Jesse Jones (1874-1956) is today just another man vanished into the anonymity of history, a fate that awaits almost all of us. His name, however, still lives in Houston and throughout the Texas area due to his generous philanthropies. In 1937, he set up the Houston Endowment, the largest private foundation in Texas. The business schools at Rice University and Texas Southern University are named in his honor. The Houston Symphony plays at Jesse H. Jones Hall. The Jesse H. Jones Rotary House Hotel serves patients and family members at the M. D. Ander¬son Cancer Center. Jones College of Communication, of the University of Texas at Austin, Baylor University’s library, the list is extensive.

Mr. Jones did not start out as a rich guy. He was born on a tobacco farm in Tennessee and never went to high school, let alone one of the universities that now have his name on a building. I am sure that everyone reading this article went to high school and way beyond, and that’s a very good thing. Self-made men like Jones had to come up the hard way. Abe Lincoln and Cornelius Vanderbilt rose to the top but, most such men never got very far. But Jesse prospered through hard work, built a reputation for honesty and fair dealing, and learned to judge human character rather than how to solve partial differential equations. At the age of twenty-four, Jesse was sent to Houston, Texas to manage an uncle’s lumber yard. He soon started his own lumber yard, and then moved into real estate, then com¬mercial construction, and then banking.

In 1908, Jesse built a new office and printing plant for the Houston Chronicle and swapped the buildings for a half-inter¬est in the newspaper. After a while he owned the whole news¬paper and kept the title of Publisher for the rest of his life. By 1914, his business and political skills enabled him to get federal funding for the Houston Ship Channel. That waterway made Houston the major port city it remains today.

The Reconstruction Finance Corporation (RFC) was set up in late 1932 under President Herbert Hoover. Hoover appointed Jones to the board even though Jesse was a Democrat, albeit con¬servative in the southern tradition. When Franklin Roosevelt was inaugurated president in March 1933, he promoted Jones to Chairman of the RFC, the key financial agency of the New Deal. In 1940, Jesse was appointed Secretary of Commerce, and served until 1945. He was 71 when he left government service.

The RFC made thousands of loans, but had few losses, with most programs returning small profits for the government. The agency people were hard-working and scandal-free. Mr. Jones built and ran a gigantic agency with skill, judgment, hard work, and honesty for thirteen years, and no one has ever done it better.

Saving the Banks

The Great Depression cascaded downwards in 1930, 1931, and 1932. In March of 1933, as Roosevelt was being inaugurated president, the American banking system completely broke down, and for ten days there was a “bank holiday.” A special session of Congress was called, and a bill was passed authoriz­ing the RFC to invest in the preferred stock or capital notes of banks. The RFC adopted a triage strategy. Class A banks were sound banks that needed no help. Class C banks had no capital left and were left to reorganize or liquidate. The RFC put money into the Class B banks that had impaired capital but had enough good assets to be worth saving. The RFC performed most of its program by buying preferred stock in the banks. At the time it was estimated that the banks could take about twenty years to retire the RFC’s preferred stock holdings. In fact, the banks got back the preferred much more rapidly than that. The bank rescue program saved thousands of banks. There were some losses to the government, but the overall principal payments and dividends allowed the RFC to make a small profit on the total program.

The Troubled Asset Relief Program (TARP) that was be­gun in 2008 was designed in part by Ben Bernanke, the Fed Chairman and economist who had specialized in studying the Depression. It was no accident that TARP put money into the banks by buying preferred stocks. The banking system reacted similarly, retiring the preferred stock as quickly as they could, so that again the banking system survived and the government made a small profit. That is not including the rescue attempts for Fannie Mae and Freddie Mac. That will take hundreds of billions of dollars to wind down.

The RFC was then involved in making agricultural loans to prop up the farm sector, loaned a billion dollars to 89 railroad companies, rescued some mortgage banks, a number of insur­ance companies, and financed many infrastructure projects.

The lesson for us isthat there is some predictability even in very scary events, such as the 2008 crash. Mr. Bernanke imme­diately went to the Jesse Jones playbook and the banking system reacted in the same way.

The RFC also financed many infrastructure projects:  The San Francisco Bay Bridge, the Pennsylvania Turnpike, the Colo­rado River Aqueduct that carried water from the Colorado River to Los Angeles, and the Brooklyn-Battery Tunnel were some of the many RFC-funded public works. Did these projects help end the depression? Shlaes Sprinkel and other conservative scholars think the RFC loans merely displaced other capital, and the de­pression didn’t end. Perhaps, but I think the banking rescue was important, and also rubber.

Rubber

We are going to discuss the rubber industry. The reason for the apparent interruption to the RFC story will become clear as we progress. The rubber industry today has few companies in it and I suspect that few of us deal with portfolios that have more than one percent weightings in the group. Nevertheless, the modern world could not exist without rubber. Nobody in the developed  world had heard of rubber until the middle of the 18th century when explorers returned from Brazil with some samples. They discovered it was bouncy (the Mayan civilization in Mexico used rubber balls in games). Some of this ancient sport tradition still exists. When in Oaxaca a few years ago, Leah and I watched two teams of local people throwing rubber balls across a field, in a game that seemed to have very few rules but was marked by cheerful enthusiasm.

Some Europeans discovered that a lump of the stuff could erase pencil marks and so the English called it “rubber.” Mr. MacIntosh figured out that if he took a thin sheet of rubber and attached it to cloth, he could make a waterproof garment. Wa­terproof shoes were also produced. Rubber was not really useful, because in hot weather it got soft and runny and in cold weather it got brittle. In 1839, Charles Goodyear invented vulcanization that stabilized rubber enough for general use. It was quickly used for hoses, shoes, and finally tires.

The “killer app” for rubber was the first great personal transportation boom of modern times, the bicycle. The bicycle required much more tonnage of rubber than had previously been shipped, and the price soared. Rubber in 1890 was made from the sap of the rubber tree, found in the Amazon basin. These trees grew wild in the forest so workers went from tree to tree with axes, bowls, and buckets, tapping the trees and deliv­ering the liquid latex for processing. If this sounds like a slow, primitive process to you, you are right.

The price of rubber went from a few pennies a pound to $3.00 a pound in 1893. In 1893, $3.00 represented the wage of a locomotive engineer or a hard rock miner for a twelve hour shift. So a bicycle tire was a valuable item. There may have been Robber Barons in American Industry, but there were certainly Rubber Barons in Brazil. The city of Manaus, way upstream in the Amazon jungle, became a boom town with extravagant mansions and a $10 million opera house that still exists today.

Opera House In Manaus, Brazil

Hunting around the jungle to find individual wild rubber trees wastes a lot of time. The inefficient Brazilian industry was a pothole on the road to progress. It was solved by the English­man Henry Wickham, when he smuggled a sack of rubber seeds from Brazil to London in 1876. The Brazilians were furious but couldn’t do anything about it. Rubber plants were then shipped to Ceylon (now Sri Lanka) and the Malay states (now Malay­sia). Plantations were developed in the mid-1890s in response to the high Brazilian prices. The new rubber plantations were suc­cessful. The rubber trees liked growing in Southeast Asia just as well as they had in Brazil and the plantation workers were much more efficient that the Brazilians. A number of the plantation companies sold stock to the public. The rubber price came down from the 1893 peak but was still satisfactory, and then the auto­mobile started a new demand for rubber. Prices started to rise. There was a fine story in the New York Times (Feb. 28, 1910) headlined, “British Public Mad over Rubber Stocks: Speculation in Plantation Shares — New Issues Snapped Up.” The price of rubber was lofty again in 1909 and punters expected it to go much higher. Surprisingly, it didn’t, and the speculators were erased.

The sap of a rubber tree can certainly be considered an agri­cultural commodity, but it doesn’t act like one. If you are grow­ing corn, wheat, or soybeans, you can get a crop every year. That means that if this year’s soybean prices are high and corn prices are low, that next year you can switch soybean acreage to corn and damp the price cycle. A rubber tree takes seven years from planting to become a productive tree, so a high price in 1902 will encourage the planting of new trees, but then it takes seven years before the supply increases. Obviously that will amplify any up­swing in prices. Then when the supply from the new plantations hits the market, prices will drop rapidly, but production will stay high. A newly producing rubber tree will continue its pro­ductive life for about 30 years without very much maintenance expense, so excess supply stays in the market. One would expect rubber prices to bounce around with these economics and this has been proved. Between 1870 and 1930, rubber consumption grew at an 8% annualized rate, an extremely rapid increase over that long period of time. Nevertheless, rubber that sold for $3.00 a pound in 1893 was selling for 3 cents a pound in 1932.

The Malayan planters were very happy with their new plan­tations, but just as the English in Malaya had stolen market share from Brazil, the Dutch were able to start their own rub­ber plantations on Sumatra and other isles of the Dutch East Indies (now Indonesia). In addition to plantation rubber, local farmers started planting rubber trees as well. Abundant sup­plies made the 1930s awful for rubber producers. Then in 1942, the Japanese captured both the Malay States and the Dutch East Indies. The Allies had to fight WWII without new supplies of rubber. But you cannot run a modern economy, let alone fight a war, without rubber. Every jeep, truck, tank, and airplane needs tires, gaskets, hydraulic hoses, fan belts, and so on. So how come we won?

Jesse Jones and the RFC saved the day. In 1940, it was al­ready clear that rubber supply was a critical problem. In June of 1940, Congress gave the RFC the authority to stockpile rubber and tin. The RFC, working closely with the U.S. tire manufac­turers, bought all of the rubber that was available on the market through a new subsidiary, the Rubber Reserve Company. The stockpile by the beginning of 1942 amounted to 630,000 tons, a large quantity compared with the 1939 consumption for the U.S. of 900,000 tons. The rubber stockpile was essential but not sufficient. New rubber supplies had to be created, in size and quickly. But how?

Synthetic rubber had been invented by German chemists as early as 1882 and the Germans produced a low quality synthetic during WWI. In 1929, I.G. Farben, a giant German chemical company, invented modern synthetic rubber, made from the petrochemicals butadiene and styrene. This was an important invention, because the Germans knew that in a European war the British Navy would blockade rubber supplies. The U.S., of course, assumed that Southeast Asian rubber would always be available, and ignored the problem until 1940. American rubber companies had been doing lab work on synthetic rubber, but there were no commercial scale factories. A new industry had to be built in the U.S., in a very short period of time.

Jesse Jones made a written request to FDR in September 1940 asking for permission to invest $100 million in new syn­thetic rubber plants. FDR, not impressed, agreed to only $25 million. Jones made plans to spend $40 million anyway. Getting all the rubber and chemical companies to pool patents and co­operate with their competitors was difficult until Pearl Harbor, but after that patriotism caused them to cooperate fully, and the program went ahead at high speed. The $40 million budget jumped to $400 million. The rubber program solved all its pre­dictable technological and political problems, and it worked. In 1944, production exceeded 700,000 tons. (The German program had started a decade earlier, of course, and German chemical technology was by far the best in the world. But the peak in Ger­man synthetic rubber production was in 1943, at only 109,000 tons.)

The Soviets also had a synthetic rubber program, but its production was probably less than the Germans. The U.S. sent experts to Russia to see if Russia could help the U.S. in any way but the delegation was refused entry into any Soviet rubber fac­tories.

So, the war was won, and Jesse Jones and the RFC deserve enormous credit for foresight and energy creating this war win­ning industry. The synthetic rubber plants were controlled by the government until 1955, at which time the factories were sold to private companies.

Ralph Wanger, CFA, Senior Advisor,
Wanger Investment Management, Inc.