The Quintessential Mobilization Economy

By Stuart Rosenblatt

The following is part 4 of a series devoted to “Lessons for a Recovery: The WWII Economic Mobilization.” Click the following titles for the previous three parts: Part One, Part Two , and Part Three .

July 18, 2018—The evening of December 7, “the day that will live in infamy”, saw the beginning of the dramatic transformation of the United States war effort.  A “Pearl Harbor Effect” swept over the nation.  People who had been waiting on the sidelines rushed to enlist in the armed services; contractors and engineers who had been producing what they could within the constraints of uncertain budgets were suddenly given contracts to produce the “impossible” systems; government officials who had been entrapped in government bureaucracies were freed to unleash a wave of innovation.

The secret to victory lay in fully activating the productive capability of the economy. Unleashing this capacity would win the conflict and effect an “upward phase change of the entire productive economy.”  It would be driven by new creative-scientific breakthroughs and technological innovations, which would punctuate the process at all levels.

But the first step required was decisive leadership from the President. The objectives had to be laid out clearly, even if they seemed impossible. This was the method used decades later by President Kennedy as well, when he laid out the objective of landing on the Moon, and moved to inspire and mobilize the nation to do just that in 10 years.

Franklin Roosevelt shocked not only the nation, but his own staff by going public with exactly what needed to be done. In his January 6 State of the Union Address on January 6, he called for:  60,000 planes (45,000 combat) for 1942 and 125,000 for 1943; 45,000 tanks for 1942 and 75,000 for 1943; 20,000 anti- aircraft guns for 1942, and 35,000 for 1943; and 6 million deadweight tons of merchant ships for 1942 and 10 million for 1943 (he later raised that to 9 million and 15 million respectively).

The key factor for success, FDR argued, was the conversion of the civilian economy into war production.  As an example, he cited steel production, which was using only 25% of its capacity on defense orders. FDR wanted steel production increased from 1 million tons in 1941 to 10 million tons in 1942, and the same kind of increase for the rest of the productive apparatus.  To do this, however, would require top-down direction of the procurement and productive process, which he vested in a new federal board, the War Production Board (WPB).

Yet, ultimate authority—and the purse strings—lay with the President, and his trusted collaborator Jesse Jones, who, from 1939 on, served as Federal Loan Administrator, Commerce Secretary, and de facto head of the Reconstruction Finance Corporation (RFC), which functioned as a de facto national bank for the duration.

In this installment of our series, I will deal with the conversion process and the complementary mobilization to fill gaps in necessary supplies. All of these required the energetic leadership of the Federal government, which provided credit, facilities, and ideas to spur major advances in productivity. Together they made the early 1940s the quintessential mobilization economy.

Conversion to Military Production 

Conversion of the auto industry was the first and most important job to tackle.  At the onset of WWII, the U.S. auto industry was the pinnacle of productive capability in the world, producing more engines than the rest of the world put together.  The industry was also the repository of the largest concentration of machine tools in the economy.  Fully half the tools in the nation were deployed in the auto industry.

Conversion would require collaboration between the military and the civilian economy.  It would also demand that the industry not ride roughshod over labor’s needs nor reverse the governmental oversight established in the New Deal.

For over a year prior to the attack on Pearl Harbor, United Auto Workers President Walter Reuther, an accomplished tool-and-die maker, had circulated a plan for transforming the auto industry to meet the imminent demands of war.  After personally surveying most of the auto plants in the nation, he issued a call for utilizing unused factory capacity to produce necessary military equipment, especially airplanes.  He also sketched a plan for labor-management committees to help implement the transformation.  The plan met with general support among government circles and some industry groups, but was wholeheartedly rejected by industry leaders.  Although the plan was never implemented, its basic outline helped shape the effort.

The War Production Board (WPB) had responsibility for the overall conversion process, and immediately put a major focus on auto. Board chairman Donald Nelson appointed Ernest Kanzler, a Ford Motor Company Vice-President, to oversee the sector.  Ironically, one of the first things they did was to issue a call over nationwide radio for the formation of labor-management committees to advise the switch-over, just the proposal the industry moguls had previously rejected.

Nelson outlined three stages for the conversion of the auto industry.  First, they had to calculate the total demand for production, i.e. men, materials, and machinery, for both civilian and military parts of the economy.  Then they had to figure the available resources, what kind of shape they were in, and how easily could they be adapted for war time usage.  Finally, they had to match the two totals, and then identify the shortages, bottlenecks, and areas where new products/facilities had to be created.  It was a monumental task, to say the least.

By the end of June, production of consumer durable goods had been cut by nearly 30%.  It had been determined that 43% of the 184,000 manufacturing companies were not suitable for changeover.  Many other plants, mostly small and medium size, got caught in the crossfire and could not obtain materials to keep producing for the civilian economy.

Auto Takes the Lead

But in the auto sector, it was full-steam ahead. Machine tools that were incompatible with the new production demands were wrapped in brown paper and stored outside the plants, until the emergency was over.  New cars sat idle in parking lots until ration tickets had been issued.  New plants were going up all over the Midwest, and others were being totally transformed.   A March issue of Newsweek had the headline, “Business As Usual in Detroit is not dead; it is forgotten.”

The gigantic Ford River Rouge plant now pushed out airplane engines, and the Packard plant turned out Rolls Royce engines.  Chrysler’s three assembly plants made tanks, not cars, while the Hudson plant was increasing its production of antiaircraft guns by three hundred percent in a period of three months.

The Ford Motor Company Willow Run plant was nearing completion and was breathtaking in its sheer size. The Flint, Michigan AC Spark Plug plant was setting the pace for machine gun production.  Plymouth replaced a huge assembly line with dozens of new machines in one month.  De Soto replaced one machine in its tank production to install three assembly lines, and then put the gigantic machine back three days later.  Chrysler took fifty machines deemed out of date and reconfigured them to produce antiaircraft guns.

Dodge engineers altered some passenger car equipment in order to manufacture a new universal joint after they were informed that a machine they had ordered to do the job was not being delivered.  Ford engineers, among the most skilled in the nation, used castings in place of forgings on air-cooled airplane engines, saving time, machining, and thirty five pounds of steel.  They converted a spindle boring machine for V-8 engines into a unit for tank gun mounts.  These innovations were endless and increased the productivity of the recalibrated auto industry by orders of magnitude.   (The preceding paragraphs are from Arms, pp. 374-75)

The conversion of the auto industry in the first half of 1942 was one of the most enormous productive transformations in human history.  It had the result of increasing Total Factor Productivity for the entire manufacturing economy, and examples of on-site creative innovation, improvisation, and “tinkering.” Production was constantly altered to deal with problems encountered on the battle field. For example, when engagements in North Africa exposed the weakness of riveted tanks, the industry pivoted on a dime to churn out all-welded tanks, with revolving turrets.  All military vehicles were quickly outfitted with all-wheel drive to allow them to climb grades of 40-50% in the rugged terrain.

New methods were developed to control carbon steels, and new solders were developed using silver, antimony, and lead, which replaced tin and lead.  New technologies and innovations allowed airplane manufacture to speed ahead by 20-40%.  New machine tools increased productivity and output by orders of magnitude.

Lawfully, the increased productivity also lowered costs.  One naval component for example, had its cost cut six times within a year by new technologies.  Another factory cut the cost of wing panel production by 75% and $1,000 per item.

By the end of June 1942, the conversion process was complete.  “Detroit was building 75% of the nation’s aircraft engines, more than half the navy’s diesel engines, more than a third of all machine guns, and nearly half of all tanks, along with thousands of motorized vehicles, weapons, parts, and accessories.  One company agreed to make shells, and it used equipment originally designed to make wheel hubs. It turned out a million shells in thirty-five days.  A producer of an antiaircraft gun cut eighty days from the British production schedule for it.  A parts-producing  firm devised equipment that produced machine-gun parts thirty times faster than the regular arsenal machinery could assemble them.  One company boasted that it would soon handle in one day the materials it handled in thirty days a year earlier.” (Arms, p. 375)

Tackling the Shortages

The astonishing rate of conversion of much of the civilian economy to war-time production exposed the next problem in production:  shortages of materials, equipment, and manpower.

Manpower was a huge problem.  The government had to reconcile the need for a rapidly growing military force with the skilled and unskilled labor necessary to equip those soldiers to fight. This resulted in the recruitment of women into the workforce, and the huge migration of the rural African-American population in the South into the factories.

Simultaneously there was a new shortage in machine tools.  Despite progress in the pre-war period, the production of machine tools was inadequate to supply the new or converted plants that were being erected.  The Defense Plant Corporation (DPC) and the RFC cranked up production to meet the machine tool demand, and install these most essential of war-time elements.  Starting the day after Pearl Harbor, the DPC issued almost $2 billion worth of contracts for machine tool-related construction, and also provided tool makers with supplementary capital to purchase, alter, and fine-tune new equipment.  As before, it underwrote the construction and production investments of the industry, and made advances against purchase orders, alleviating their fear of “being left holding the bag.”

A third big bottleneck was production or storage of needed materials to input into production.  As reported in an August 1941 issue of Fortune magazine in an article appropriately entitled, “The Crisis in Materials,” steel was projected to have an 8 million ton shortfall in 1941, and a 27 million ton shortage in 1942.

The shortages were daunting. There was an enormous shortfall in aluminum.   Magnesium production was 10% of what was needed.  Zinc had to be increased by 40%, and copper had to be increased as well.  Copper was used in a variety of military goods and also in plumbing and electrical goods.  Brass, a key component of cartridges, was a mix of 70% copper and 30% zinc.  Lead was scarce; tin was in desperate shape, as the majority of it came from Southeast Asia, now under Japanese control.  Silk was a key ingredient in parachutes and in the powder bags that held the propelling charge in large guns; it was also under Japanese domination.

Manganese was crucial in the production of steel, and magnesium was a alloy critical to airplane and other production.  Tungsten was central to the mass production of cutting tools and carbide tooth bits, while nickel was central to many forms of armaments.  The nation consumed 1.1 million long tons of manganese in 1941, but produced less than 75 long tons.  The United States used 60,000 tons of nickel but produced 500 tons.  We used 700,000 tons of chrome but turned out only 2,600 tons, and consumed 9,000 tons of tungsten while domestic output was half that.  The utilization of tin was 90,000 tons in 1941, while fabrication was a mere 50 tons.  (The above sections came from Arms, pp. 215-16)

Much of the responsibility for dealing with these shortages fell on the Defense Supply Corporation (DSC), which FDR had set up under the Reconstruction Finance Corporation (RFC) in the summer of 1940.  “It was empowered to produce, buy, sell, and store critical strategic materials; to buy or lease land; buy, build, or lease plants; engage in the manufacture of arms, ammunition, and implements of war; produce or buy railroad equipment, airplanes, aviation training fields and camps; buy and control transportation facilities in and between other American countries in the Western Hemisphere and the United States.” ($50 Billion, p. 355)

With this broad mandate, the DSC moved rapidly to provide the needed equipment.  It coordinated efforts with the other RFC offshoots and the War Department, spending $9.2 billion, roughly the same amount as the Defense Plant Corporation.  It bought key items, stockpiled, loaned and subsidized operations in the continental United States and 45 foreign nations.  Disbursing over $5 billion in commodities, it procured or dispensed over two hundred items critical to the war effort, and it spent over $2.7 billion in subsidies both to domestic consumption items like beef, butter and bread, as well as crucial military goods.

Another major role was played by the Metals Reserve Corporation (MRC), also a 1940 offshoot of the RFC. MRC was deployed globally and domestically to either purchase or subsidize the production of the vast array of metals needed.  It ultimately spent approximately $3.7 billion, and typically for Jones, covered all but $875 million of the outlay in revenue.  It bought over 50 crucial, but scarce, metals and ores, and underwrote the production of zinc, copper, and lead, and also iron to a lesser extent.

Assuring the availability of these raw materials required an overview of the production process, something various members of the WPB, such as William Knudson, were expert in. It means understanding the process sheet of production, including not only crucial inputs, but the various steps where upgrades were possible. To give the reader an idea of magnitude of the task, we review how FDR’s war-coordinating apparatus dealt with certain specific materials.

Aluminum

Aluminum production was essential to fulfilling the demand for 50,000 war planes. It was superior to steel as it was lighter and never rusted.  In 1940, Alcoa was virtually the only producer of industrial aluminum and its output was 400 million pounds per year.  The National Defense Advisory Commission, predecessor of the War Production Board, negotiated a plan with Alcoa to increase its output by nearly 300 million pounds per year by 1942. The needed facilities were provided by investment from the DPC, which increased dramatically after Pearl Harbor. Both Alcoa, and the smaller Reynolds Aluminum, leased the new plants, and by October 1943, the nation was producing 2.25 billion pounds of primary aluminum. Over half of that was in the DPC-built plants.

Aluminum production required a large investment of electricity to utilize the electrolysis technique to convert bauxite to aluminum.  For this it relied heavily on the hydro-electric investments the FDR Administration had made during the New Deal. An aluminum plant built in Listerhill, Alabama relied on the TVA’s hydro-electric dams.

In the Northwest, the plants relied on electricity from the Bonneville and Grand Coulee Dams. It is estimated that Grand Coulee alone supplied the power to produce the aluminum in 33% of the war planes deployed in WWII!

Magnesium

Magnesium was another important input for airplane production, as well as incendiary bombs and flares.  It was lighter than aluminum and nearly as strong.  Here the DPC had to play a greater role, since there was little private corporate investment. DPC spent nearly $300 million constructing new plants, almost 75% of the total investment in this industry.

Jesse Jones also financed a magnesium plant in Palo Alto, California, run by shipyard magnate Henry Kaiser.  Kaiser, a major investor in ship building, airplanes, and many other war industries, broke into the magnesium industry with DPC financing.

Steel

Overcoming the steel bottleneck was another major focus of attention.  Despite the vast New Deal construction programs, steel utilization routinely fell below 50% of capacity, as the industry preferred to profit from the shortages. FDR and Jones decided to force the issue, using the DPC.

The Corporation put nearly $1 billion into plant and equipment expansion.  These new installations produced steel and pig iron, as well as new foundries and other auxiliary facilities.  Simultaneously the RFC loaned over $100 million to the steel companies to fund more expansion, and the Navy and War Departments financed another $250 million of steel production.  The steel corporations also spent $1.3 billion in new plants.

FDR personally picked the sites of many of the new steel mills, and in keeping with his and Jones’ policy, they disbursed the construction nationwide.  In the event of invasion, they did not want to have the nation’s productive capability located in one targeted location; decentralization also meant that the benefits for the workforce would be spread nationwide.

Kaiser built a mill in Fontana, California, near his shipbuilding operation, using RFC money, and the RFC also financed a Sheffield plant in Houston.

The RFC invested nearly $100 million in the Kaiser Fontana plant.  It was massive.  It boasted 90 coke ovens, and a 1200 ton blast furnace.  It could smelt 438,000 tons of raw pig iron.  It had six 185 ton open hearth furnaces that could produce 675,000 tons of ingots annually.  The rolling mills could produce 472,000 tons of alloy-finished steel products.  (Arms, p. 539)  Kaiser would use this production to supply his immense shipyards and other facilities.

The biggest DPC investment in steel production was the Geneva, Utah plant. This vast, fully integrated, operation covered 1600 acres. It included raw material facilities, coke ovens, blast furnaces, and steelmaking equipment.

In total, DPC financed over 40% of the expansion of the nation’s steel ingot capacity, 44% of the new blast furnaces, 37% in coke, and 43% in sinter capacity.  Every area of the steel industry was improved by DPC.  It invested in 205 plants, and added 6.2 million tons of the 15 million new tons of steel ingot production.  The amount added by DPC to the U.S. steel capacity was equal to the output of pre- war Japan or France.  (Billions, pp. 74-75)

Tin

At the outset of the war the United States was totally dependent on the rest of the world to supply and smelt all the tin used in the nation.  Yet tin was essential in many operations including cans, solder, bearings, etc.  The MRC imported tin in 1940 from China, Belgian Congo, and other suppliers not under Japanese control.  Bolivia became a major supplier of tin ore.

Jones negotiated a deal with a tin smelting expert, Dr. Johannes van den Broek, a Dutch managing director of the N.V. Billiton Maatschappij Corporation, the biggest Dutch tin company, to build a huge plant in Galveston, Texas.  It was financed by the RFC, and took advantage ofthe nexus of the deep water port (Galveston/Houston), and an abundance of the natural gas produced in the area, and hydrochloric acid, a by-product of petroleum crucial to tin smelting and turned out in large amounts in the vicinity.

Copper

Copper was required for valves, pumps, shafts, bolting, flanges, steering mechanisms, and turret functions in tanks, periscopes, aircraft and countless other applications.  Ironically, the United States was a world leader in copper production at the outbreak of the war, but had to ramp up production inside and outside the nation to meet the new demands. All of this was underwritten by the MRC.  The Corporation loaned $23 million to an Anaconda Copper subsidiary to build a copper facility in Sonora, Mexico, and it loaned another large amount to Phelps Dodge for a similar plant in Sonora.  It invested $20 million for a new plant in Chile, and $30 million to Morenci mine in Arizona.  On top of this, MRC subsidized the price of copper, to guarantee a market, at over $75 million.

The Metals Reserve Corporation also invested in plants, provided price supports, and purchased the necessary output for other crucial metals, specifically nickel, tungsten, and zinc. There were cash advances, long-term purchase contracts, and other financial underpinnings by the RFC agencies to meet the requirements war.  Ultimately MRC subsidized production of zinc, lead, and copper at over 3100 mines in the United States, spending over $211 million.

Ultimately the Metals Reserve Company spent $2.7 billion in its global operations. It actually ran a slight profit, but ended up in deficit due to its subsidies of metals production or purchase.  That was anticipated by Congress when it authorized its creation.  The MRC was funded by borrowing from the RFC at 1% interest, the same rate the RFC borrowed from the Treasury.  This was another example of the RFC functioning as a national bank to “fill the gaps” during the WWII economic mobilization.  (Much of this section is either paraphrased or highlighted from $50 Billion, Jesse Jones)

There is no reason why a similar funding mechanism could not be applied to the U.S. economy’s urgent needs today.

Tags: auto industry, conversion, economics, Franklin Roosevelt, metals, Reconstruction Finance Corporation, Stuart Rosenblatt, Total Factor Productivity, World War II