  to Loan Administrator  (and RFC overseer) Jesse Jones, to urge him to ask the President to allocate $100,000,000 toward the effort.

Roosevelt, however, who had nothing but animus toward the rubber companies, threw cold water on the entire operation. “These wealthy rubber companies ought to build their own plants,” he told Jones. ($50 billion, p. 405)  Eventually he relented, and authorized $25 million be invested in the companies to allow them to develop synthetic rubber, but this was vastly below what was required.  Jones, who was also somewhat skeptical of the companies’ ability to develop an alternative, held back and failed to fight for additional funding.  Control over the program was put in the hands of the RFC, and it took a go-slow approach. For nearly a year, the process languished.  This was one of the few failures of the RFC in the mobilization.

However, perhaps at the ungentle prodding of the President, the rubber companies did productively utilize the $25 million allocation.   BF Goodrich developed its own synthetic, Ameripol, and Jersey Standard announced it would build a plant in Baton Rouge to produce Buna-S rubber, made out of rubber gasses, not coal.  Jersey Standard also offered to license Buna-N (the derivative of butadiene) to other companies, and Firestone and United States Rubber accepted.

The RFC’s Role

Well into 1941 the rubber mobilization finally jumped into high gear.  The results were impressive.  The success was due in part to the fact that the regular government agencies, caught in bureaucratic turmoil concerning appropriate responses to the escalating war in Europe and the potential war with Japan, ceded total responsibility for accumulation of conventional rubber and production of synthetic rubber to the RFC and its subsidiaries.

In a New York Times interview on January 1, 1942, Jones commented on the crucial role of the RFC: “The armed services cannot spend money without an appropriation, and that takes time.  So, often when they knew they were going to need something very badly and must act swiftly in order to get production started, they have asked us to intervene.”  The RFC circumvented Congress and directly funded programs that were urgently needed.  (Fenberg, p. 400)

The Rubber Reserve Corporation and the Defense Plant Corporation (DPC) oversaw the development of synthetic rubber, virtually out of the test tube, and its production on a mass scale over a very short time frame.  Both agencies spent $700 million to build 51 government-owned plants.  Forty-nine rubber, chemical, petroleum, and other industrial companies participated in this crash program effort.  There were many scientific and technological breakthroughs made along the way to producing an entirely new industry.

Houston’s oil industry made it a natural location for rubber plants as well.

The way it worked was this: With financing from the RFC, which as an arm of a national bank, the DPC built the plants and then leased them to the operating companies at a dollar a day until the end of the war.  The participating companies were then to decide whether they wanted to purchase the plants from the government.

Ultimately the prime form of synthetic rubber produced was Buna-S, known as GR-S, for Government Rubber-Styrene.   The plants were built close to the supply of feeder stock, viz. alcohol and petroleum.  Twenty-one plants were built in the East Central states and twenty-three in the Southwest, mainly Louisiana and Texas.  The other seven were in California.  Ultimately, half the nation’s synthetic rubber capacity was located on the Gulf Coast.

The industry became so large in the Houston area that the city celebrated “American-Made Rubber Day in Texas” on June 28, 1943.  Four plants were built to produce the synthetic rubber from start to finish in the greater Houston area.  The main plant had been financed by the DPC, and was operated by General Tire and Rubber Company.  Other companies supplied the raw materials to the venture, including styrene and butadiene, made by plants owned by Humble Oil Company and Monsanto, the former located in Baytown and the latter in Texas City.  The RFC estimated that 40% of the rubber produced nationally came from those four plants in the Gulf Coast area!  It was this concentration of oil, gas, and rubber that established Houston as the petrochemical capital of the nation.  (Fenberg, pp. 452-3)

By the end of the war, the U.S. was producing 700,000 tons of synthetic rubber per year, but had the capacity to produce 1 million tons.  By contrast, the Germans never were able to produce more than 109,000 tons per year.  This crash program model, orchestrated in part by the RFC, was replicated throughout the war economy.

Revolutionizing War Plane Production

President Roosevelt had issued quotas for all branches of the armed services, in order to field a modern, mechanized military capability.  War planes composed a central feature of the buildup, beginning in 1940. Before formal declaration of war against Germany, Italy, or Japan, it was difficult to mobilize the institutions or materials to carry out a full-scale effort, but between the RFC and the Defense Production  Corporation (DPC), significant efforts were made, including the building of entire new factories for the manufacture of the most modern aircraft possible .

The airplane construction process went through two distinct phases, one before and one after the Pearl Harbor attack and declarations of war.  The pre-war efforts were so successful that the output exceeded the President’s demands. Of $9 billion the DPC spent during the course of the war, over half flowed into aviation.

The massive commitment to build the aircraft industry from scratch was explained by John Biggers, Director of Production at the Office of Production Management, in testimony to the House of Representatives in early 1941, “We think of the automotive industry as the industrial miracle of the twentieth century, but please consider that we are faced with the herculean task of building up the aircraft industry in three short years—1940, 1941, 1942—from the small beginning to a more gigantic output than the automotive industry obtained during 30 years of spectacular development.  In other words, airplane production in 1939 was about equal to the automobile production of 1910.  But the airplane production of 1942 must substantially exceed the $3 billion of automobile production obtained in 1940.” (Billions for Defense, p. 68)

Banks were wary of funding this daunting enterprise, and the Congress was very cautious, so the brunt of the funding came from the DPC.  Ultimately the DPC funded three-quarters of the aviation development effort.  DPC used its patented lease formula to contract with airplane companies and their subsidiaries to build the industry. As in the rubber industry, it built and then leased the plants, demanded accountability, and delayed settling on the final status after the war.

The Packard plant, first to receive a government contract for war plane engine construction.

The DPC’s first contract was with Packard Motor Co. in September 1940. This agreement enabled Packard to manufacture 3,000 Rolls Royce engines for British and American planes.  That order was expanded during the war.  In October 1940, DPC also entered into a lease with the Wright Aeronautical Corp. to build a new plant in Lockland, Ohio.  This plant was finished in less than five months and in production within a year of signing the agreement.  It ultimately consisted of 30 buildings, spread out over 247 acres, and had 161,775 machines and other pieces of equipment on site.  (Billions for Defense, p. 68)

Fourteen of the fifteen largest plants building aircraft engines during the war were wholly or partially financed by the DPC.  The DPC spent nearly $1.4 billion just on airplane engine plants.

The biggest was the Chrysler-Dodge plant in Chicago, which covered 476 acres and cost $170 million.  At the time it occupied over 30 city blocks and was the largest building in the world.  It built the engines for the B-29 Superfortress plane which was used extensively in the air campaign against Japan.  The B-29 was the largest plane deployed by the Americans during the war.  Each aircraft had 4 Wright R 3350 engines.  Known as the Cyclone, each 18 cylinder engine had an output of 2200 horsepower.  The plant was also a model of labor management cooperation; 75% of the employees were women and 1-2 % of those were African-American.

In addition to engine production, the DPC also financed many other areas of airplane production, including assembly operations.  At the end of October 1940, the DPC signed lease contracts with Curtiss-Wright to build aircraft plants in Buffalo, Columbus, and St Louis.  In the first week of November 1940, the DPC drew up a similar agreement with Consolidated Aircraft Corporation to build a plant in San Diego to manufacture planes for the Navy.

The Chrysler-Dodge plant in Chicago.

The DPC financed plant and equipment and orchestrated tight completion schedules.  Even before the San Diego Consolidated factory had signed its lease, orders were already being placed for parts of the machinery and equipment.  By June 1941, the plant was in partial operation; it was in full production by October.  The planes were originally destined for the Navy, but as the project expanded, the majority of the output went to the Army.  It ultimately produced 6,725 B-24 bombers–that is, 20% of all medium range, four-engine bombers made in the United States.  Additionally the plant churned out over 3,000 other aircraft, including the B-32 heavy bomber.  (Billions for Defense, pp. 69-71).

The war effort brought out the best in people, and spurred innovations in production methods as well as the development of new technologies. Take the case of Consolidated Aircraft. With Roosevelt’s May 1940 call for 50,000 planes per year, and Britain and France already at war, orders poured into the company.  Its workforce increased from 1500 to 30,000 in two years.  Its floor space grew several times over, courtesy of the DPC.  To guide the massive expansion, Consolidated hired Tom Girdler, president of Midwest-based Republic Steel, a hard- nosed, no-nonsense production man.

Girdler brought mass production technology to Consolidated.  First he built a 3,000 foot assembly line, and then a subassembly plant.  The latter put together the fuselage and wings, and Girdler added a new method of installing instruments so they were already in place as they were put into the plane. Consolidated Aircraft and other manufacturers left the boutique era to meet the challenge of mass production.  New technologies and new techniques, much of it financed by the RFC, increased output per person, and per man hour, thus increasing the Total Factor Productivity of the industry and its auxiliaries.  (Arms, pp 456-7)

Aircraft assembly plants were also constructed on the East Coast.  The largest was the famous Willow Run plant in Michigan, run by the Ford Motor Company, but financed in large measure by the DPC.  Like its West Coast counterpart, Willow Run also built the B-24 bomber.  It was a mile long and a quarter mile wide, enclosing more floor space than the pre- war airplane plants of Consolidated, Boeing, and Douglas combined.  On its floor were 1,600 machine tools and 7,000 fixtures and jigs, some of them 60 feet long.  Overhead ran a conveyor system that carried the nose and tail assemblies down the line.

Willow Run was built and run by Henry Ford’s right hand man Charlie Sorenson, one of, if not the most gifted production czars and innovators in the auto industry.  Sorenson had overseen the River Rouge plant at Ford and figured out how to increase the output of auto engines by 400%.  In 1940, he undertook to make airplane engines for Pratt and Whitney.  He learned the difference between auto engines and those of aircraft.  It was a near revolution in production.

Ford’s Willow Run plant

“An eighteen cylinder Pratt and Whitney 2,000 horsepower engine packed the same power as one and a quarter Ford V-8 engines, but weighted only one pound per horsepower compared to the V-8’s seven pounds.  The machining required much higher tolerance, and expensive new tools were required along with a new plant to house them.  Sorenson got it done so vigorously that the first engines rolled off the line in August 1941, eleven months after ground was broken for the new factory.  He managed it by using the aircraft company as a classroom to learn new skills, and he did the same when Knudsen asked the auto manufacturers to make bomber parts.  Willow Run was the outcome of that education. …..

“The B-24 posed an even more formidable challenge.  Sorensen had one flown to Dearborn, Mi., where his engineers tore it down piece by piece and then put it back together again.  Where an automobile averaged 15,000 parts, the B-24 had 30,000 different kinds of parts and more than 100,000 parts in all. Each kind required its own blueprint, which meant miles of paper, and precise machining on tools foreign to automobile makers.”  (Arms, p. 458)

Once fully operational, Willow Run rolled out B-24 bombers at the rate of one every hour!  It employed 42,000 workers and produced 8700 planes.

Organizing the Inputs

But where were these gigantic assembly plants going to get the parts they needed to put the planes together? This part in the supply chain also had to be filled by the Defense Plant Corporation, which  was in the forefront of financing and building the necessary factories.  Parts production did not require plants as large as the giant assembly facilities, and they required less capital as they were a semi-integrated network of specialty companies.  But their output was crucial and had to be delivered on time.  The DPC invested two-thirds of a billion dollars into these producers.

Then there was the question of fuel. Planes could not fly without fuel, and war planes had to burn 100 octane gas to achieve maximum potency and resiliency in the air.  100 octane gasoline had been around since the mid- 1920s, but new production techniques were required to achieve the larger quantities now demanded.

In the Battle of Britain in 1940, British warplanes, deploying 100 octane fuel, purchased in large quantities mainly from the United States, out-dueled German aircraft, which were using inferior grades of fuel.  The RAF outmaneuvered and outfought the Nazis, inflicting large casualties.  Between August 8 and September 30, 1940, the British RAF lost 620 war planes while the Luftwaffe lost 2152.  The ultimate result was a pullback in Nazi raids into Britain.

Britain’s Spitfires relied on 100 octane fuel in the Battle of Britain.

This lesson was not lost on the U.S. government, which ramped up production of the aviation fuel.  Higher octanes made a dramatic difference:  “Engines had higher compression ratios, which generated more power, higher speeds, faster takeoffs, shorter runways, longer range, and greater maneuverability. Planes could travel farther, wear heavier armor, and or carry heavier loads, all of which gave them a greater advantage in combat.”  (Arms, p. 493. The preceding paragraphs were based on the same chapter)

To meet the demand, private corporations, led by Jersey Standard, began building new plants, even without substantial government guarantees.  But it was critical that 100 octane fuel be produced. To ensure adequate supplies, Interior Secretary, and later coordinator of the Petroleum Administration for War, Harold Ickes urged the President to provide the companies guarantee purchase contracts (assurances their output would be bought), so that the oil and gas industry could build the new plants to produce the fuel.

At this point the Defense Supply Corporation (DSC), another of the offshoots of the RFC, was brought into the equation.  DSC negotiated the contracts to both produce and buy the gas. This was the major investment of the DSC, which bought and sold to the aircraft industries $2.2 billion of 100 octane gasoline.  Without the crucial role of this progeny of the RFC national bank, the entire war effort, at least in the sky, would have been delayed by months ,if not years.  ($50 billion, p. 352)

In the fall of 1941, production of all aviation gasolines, not just 100 octane, was running at 40,000 barrels per day; by 1945 that figure was 566,000 bpd, of which 523,000 was 100 octane.

Investment in new plant and equipment to produce the fuel was $900 million in that period, and the DPC invested $237 million while the RFC lent $55 million.  The DSC loaned or advanced nearly $200 million for facilities construction as well.

1941: Military Escalation, and an Increased Role for the RFC

The march toward likely U.S. entry into the expanding war in 1941 was marked by two major events in the first half of the year:  passage of Lend-Lease in the Congress, and the sudden German attack on Russia in June.  While there were still many opponents of U.S. participation in the war, including all sorts of Nazi sympathizers (many books and articles have documented these), Roosevelt was able to masterfully expand U.S. efforts.

In his State of the Union address  on January 6, 1941, FDR was adamant, “… no previous time has American security been as seriously threatened from without as it is today….The need of the moment is that our actions and our policy should be devoted primarily—to meeting this foreign peril…..the immediate need is a swift and driving increase in our armament production.

“Roosevelt said he would ask Congress ‘for authority and for funds sufficient to manufacture additional munitions and war supplies to be turned over to those nations which are now in actual war with aggressor nations. Our most useful and immediate role is to act as an arsenal for them as well as for ourselves.’” (Fenberg, p. 375)

The provisions of what became known as Lend-Lease allowed the U.S. and FDR to bypass the cash payment requirement of the Neutrality Act, and permit de facto purchases of American war supplies by the British and other combatants.  It also granted extensive powers to Roosevelt to determine what constituted a “defense article”, and it also permitted repair of foreign goods (ships).  The United States could sell, exchange, transfer, or lease defense goods, and payment would be secured by “any used funds in the Treasury Department,” a de facto blank check.

A Lend-lease shipment to the Soviet Union

Several days later Roosevelt submitted his budget.  It called for $17.4 billion ($250 billion in current U.S. dollars) and within that, $10.8 billion ($156 billion) for national defense.

At the same time, Commerce Secretary and RFC controller Jesse Jones issued a news release stating that the RFC had already loaned more than $1 billion for national preparedness, of which half went to building new plants, and 40 percent to purchasing crucial materials.

In the following months, Nazi and Japanese advances vastly increased the seriousness of the threat. The Nazis conquered Greece, attacked cross-Atlantic shipping, and began the battle for North Africa. Then Hitler invaded the Soviet Union, which turned to the United States to come to its aid with war materiel. Meanwhile, the Japanese were wreaking havoc in China, and took over Indochina.

In response Roosevelt asked Congress for an emergency appropriation to combat the military crisis, and Congress responded with a $10 billion ($150 billion) funding bill for the army, the biggest in U.S. history up to that point.

Simultaneously, Jones went to Congress to ask for a new authorization, amending the 1940 bill which allowed the RFC to fund military projects.  The new bill allowed the RFC and its subsidiaries to expand into military matters, “regardless of how far removed from the final process materials may be and still be properly included with the terms of the Act.”  It gave the RFC the right to engage in Lend-Lease operations and other venues.  These included:  production of railroad equipment and commercial aircraft; and to engage in the training of aviators.   It also raised the RFC lending facility by another $1.2 billion.   (Fenberg, p. 384)

On the production front, everything increased dramatically.  New orders swamped defense producers; bottlenecks and shortages appeared everywhere.  With no declaration of war, there was still incessant bureaucratic maneuvering and no clear chain of command to organize the production effort.

During this interregnum, the RFC and its subsidiaries, which were proliferating (nine agencies would eventually be created), played a crucial role in all areas of military expansion.  Not only was the DPC building new plants, but the Rubber Reserve and Metal Reserve were buying and storing key raw materials.  The Defense Supply Corporation was doing the same, as its massive investment in airplane fuel demonstrated.

In 1941, the DSC and the Metals Reserve Company, another of the RFC subsidiaries, moved into Latin America in a large way, to procure and store the vital materials the nation would consume in the war buildup.  Jesse Jones guaranteed to Mexico that it would buy all of Mexico’s surplus output in necessary materials, including copper, graphite, lead, mercury, tungsten, tin, and zinc.

By September 1941, the DPC had loaned out over $2 billion ($29 billion) to build plants which it then leased to corporations to manufacture airplanes, steel, ships, aluminum, magnesium, ordnance, and most importantly, machine tools.  (Fenberg, p. 388)

A giant steel plan in Geneva, utah.

These included an enormous state-of-the-art steel mill in Geneva, Utah, which covered 1600 acres, and included coke ovens, blast furnaces, and railroad tracks.  The DPC investment was $200 million.  As has already been reported, the DPC was in the forefront of building airplane factories, of which the Dodge-Chicago plant was the largest.  As Jones said, “With its own steel forge and aluminum foundry, Dodge-Chicago was the only plant which took in pigs of magnesium and aluminum and bars of steel at one end and turned out finished engines at the other.”  (Fenberg, p. 389)

Among the many other projects pursued by the RFC during 1941 were production of railroad cars to move freight and soldiers, synthetic rubber plants, and oil tankers to transport oil.  The RFC also loaned Great Britain $425 million ($6 billion) through Lend-Lease against assets it held in the U.S.  By September 1941, Jones reported to Congress that the RFC had loaned out $4 billion ($58 billion in today’s money) to the defense mobilization, on top of its domestic lending programs.  He requested another $1.2 billion from Congress, to continue his policy of credit extension to industry.

In other words, Jones and the RFC were serving as a national bank, using government backing to create and extend the credit upon which new technological innovations could be created. It did so in the confidence that the resulting increases in productivity—and in the case of the war, the preservation of a world free of fascism—would ultimately “pay back” many times over, in higher living standards and progress for both the United States and mankind. This indeed is a model we could apply today.

(to be continued)

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