What If - Finland had been prepared for the Winter War?
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What If – Historically, Finland lost the Winter War in large part due to an ill-equipped military (who did amazingly well with what they had) and...
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Part 1-A - Finnish Economic and Industrial Growth

Finnish Economic and Industrial Growth Between 1920 and 1939

How and why did the Finnish government create an environment favorable to the growth of large industrial concerns which resulted in rapid ongoing economic growth through the 1920’s and the 1930’s? That they did, and that the economic and financial ramifications were many and varied, is now well known and an interesting case study. Less well known is the effects this growth had on Finland’s ability mount a strong defence against the USSR in 1939. As a prelimary to covering the strengthening of Finland’s defence forces, we will first look at Finland’s economic and industrial growth through the 1920’s and 30’s.

Although small in population, Finland rapidly developed into a modern European industrial state during the interwar period. This accomplishment was exceptional among the new nations that had gained sovereignty after World War I. Why did Finland succeed where others failed? Historians have long pointed out that Finland had already created independent legal and bureaucratic institutions by the 19th century. Finland was also able to build a relatively strong national identity under Russian rule and by the time of the Bolshevik Revolutiion, was politically, socially and culturally independent and ready to set herself free from the Russian empire.

Very briefly summarised, the Finnish government integrated private and state owned enterprises, as well as multinational enterprises, into a process that unified the nation and transformed Finland from an agricultural in to a modern industrial state.The core of this process was a public policy deeply influenced by nationalism. Hence, we will also argue that nationalism played a far greater role in the creation of modern Finland than previously thought. Finnish Nationalism encouraged the Government to create large state owned enterprises and to support and guide the growth of Finnish businesses, to allow foreign high technology enterprises to selectively invade Finnish markets, to find a new type of industrial entrepreneur, the “patriotic manager" and finally, Finnish Nationalism combined with ongoing economic growth gave Finland both the incentive and the means to develop the military strength to adequately defend herself.

Industrialization and Accelerating Growth 1800-1920

In the 1800’s, Finland was an agrarian country, despite climatic conditions that were not suited to efficient grain growing. Seventy percent of the population was engaged in agriculture and forestry, and half the country’s income came from these primary industries in 1900. Only in the nineteenth century did slash and burn cultivation give way to permanent farming, even in the eastern parts of the country. Where agriculture was praticed, it was generally based on large estates with a work force consisting of tenant farmers and itinerat farm workers, with a great deal of poverty (common across Europe in that period).

Industralization had begun as early as the seventeenth century when some small iron works were first founded in the southwestern part of the country to process Swedish iron ore. Significant tar burning, sawmilling and fur trading also brought cash with which to buy a few imported items such as salt, and some luxuries – coffee, sugar, wines and fine cloths. The small towns in the coastal areas flourished through the shipping of these items, although restrictive legislation in the eighteenth century required transport via Stockholm. The income from tar and timber shipping, Finland’s primary industries in the eighteenth century, served to accumulate capital for the first industrial plants.

The nineteenth century saw the modest beginnings of industrialization, far later than in Western Europe. The first modern cotton factories started up in the 1830s and 1840s, as did the first machine shops. The first steam machines were introduced in the cotton factories and the first rag paper machine in the 1840s. The first steam sawmills started only in 1860. The first railroad shortened the traveling time from some inland towns to the coast in 1862, and the first telegraphs came at around the same time. Some new inventions, such as electrical power and the telephone, came into use early in the 1880s, but generally the diffusion of new technology into everyday use took a long time.

The export of various industrial and artisan products to Russia from the 1840s on, as well as the opening up of British markets to Finnish sawmill products in the 1860s, were important triggers of further industrial development. From the 1870s on pulp and paper from wood fiber, delivered to Russia, became major export items, and before World War I one-third of the demand of the vast Russian empire was satisfied with Finnish paper. Finland became a very open economy after the 1860s and 1870s, with an export share equaling one-fifth of GDP and an import share of one-fourth. A happy coincidence was the considerable improvement in the terms of trade (export prices/import prices) from the late 1860s to 1900, when timber and other export prices improved in relation to the international prices of grain and industrial products.

Finland participated fully in the global economy of the first gold-standard era, importing much of its grain tariff-free and a lot of other foodstuffs. Half of the imports consisted of food, beverages and tobacco. Agriculture increasingly turned to dairy farming, as in Denmark, but with poorer results. The Finnish currency, the markka from 1865, was tied to gold in 1878 and the Finnish Senate borrowed money from Western banking houses in order to build railways and schools. GDP grew at a slightly accelerating average rate of 2.6 percent per annum, and GDP per capita rose 1.5 percent per year on average between 1860 and 1913. The population was also growing rapidly, and from two million in the 1860s it reached three million on the eve of World War I. Prior to WWI, only about ten percent of the population lived in towns. The investment rate was a little over 10 percent of GDP between the 1860s and 1913 and labor productivity was low compared to the leading nations. WW1 in particular was beneficial to the Finnish ecomony at first. Finns were not subject to conscription into the Russian military and Finnish exports to Russia boomed as a result of war spending.

The Collapse of the Market Structure

Finland industrialized during the last three decades of the 19th century. Lumbering in previously untouched forests and incipient development of hydro power made large scale production of timber, pulp and paper possible. The domination of Finland's export market by forest industries is illustrated by the fact that wood, paper and pulp comprised more than 90% of Finnish exports in 1920 and over 80% as late as 1938.

Table1: Main export goods in 1920 and 1938 ( %)

Timber and wood procucts 56.4 40.3

Pulp and paper 37.3 41.5

Forest products total: 93.7 81.8

Other export goods total: 6.3 18.2

The wealth created by forest industries was broadly dispersed in Finnish society. It is often argued that Finnish society and its cultural heritage have been built on forests. The dominance of forests in Finnish culture is derived from age-old traditions. Historically forest land had not been owned by private companies, but rather by farmers, peasants and the state. Therefore, forest industries became dependent on farmers and land-owners

The movement of capital from the industrial to the agricultural sector

The agricultural sector in turn, supplied forest industries with raw materials and skilled as well as unskilled labor. Finnish sawmills and tar producers established business relations with European ship-building and construction industries by the 17th and 18th centuries. These associations proved valuable in the 19th century when rapid urban development in England and Germany opened new markets for wood products. Finnish sawmills and lumber companies eagerly supplied these new markets. Just prior to World War I, Finland was estimated to be the third largest timber exporting country in Europe. A sizable proportion of Finnish pulp and paper products were sold on the Russian markets. An estimated 80% of the total production of paper in Finland was "exported" to Russia before World War I. The word "export" is slightly misleading because the Russian markets were in fact domestic markets for Finnish paper makers.

Finnish paper was very popular in the large printing houses of St. Petersburg, Moscow, Kiev, Odessa and Minsk. Just before the war the Finns controlled about 30% of the Russian paper market. World War I, the October revolution and the Civil War in Russia changed the structure of the paper market entirely. In short, the Russian paper market closed when the Bolsheviks seized power. At the same time, World War I closed the export route of timber from Finland to European markets. The dramatic change in market structure is illustrated by the followingf igures: in 1910 about 27% of Finnish exports went to Russia and approximately the same share went to Great Britain; two decades later the tide had turned, Germany and Great Britain were the most important trading partners while only 0.5% of Finnish exports went to the Soviet Union.

The collapse of the Russian market was, of course, a terrible shock to the Finnish paper industry. Paper makers had to find business partners in western European markets. The loss of Russian markets also caused a decrease in the food supply in Finland. Russia had started to "export" inexpensive grain to Finlandi n the 19th century. Because of this, dairy-farming gradually replaced grain production, especially in the eastern part of Finland. By the dawn of this century, Finland was not self-sufficient in grain.When Lenin's government cut off the grain supply in 1917, starvation and hunger plagued Finland for the first time since the years of the great famine of 1867-68.

A Nation Divided

On December 6, 1917 the Finnish Senate declared Finland independent from the Russian Empire. The declaration of independence ended a century long relationship between the two nations. The decision to separate the Grand Duchy of Finland from Russia was made rapidly after Bolsheviks seized power in St. Petersburg. The quick declaration of independence alarmed Finnish Socialists and Communists, who declared their solidarity with fighting comrades in Russia. Conservatives parties however, were determined to secure independenc. As a result, political polarization escalated and a bloody and bitter civil war was fought during the spring of 1918.

As usually happens after a civil war, a nation is socially, politically and culturally divided. Finland proved to be no exception. Victorious Whites controlled society. Communists and socialists were imprisoned or forced into exile in Soviet Russia. This situation could not last long. The White government was very much aware of the fact that a divided nation was unable to resist the political and ideological pressures coming from the East. In addition, England, France and the United States delayed their recognition of Finnish independence as long as the political situation in the country remained unsettled.

New Economic And Political Policies

The White government took the first steps to unify the nation in the fall of 1918. Red prisoners were pardoned, concentration camps dissolved and moderate left-wing parties were granted political rights. Upheaval in the spring and summer of 1918 forced the government to take radical steps to improve the economic situation as best they could, but there was not much the government could do. Land reform was introduced which provided farming land to a politically unstable rural proletariat. Municipal governments were encouraged to start social housing projects and employers to improve working conditions in factories. But Russian paper markets were permanently dosed and the markets for timber exports remained closed as long as the war in Europe continued. The domestic situation was even worse. Many Factories had been partially demolished and a large number of workers had suffered from diseases and malnutrition in concentration camps. Deserted farms and uncultivated fields predicated more starvation and famine for the coming winter.

The Economy of the Interwar Years

The Russian Revolution of 1917 and Finland's subsequent independence cut off Russian trade and devastated Finland's economy. The food situation was particularly difficult as 60 percent of grain required had been imported from Russia. With Civil War in Russia, this source was no longer available and Finland was also largely cut off from trade with the rest of the world. The collapse of the Russian empire had however eliminated one of the largest producers of timber from the European market and Finnish sawmills were more than eager to take over the former Russian share. Also, the demand for paper was expected to increase after the war. Although Finnish paper was low in quality, there was a growing demand for brown wrapping paper and low quality newsprint in Europe.

As the war in Europe approached its conclusion, Finnish companies and the government hurried to make preparations for what they foresaw as the coming economic boom.A committee setup by private business associations in 1913 had provided comprehensive guidelines for future policies. The committee recommended first, that Finnish companies that exported goods should form cartels to minimize domestic competition, and second, that the government should take strict measures to protect domestic industries (iron and steel, textiles, foodstuffs) from foreign competition. In the midst of the political chaos, the Finnish government quickly introduced a new economic policy based on these two recommendations. The new government had also signed commercial treaties with Germany and Austria-Hungary in 1918. In the early 1920s, similar agreements were made with France, Estonia, the British Commonwealth and the United States.

In addition, Parliament passed laws prohibiting foreign enterprises from purchasing or owning land, forests, hydropower resources or mineral ore deposits. New tariff regulations and tax reductions were introduced which gave domestic industries almost total protection against foreign competition. Forest industries followed the recommendations by forming export cartels in 1918. FINNPAP, FINNBOARD and FINNCELL agreed upon prices and regulated production of paper, pulp, board and timber. After WW1 ended, postwar reconstruction in Europe and the consequent demand for timber soon put the Finnish economy on a swift growth path. Finnish sawmill products, pulp and paper found old and new markets in the Western world, including the American and South American markets.

Finnish Cartels also promoted the increase of exports by establishing broad networks of sales branches in major European, North and South American, and Asian cities. In addition, Finnish export cartels collaborated with other Scandinavian paper and timber Cartels, for instance with Scannews and Scankraft. Other growing industries included mining, basic metal industries and machine production, but they operated on the domestic market, protected by the customs barriers that were typical of Europe at that time. Textiles and metal products on the other hand found no markets in the West and had to compete hard with imports on the domestic market. In 1920, more than four-fifths of exports were still based on wood, and one-third of industrial production was in sawmilling, other wood products, pulp and paper.

The land reforms of 1918, among the first measures implemented by the new Government, had broken up the large estates and secured land for tenant farmers and farm workers. A large number of new, small farms were established. However, these were generally so small that they could only support families if they had extra income from forest work. The country itself continued to remain largely agrarian. Even on the eve of World War II, almost half of the labor force and one-third of the production were still in the primary industries of agriculture and forestry. Small-scale agriculture used horses and horse-drawn machines, lumberjacks went into the forest with axes and saws, and logs were transported from the forest by horses or by floating.

The new economic policies were highly successful. The volume of Finnish industrial production increased by almost 12% annually in the immediate post-WW1 years.This was faster than the average growth of world trade. The wealth created by the volume of exports and the very favorable trade balance was widely dispersed throughout society. The nation's standard of living improved rapidly, and for the first time, people had money to spend on fashionable clothes, new technological appliances, automobiles and entertainment. The rapid and steady economic development in Finland was exceptional relative to other small Eastern European states. Tariff protection and other policy measures had helped to raise the domestic grain production to 80–90 percent of consumption by 1939.

Finnish Nationalism as a Key to Economic Success

Although the new economic policy effectively protected Finnish industries, Finland could not dictate the rules in world markets.Rapid increases in exports and the standard of living created pressures to open domestic markets to foreign goods. As Finland modernized, the country became an attractive new market area for foreign investors. Large foreign enterprises were eager to procure rights to Finland's largely untouched natural resources. Sizable German companies in particular viewed Finland as a potential buyer of high technology goods and supplier of wood products and minerals.

It is difficul to estimate how seriously foreign enterprises planned to invest in Finland. A number of variables mitigated against permitting foreign investment, among them the close and unsecured border with the Soviet Union, as well as Finland's small population and long transportation routes. Yet, it is certain that harnessing the capacity of the Imatra Falls interested British and French electric power companies. We also know that Metallgeschellshaft tried to obtain rights to exploit the rich copper-ore deposits in Outokumpu. However, the protective barrier was strong. The only foreign companies that successfully penetrated the protective barriers were ZellstoffabrikWaldhof, which built a chemical pulp factory in Kexholm, near Lake Ladoga, and the International Nickel Corporation, which obtained rights to extract nickel ore in Petsamo.

For the Finnish government it did not matter how real or unreal foreign investment plans were. The government was determined to prevent the nation's resources from slipping in to the hands of foreign multinational enterprises. In 1918 the state accordingly purchased two foreign owned companies, W. Gutzeit & Co. and Tornator Ltd. These transactions amounted to more than 150 million markkas, or a little over 10% of public revenue in 1918. These two companies were chosen by the Finnish government on the basis of practical considerations. British and Norwegian families owned companies had acquired more than 500,000 hectares of forest before the Finnish Senate passed laws prohibiting lumber companies from buying forested land. The state fused W. Gutzeit& Co. and Tornatori nto a new company, Enso-Gutzeit Ltd., which inherited not only the forests, but also a number of sawmills as well as pulp and paper factories. The giant state-owned company became one of the largest paper, pulp and timber manufacturers in Finland and had buyers all over the world.

The state took its next step in 1921. Parliament turned down offers from foreign companies and asked Finnish electric power and construction companies to harness the Imatra Falls. This effort was intended to demonstrate the strength and technological skill of the new nation. It was not an accident that the government chose Imatra Falls to display determination and nationalistic enthusiasm. Imatra Falls had always had cultural and social value in Finland, similar to Niagara Falls in the United States. The gigantic task of building the Imatra power station took more than ten years to complete with the total cost exceeding 250 million markka.When the power station was finished, the state founded Imatran Voima Corporation which monopolized electric power distribution in Finland. Finally, in the early 1920s, the state purchased the rights to develop the Outokumpu copper deposit from a Norwegian-Finnish company. This transaction destroyed Metallgesellschaft's plans to transport copper ore from the Outokumpu mine to the company's new smelter in Hamburg. The government founded Outokumpu Mining Corporation in 1924. Soon after, the state built a production chain which linked the Outokumpu copper mines to electrolytic refineries and iron and steel works in Imatra and Pori.

These initiatives taken by the Finnish government had several important consequences. First, state owned enterprises eliminated foreign competition and concentrated the production of paper, pulp, timber and minerals in the hands of Finnish companies. Second, state owned enterprises supported private companies by investing heavily in technological and industrial infrastructure. In addition, state owned enterprises produced raw materials and semifinished goods and sold them to other industrial sectors. This decreased the need to import expensive goods from abroad. Third, state owned enterprises escalated industrialization through the use of large amounts of natural resources. New enterprises were often built in distant locations, where private companies hesitated to invest. This was especially true in the case of the Veitsiluoto sawmill. The new sawmill was located in the northern part of Finland close to the Arctic Circle where it used large state owned forest resources. Fourth, state owned enterprises strongly affected the unification of the nation. New factories increased the consumption of wood and other raw materials in the peripheral areas of the country. This provided extra income to farmers and land-owners. State owned enterprises increased employment opportunities, which in turn decreased the rate of unemployment and thus lessened social tensions.

In spite of the rapid industrialization, in 1925 the Finnish industrial sector was still extremely specialized. Paper, pulp, timber, and iron and steel industries produced only primary products such as timber, pulp, paper, plywood, iron and copper ore.Without high technology capability, Finnish industry depended on foreign high technology companies for such goods as telephones, electric appliances, chemicals and machine-tools. This dependence on foreign high technology goods and knowledge was a serious concern to the Finnish government. Although necessary, multinational enterprises represented alien interests which threatened to undermine the development of a strong national state. Once foreign investment had begun, it became difficult to prevent the incursion of foreign capital into primary production sectors. From this delicate position the government attempted to find ways to satisfy both foreign high technology enterprises and domestic companies.

To construct a safety net that would tie Finnish companies and foreign high technology enterprises neatly together, the government issued a statute in 1919 which required a foreigner to obtain a permit before establishing a business in Finland.Additionally, foreign investors could not own shares in Finnish liability companies. New laws and regulations supported these measures by stipulating that the general manager of a firm as well as a majority of members of the board of directors had to be Finnish citizens. In order to operate in Finland, foreign high technology enterprises were thus obliged to establish affiliate companies and recruit a large number of Finnish Managers, directors and engineers to operate and manage factories in Finland. This gave Finnish managers and engineers unique opportunities to obtain training and education in highly developed foreign enterprises.

The history of Finnish C hemicals provides an excellent early example of how the state successfully encouraged foreign high technology companies to support industrial development in Finland. Finnish Chemicals was founded in 1927 by three giant multinational enterprises: IGFarben, I CI and Solvay& Cie. The affiliate company, Finnish Chemicals, produced bleaching chemicals (chlorine and caustic soda) for the pulp and paper industries. These chemical substances were needed to produce the white news-print which was rapidly becoming the the trademark of the Finnish paper industry on the world market. Instead of supporting the development of domestic electrochemical industries, the government asked I G Farben, I CI and Solvay & Cie to build an electrochemical plant in Finland. To make the offer even more attractive, the government promised to partially finance the constructiom of the Aetsa plant. Because of the size and quality of the production in Aetsa, Finnish Chemicals soon gained control of the rapidly growing bleaching chemical markets in Finland.As the government had expected, foreign owners equipped the Aetsa plant with the latest production technology and trained the management in England.

As this example illustrates, the government selectively allowed foreign high technology enterprises to operate in Finland. Simultaneously, legislation carefully protected the primary production sector. Formation and implementation of industrial and public policy therefore resembled in many ways the post-WW2 Japanese policy making process. Thus, Finland followed a kind of intelligent follower's strategy by selectively allowing western influences while integrating business targets of foreign multinational enterprise with national development goals and projects.

“Patriotic Managers” and the development of Social Cohesion

In order to function effectively, the new economic policy required the support of the private business sector. In the late 19th century, a relatively strong managerial culture alreadye existed. The first generation of business managers however represented old Swedish families who had stayed in the country after Russia captured the province of Finland from Sweden during the Napoleonic wars. Legendary entrepreneurs such as G. Serlachius, Wilhelm Rosenlew and William Ruth penetrated inhabited forest areas in order to establish modern paper, pulp and timber industries in the Russian Grand Duchy of Finland. Because of the wealth and cultural background of these men, they comprised a small Swedish elite that held political as well as economic power in Finland during the Russian regime.

The situation changed however after Finland became independent. The newly founded independent state, now ruled by the Finnish-speaking middle class, regarded the Swedish-speaking business elite as disloyal and alien. Nationalistic slogans urged the government to take action against the Swedish and return Finland to the Finns. There was, however, very little the government could do to limit the economic power of the Swedish elite. The young nation of Finland couldn’t risk loosing capital, knowledge and managerial skills during the period of transition. In order to create a balance between the Finns and Swedish-speaking business elite, the government hired top level managers for large state owned enterprises from middle-class Finnish families. This decision proved to be highly successful. Both blue and white collar workers relied on new managers who spoke the same language and shared the same ethnic heritage. These managers in turn, spread the gospel of nationalism and national unity in isolated industrial towns and villages.

V A Kotilainen, the managing director of Enso-Gutzeit, serves as a good example of this class of manager. During the civil war, Kotilainen served in White headquarters, where he established a personal friendship with top level politicians and military leaders of the White army. Soon after the war, Kajana Wood Corporation hired Kotilainen to be its executive manager. At the time, Kajana Corporation was one of the largest pulp, paper and timber corporations in the country. What was more important, however, was that the devotedly nationalistic Paloheimo family owned the corporation. Kotilainen created an even stronger nationalistic image for the company than it already had. General Rudolf Walden, the distinguished head of the United Paper Mills and a close friend of General Mannerheim, strongly encouraged the government to hire Kotilainento be the new executive director for the state owned Enso-Gutzeit company in 1924. Walden's trust in Kotilainen came from the time the two men spent together at the White headquarters.

V A Kotilainen in Army uniform during the Winter War

Kotilainen managed Enso-Gutzeit from 1924 on. One of his first management acts was to ensure the image of the company became increasingly Finnish, moving the company headquarters to a new location, Enso, in the eastern part of the country. In addition, he introduced Finnish as the company's official language and strongly rejected Swedish which had been spoken in board meetings and business offices for more than two centuries. Finally Kotilainen changed the company's name by replacing an originally Norwegian name, W . Gutzeit & Co., with the Finnish Enso-Gutzeit, emphasizing the favored Finnish culture and ethnic heritage over the previously dominant Swedish culture

Nationalism continually shaped the social policy of Enso-Gutzeit. It was a dream of VA. Kotilainen to organize the work and life of the company's paper, pulp and timber factories so that blue and white collar workers and managers could live in proximity and harmony. The social policy of Enso-Gutzeit provided employees with modern medical care, primary education and vocational training free, or at minimal cost and from 1931 on actively encouraged employees at all levels to join the Suojeluskunta (the Finnish Civil Guard) or, if female, the Lotta Svard. Additionally, the company commissioned top Finnish architects (for instance Alvar Aalto) to design houses and buildings for workers and managers. Kotilainen also hired Martti Jukola, a leading Finnish journalist and powerful national agitator, as the editor-in-chief for the company’s weekly journal, which had a strongly nationalist agenda. In this, Enso-Gutzeit set a policy and standard which was followed by all other state-owned, and many private, companies.

Limitations on Development

However, the newfound economic sucesses of the first half of the 1920’s could not be maximised as well as they could have been due to two factors. The first was Nature. Finnish ports were blocked by ice for the winter months and with icebreakers only available for Hanko and Turku, only these ports could be kept (mostly) open throughout the long Nordic winter. This was not optimal for Finnish forestry industries as the primary export harbors for forestry products were Viipuri (connected via the Saimaa canal to Finland’s inland lakes) and Kotka. The Ports of Oulu and Kemi, situated at the mouth of the Oulujoki and the Kemijoki respectively, were needed to ship forestry products from the large wood reserves of their hinterland, but could not be exploited at all during winter months.

The second limiting factor was a man-made one. Finnish Shipping Companies were small and had difficulty servicing export markets. Due to their small size they experienced difficultues in being accepted into the cartel system operated by the large transoceanic shipping companies. For example, it was impossible for Finnish ships to carry cargoes of coffee from South America to Europe, meaning that while they could carry freight out, it was next to impossible to find freight to carry back, making voyages uneconomic. The dependence of Finnish exporters on foreign shipping companies resulted in lost transit time and worse access to foreign markets. Finnish products were often sold without any mention of their Finnish origins, which in practice meant an inability to create lasting trade relationships.

At the same time, the established Finnish ship-building industry was experiencing a marked decline. Up until 1917, Finnish shipbuilding had been largely sustained by a combination of the Russian merchant shipping and naval markets. Post WW1, the Russian market had evaporated and the penetration of new markets was difficult as a result of the post-WW1 abundance of merchant shipping. The longterm prospects for the Finnish shipbuilding industry seemed bleak. It was at this point, in the mid-1920’s, that a number of different economic and political factors came together with effects that had long term ramifications for both Finland, and, later, for Europe.

The first factor was the occurrence, on 4 October 1925, of the worst accident suffered by Finnish defence forces in peacetime, when the old Torpedoe Boat S2 sank outside Pori with the total loss of all 53 crew. The accident sparked widespread public outrage which was exploited by both naval and industrial circles. The Finnish Navy had been established in 1918 using a hodge-podge of Russian Czarist Navy ships left in Finland during the chaotic "Baltic Fleet ice cruise" which had occurred during the Finnish Civil War. The ships taken over by the Finnish Navy did not meet Finnish defence needs and were mostly obsolete while the officers and seamen of the new navy were not that skilled. This combination of causes had led to the loss of the S2. It was at this point that a new organization - Laivastoyhdistys or the Finnish Navy League - was established by naval and industrial circles to promote the need for the construction of new ships for the Finnish Navy.

The second factor was a combination of the abovementioned decline of the shipbuilding industry together with the difficulties being experienced by the forestry industry in exporting and the inability to penetrate markets of the small Finnish shipping companies. The third factor was political, and was largely the work of one man, Marshal Mannerheim, the leader of the Whites in the Finnish Civil War and the former Regent of Finland immediately after the Civil War. Mannerheim had retired after losing the race for the first Finnish Presidential elections, but continued to be highly influential in Finnish politics, almost despite himself, for he was not by any stretch of the imagination a politician.

Mannerheim’s concern, articulately and forcefully expressed, was that in order to maintain its continuing independence, Finland needed to ensure its Armed Forces were capable of defending itself without any reliance on foreign powers. And that defence would be against the Soviet Union, the only state that threatened the existence of Finland. That this was not a welcome message to many politicians of the Left was somewhat of an understatement. From independence until the mid-1920’s, Finland’s government had neglected the military, concentrating on social and economic reforms and almost willfully ignoring the Bolshevik Government that now ruled what had become the Union of Soviet Socialist Republics. Finnish military equipment was either semi-obsolete or non-existent. The Air Force and Navy could not provide any credible deterrent and the Army, while sizable in numbers when the Reserves and Civil Guard were mobilized, was basically an infantry force of 9 Divisions with little in the way of modern artillery, ammunition stockpiles or even uniforms.

As Mannerheim articulated it, in the event of a war with the Soviet Union, Finland would, with the exception of its border with Sweden, be geographically isolated. And relations with Sweden in the mid-1920’s were strained, largely over the Aland Islands issue. Any foreign aid would take time to arrive and would be beset by considerable logistical difficulties, not least of which would be the Soviet naval threat within the Baltic and the icing over of the Gulfs of Finland and Bothnia for a good part of the year. Mannerheim was also very much a realist with regard to both diplomatic and military assistance – it was unlikely that the League of Nations would do anything more constructive than condemn any attack, and while Finland could expect public sympathy in Europe and North America, this would be unlikely to translate into any substansive assistance. Nor could any decisive assistance be expected from Finland’s Nordic neighbours, Sweden and Norway.

Norway had a small and ill-equipped military and, politically, was unwilling to make any commitments. Sweden’s left-wing government was not a reliable defense partner and was unwilling to enter into defensive agreements with Finland, and would in all likeliehood give in to Soviet pressure not to intervene in any conflict. And there was also a major disagreement with Finland over the status of the Aland Islands. Mannerheim’s position was that while it was very much evident that the only real threat to Finland was the Soviet Union, the Finnish Armed Forces were not in a position to provide an effective defence and no help could be expected from other countries if Finland was attacked. It was this position that Mannerheim sought to correct and in this, he sought support from all sectors of Finnish society – with, as we know, surprising success, both for the Finnish economy and for the Finnish military.

Part 1-B - Building the Finnish Military-Industrial Complex

Building the Finnish Military-Industral Complex

Working behind the scenes, Mannerheim slowly built a coalition of support for his well-thought out proposals. Essentially, these were broken down into two broad areas. The first was specifically maritime. Bringing together Naval, Naval League, Shipping and Forestry interests, Mannerheim built a consenus that supported a “Naval and Merchant Shipping Act.” The Merchant Shipping component of the Act sought to establish a maritime infrastructure capable of making Finnish maritime trade a year-round affair and establishing state-owned companies capable of conducting Finnish trade with Finnish flagged ships to North and South America and elsewhere. The Naval component of this Act sought to provide a naval force capable of fulfilling the defense role envisaged: securing the demilitarized Åland Islands in the event of war, strengthening the Coastal Artillery to resist landing attempts and securing Finnish trade routes to Sweden and through the Baltic.

The Act initially sought the construction of Icebreakers, to operate under the existing Finnish Maritime Adminstration, while a new company, Merivienti Oy, was to be established as the state owned shipping company. The two existing Finnish steamship companies were to be allowed a large share in Merivienti Oy, which was also not to be allowed to compete with existing companies in the lucrative European trade. In order to ensure a steady flow of orders for the Finnish shipbuilding industry, the basic schedule to be followed was first build the Icebreakers necessary for ensuring year-round foreign trade, then build merchant ships to gain experience in building larger and more modern ships, whislt also embarking on a parallel program of continued naval construction on a limited scale.

The second area where Mannerheim successfully generated a consensus of support was in the further development of Finnish Industry. This was broken down into a number of areas: – support for the existing but limited Finnish metallurgical industry, the development of new manufacturing companies specializing in motor vehicles, aircraft and engines for both, , the establishment of an oil refinery and oil and fuel storage facilities, and the rapid expansion of Finland’s hydroelectric power production capabilities in order to supply electricity for these new industries and somewhat incidentally (except to Mannerheim) the development of a small internal armaments industry

After the initial groundwork had been laid, the necessary legislation was pushed through the Finnish legislature in 1926 with surprisingly ease. The Right-wing Kokoomus (National Coalition) Party was dead-set against socialism - but in Finnish political tradition state funding for business has never been seen as Socialism. Their support was unanimous for the legislation put forward. The left-wing SDP (Social Democratic Party) was opposed to the military components but supported the civilian components (and then the legislation in its entirety) due to the promise of more work for industrial workers. The Swedish People's Party (RKP) traditionally supported the interests of the merchant marine due to the interests of their supporters. The Agrarian Party was staunchly opposed to increases in the State Budget but was supportive of the expansion of the forestry industry (and the possible improved wood prices, important for small and large landowners alike) as well as the improvements in national defense.

The only party wholly in opposition to the arrangement was the Socialist Party of Workers and Smallholders (STP), a cover organization for Soviet-backed communists. Any increase in national defence capabilities was against Soviet interests as were improvements in Finnish industry – particularly as the Soviet Union was heavily dependant on the export of forestry products produced with slave labour in order to acquire much needed hard currency. The STP was a distinct minority, however, and all legislation was passed by the Finnish Parliament in April 1927, to be enacted from 1928 onwards. In practice numerous studies and planning exercises had been completed by the Finnish Navy, Finnish Maritime Adminstration, Finnish Army and Air Force and and Finnish industry associations over the preceding two years of negotiations and consensus building and orders were placed and work commenced almost immediately after legislation was passed.

Development of the Finnish Oil Refinery

The first new project to get underway was the construction of an Oil Refinery. In 1925, Finland had no oil refinery. The country was one of the few in Europe that imported all its oil and petroleum products from abroad and there had been no private industry interest in undertaking refining and bulk storage of petroleum products. Given the increasing strategic importance of oil and petroleum, as well as the Governments plans to boost motor vehicle manufacturing, the legislation specified that the Ministry of Trade and Industry was to establish a company which would construct an oil refinery with the capability for 700,000 tons crude oil capacity and that storage distribution of fuel and lubricant oils were to be placed under the control the same company. The new agency was to be headed Colonel Väinö Vartiainen. Dr. Albert Sundgren, Finland's only petrochemicals expert, was a senior staff member of (Sundgren had been a strong advocate of the establishment of an oil refinery in Finland from the start).

Neste Oy (Finnish=”Liquid”) was set up, with its first general meeting held on January 2, 1927. The state of Finland was registered as a shareholder with 207 shares, Oy Alkoholiliike Ab, the state-owned alcohol monopoly with 140 shares, Imatran Voima, the recently established state-owned power company, with three shares and the Ministry of Defence with 50 shares. In the articles of association of the company, it was stated that its purpose was to refine oil, own and rent storage for liquid fuels and lubricants, and to act as importer, refiner, transporter, and manufacturer of these products, as well as trading in them. Neste planned to store its fuel oil and lubricant supplies in caves in the granite rocks of Tupavuori, in the township of Naantali on Finland's southwestern coast. The storage caves in Naantali were named NKV, from the Finnish words for Naantali Central Storage. An area near the cave storage reservoirs was selected as the future site of the refinery. The harbor conditions at Tupavuori were considered to be excellent. The planning of the refinery was entrusted to a U.S. firm The Lummus Company, an early specialist in the field. The delivery of plant and equipment was entrusted jointly to the French company Compagnie de Five-Lille and Germany's Mannesmann. The civil engineering was carried out by Neste itself. Construction work started at Tupavuori in Naantali in October 1929, and the inauguration of the refinery was held on June 5, 1932.

The start-up of production in August 1934 had already shown that no technical problems existed. The guaranteed capacity of 700,000 tons was reached by the beginning of October, and soon it was apparent that the new refinery could reach a capacity of up to 1.2 million tons of crude oil per year. Neste had planned to refine crude oil from many sources, primarily from Western suppliers. As the company had no intention of forming a retail delivery system of its own, the marketing of products was based on cooperation with oil companies already operating in Finland. The most important of these were Shell, Esso, and Gulf. Shell and Gulf delivered crude oil of their own to be refined by Neste. All prices were tied to international market rates.

However, the Government saw an opportunity to expand trade links, which were almost non-existent, with the Soviet Union and in 1935 a trade agreement was signed whereby Finland obtained half the needed supply of Crude Oil from the USSR in return for the supply of heavy industrial items including merchant shipping and locomotives (this reciprocal trade with the Soviet Union is an area that will be addressed in more detailed later). Neste's strategy was to deliver all the motor petrol Finland needed and adjust the production of other derivatives of crude oil accordingly. Thus the company chose a technology that gave maximum petrol output. At the same time, the sourcing of crude oil from the Soviet Union led to an increase in Finnish exports in payments, as Finland preferred not to use their somewhat limited foreign currency where not necessary.

This led to increased exports, in particular for the Finnish manufacturing industry. In 1937, Neste purchased Sköldvik Manor, an area of 628 hectares near the town of Porvoo (east of Helsinki) with good access to deep water, as the site for the development of a heavy chemical industrial complex. Neste started detailed planning for this event, again with Lummus, but these plans had not been completed by the outbreak of the Winter War. In conjunction with other legislation being passed, it had been decided that Neste would import crude oil primarily in ships owned by the company. In the spring of 1930, Neste purchased an old oil tanker from Norway in order to gain experience with the shipping of oil products. At the same time, anticipating completion of the refinery in 1935, initial orders were placed with the Finnish shipbuilding industry for the construction of six crude oil tankers.

Soviet oil was imported from Black Sea ports, while crude oil was also imported from Persia. By the late 1930’s, Neste had 18 tankers (two modern tankers built in Finland, 16 older tankers purchased second-hand from the US and Britain) plus five tugs and carried much of the Oil imported into Sweden and the Baltic States as well as for Finland. Anticipating the outbreak of WW2, Neste had by 1939 built up large stockpiles of both crude oil and refined petroleum products in the storage cave reservoirs near Naantali, estimated to be enough to supply the entire country for six months. With strict rationing, these reserves proved to be sufficient for the duration of the Winter War of 1939-40.

Development of the Finnish Power Generation Industry

When Finland gained independence in 1917, despite being a leading timber exporter, much of the timber felled annually from its forests was used as firewood - annual fellings from its forests amounted to nearly 30 million cubic metres, of this over 20 million cubic metres was used as firewood. The firewood was sold as metre-long split billets, and neat stacks of them could still be seen throughout Finnish countryside and towns in the 1960s. Besides being used for heating buildings, wood was also used to fuel steam engines and boats. Despite this heavy reliance on wood for heating and energy, Finland was at the forefront of European electrification. The initial stage of the history of electricity dates back to the turn of the year 1877-78, when Finland carried out its first experiments with electric light. The first permanent power plant producing electric light, which was also one of the first in Europe, was erected at the Finlayson factory in Tampere in the spring of 1882. Within a year, electric light was coming on in Pori, Jyväskylä and Oulu. Helsinki received its first power plant in 1884, the same year as Berlin.

Firewood for Helsinki was stored on Hakaniementori square during both world wars.

Source: Helsinki City Museum

The first pioneers of Finnish electrification built power plants, acted as importers of electrical goods, and even manufactured the equipment and appliances needed to produce electric light. At first, all electrical goods were imported from abroad. In 1889, Gottfrid Strömberg set up a company in Helsinki bearing his own name, and this company became the mainstay of the Finnish electrical industry for almost the next one hundred years. At the turn of the last century, some small-scale hydroelectric power stations and other kinds of power plants were built in Finland, and these brought electrical power to factories and light to urban dwellings.

The First World War and the Civil War slowed the pace of Finland’s electrification, but after the war, a large number of electrical companies were established in Finland, and new factories were built, such as Suomen Kaapelitehdas (the Finnish Cable Factory), later to be called Nokia Cable, a forerunner to today’s Nokia. Old German companies also returned to the Finnish market, and a group of new companies was set up, including Osram of Germany, Philips of the Netherlands and L M Ericsson of Sweden. In the 1920’s, much national effort went into the construction of the power station at Imatra and the erection of a power line from Imatra all the way to Turku. Construction at Imatra started in 1922 and the power plant, the largest hydroelectric plant in Europe, was completed and electricity production started in 1929.

In addition to Imatra, in order to support the planned development of large scale heavy industry in the region, the building of a number of hydro-electric power plants in the Oulujoki and Kemijoki river catchment areas was planned, with work commencing immediately on completion of Imatra (this was largely done in OTL during the post-war decade using pre-war plans). The hydropower plants in these two rivers were intended to not only supply local industries but also to transfer power to more populous and industrial Southern Finland. While these plants were smaller than Imatra, they were more numerous, and with construction work on the first starting in 1928, these began generating ever increasing amounts of electrical power from 1931 on, with construction continuing unabated up until the outbreak of the Winter War in late 1939.

Development of the Finnish Motor Vehicle Industry

Prior to 1928, all motor vehicles used in Finland had been imported built-up from abroad. As part of the industrialisation program the Finnish Government established “Sisu Auto Oy” in 1928, with a truck and bus factory constructed Hämeenlinna, some 100 kilometres north of Helsinki. The first nine Sisu vehicles, a prototype series consisting of a bus and eight trucks, rolled off the production line in 1929. With the large and growing demand for heavy vehicles for both the forestry industry and for construction work, production was expanded until by 1935 some 1000 trucks and 200 buses (some being exported) were being produced annually. A third production line was added in 1932 to produce tractors for agricultural use. These were, incidentally, designed so that, in the event of war, they could be used to tow artillery. Construction was expanded further in 1938, with a fourth production line introduced and the work force being expanded to produce trucks for the military.

Sisu Logging Truck, circa 1935...

Sisu Logging Equipment, circa 1935

Sisu’s primary competition for the Finnish vehicle market came from the Ford Motor Vehicle Company of Finland, Oy Ford Ab. The Nyberg brothers from Nedevetil had been the first Ford Dealers in Finland, returning from America to open business in 1912. When Ford started production of his Model T, the three brothers Alexander, Fritjof and Tor Nyberg from Nedervetil were emigrants in Arizona. With their business sense they realized that the Model T Ford was something in which to invest. What followed was the introduction of the Ford automobile to Finland when the brothers imported the first Ford and built up a sales system. They went to the Ford sales office in New York and negotiated to establish a sales network in Finland which was still a part of Russia at that time. While Ford was producing and setting up sales of his automobile, he received assistance from pioneers in other countries. He revolutionized the way of life with the combustion engine’s triumphal march around the world. On the basis of the experience of the first five years, by 1908 he began production of the world famous Model T which brought a world-wide demand for the Ford cars. While Henry Ford was building his own enterprise without foreign financing, Ford’s first representatives were mostly "self-made men" — businessmen without other capital but with a lot of energy. Their first operation became a great adventure for them with shining results which they had never vizualized. The three brothers from Gamlakarleby were pioneers and adventurers whose foresight we can thank for the coming of age for Ford in Finland. They were happy to receive an affirmative reply from Ford’s New York office as to whether there was an opening for a Ford representative in Finland. During the hectic production schedule no one had time to give a thought to remote Finland as a place for a Ford sales office. After the Nyberg brothers received approval to their proposal they were urged to contact Ford’s chief agent for Europe who had his office in Paris. Light-heartedly Fritjof and Tor rushed back to Finland, while their oldest brother Alexander went to Paris. He used the "captain’s title" he had received as a mining foreman in America and reported to the European director, H. B. White. White, who had a hundred irons in the fire, tersely announced that he could give the Finlander only two minutes of his time. But Alexander, slow and thorough by nature, took his time and explained his proposition. When White heard what Alexander said he became interested and asked all about Finland and the two minutes stretched into two hours. Alexander left the office with an agreement in his pocket.

The brothers first had to take a test for a professional driver’s license. Their instructor was the known motor vehicle inspector and engineer Thornwald Tawast. Then they set up a sales office at Norra Magasingatan 6 and immediately began to cultivate business from their countrymen. The first Ford was expected to arrive in the country during late winter of 1912. Drivers were in the minority at this time. Consul Nikolajeff had begun to import automobiles to Finland in 1905, but no one would have dreamed the effect the Ford Model T would have when it came to the country. Automobiles were still a rarity on the roads and were considered a luxury item reserved for the rich. Three roads reached Helsingfors by 1912 which gave the brothers an opportunity to tour in their own auto around Finland. The first Model T was equipped with a brass hood, carbide lamps and a cloth top. For their first car the brothers had to pay a total of 2500 marks, including freight and customs. The Ford factory established a retail price of 4400 marks. The first test drive only went to Uleåborg and the car generated great excitement everywhere. For the first time people saw a vehicle that drove without a horse and they foresaw that wild reckless driving would lead to the speedy destruction of the world. Gallen-Kallela, who made the first auto posters was at the steering wheel. Despite old women rolling their eyes, the first Ford was a huge public success. People gathered to see with their own eyes a vehicle that went with its own power, and it was impossible to arrange for test drives for all who wanted to ride. Orders came thick and fast for the brothers who already received a hundred names during the first demonstration drive.

Between 1910 and the 1920’s, Ford had various dealers within Finland, in 1925 selling 3,661 vehicles (more than half the cars sold in Finland at that time were Fords). In 1926, Ford established the Ford Motor Company of Finland. By 1929, the company's shares made up 40% of the domestic share market. In 1938 the company was listed on the Helsinki Stock Exchange, listed as Oy Ford Ab. While for Ford, the 1920s ended in the stock market crash of 1929 and economic stagnation, in Finland, due to the Governments economic policies and industralisation programs, business grew.

The T-Ford is making its entry into the countryside of Ostrobothnia near Sideby in 1927. Erik Storteir, 17 years of age, is sitting on the hood of his first T-Ford. Passengers were Dagny Lassfolk, Gerda Söderlund, Ingrid Hällback, Elin Lassfolk and Valter Norrback

In 1930, with government encouragement and financial incentives, construction work started on the Helsinki Hernesaari assembly line, which was completed in 1931 (together with a domestic engine plant which was later expanded to produce engines for Finnish-manufactured tanks and armored fighting vehicles), with the first domestic Ford vehicles being delivered off the construction line in early 1932. The initial assembly line produced cars (the Ford Model-A) and light trucks and sales were steady through until 1935, after which sales began a steady increase as economic conditions began to improve. Light Trucks found popularity largely in rural districts and were increasingly used by farmers and small rural businesses. Produced in a Panel Van version, they were also used increasingly within the cities and larger towns by organisations such as the Finnish Post Office. Sisu and Ford did not compete directly with each other - Ford produced no real competitors for the now established Sisu line of heavy vehicles and Sisi did not produce cars or light trucks. Import taxes restricted the importing of vehicles into Finland to a small number of luxury vehicles. Interestingly, a number of American engineers and skilled auto workers had moved to Finland to assist in establishing the Plant and its production lines, a number stayed on in Finland after initial work had been completed and many of these continued through the Second World War.

Hernesaari assembly line under Construction, 1931

By 1935, the Finnish motor vehicle industry was producing approximately 1,000 Sisu heavy trucks and around 10,000 Ford cars and light trucks annually, with all the components being manufactured within Finland. This had ramifications beyond the mere construction of motor vehicles – and a good example of some of the other ramifications of the rapid development of the Finnish motor vehicle industry can be seen by looking at the history of Imatra Steel Oy Ab. The origins of the Imatra Steel group could be traced back to the early years of the Finnish and Swedish iron and steel industries. The core of Imatra Steel stemmed from 1630, with the founding of the Antskog ironworks, one of the earliest in the Swedish kingdom, which included present-day Finland among its territorial holdings at the time. In the 1640s, the owner of the Antskog works expanded, founding a new ironworks in the town of Fiskars. By 1647, the Fiskars works had come into the possession of Peter Thorwöste, originally from Holland, and in 1649 Thorwöste began casting and forging. This laid the foundation for the Fiskars company.

Fiskars was to change ownership a number of times over the following century, and along the way had ceased iron production in favor of copper production. In 1822, however, the works was bought by pharmacist John Julin, who reoriented the company to iron production. In the early 1830s, Fiskars initiated fine forging operations, producing the cutlery and other utensils that were to make the company a brand name. Fiskars also became an early player in Finland's Industrial Revolution, inaugurating its own machine and engineering workshop in 1837. By the following year, the workshop had completed its first steamship engine. The development of machinery and equipment, the laying of the Finnish railroad system, as well as the construction of bridges, led Fiskar to continue to expand its production in the middle of the 19th century. In 1890, the company acquired a bankrupt steel mill at Aminnefors, which Fiskars then renovated, installing new furnaces. The development of the internal combustion engine resulted in the creation of new machinery types and new motorized vehicles; it also led to a need for new types of components, including springs. By the end of World War I, the Aminnefors site had begun producing its own spring-grade steel, leading Fiskars to establish a factory dedicated to the production of springs, particularly for the railroad industry, in 1921.

In the 1920s, Fiskars continued to expand its steel production operations, buying up iron and steel works across Finland, including the Billnäs Bruks works, which remained a key part of the group, which renamed itself Imatra Group in 1927. In 1929, the company began manufacturing the first springs for Sisu trucks. With the rapid development of the Finnish motor vehicle construction industry including the Sisu Auto Plant and the new Ford Plant constructed in Helsinki, Imatra Steel found a new, specialised and rapidly expanding market. Motor Transportation was expanding rapidly from the mid 1920’s due to a combination of the expansion of forestry industries and the growth in large scale construction and building projects. Large number of small transport companies operated heavy trucks (for their time) during winter in support of wood procurement and delivery and during summers on various construction projects. At the same time, the general population was benefiting from the growth in the economy and more and more people could afford cars while small businesses were increasingly utilising the small trucks and panel vans produced by Ford. The Finnish motor vehicle construction industry needed parts, and Imatra Steel worked to meet the demand, rapidly becoming THE specialist manufacturer of steel and steel components for the automotive and mechanical engineering industries within Finland.

The company's products expanded to include low-alloy engineering-grade steel bars, produced at the main Imatra steel works, as well as forged engine blocks and axles, crankshafts and camshafts, leaf springs and stabilizer bars, connecting rods, and components for steering columns for cars and heavy trucks. In addition, with the growth in shipping construction, Imatra Steel also became a supplier of steel and steel components for the shipping industry and also began to develop a sideline in components for the small Finnish aircraft manufacturing industry as well as a wide range of non-automotive steels and steel products including nails, chains, and wire rods. When the government joint venture with Tampella, Patria Oy, began, in the late 1930’s, producing tanks and then other armored fighting vehicles for the Finnish Army, Imatra became a major parts supplier. And Imatra Steel was only a single example. There were many more, both large, medium and small, spread acoss the entire spectrum of the Finnish economy.

The expansion of civilian motor transportation, particularly in heavy trucks, had implications for national defence. In early 1930's, a divisional organic light artillery regiment used 1164 horses for summer TO&E. Out of the manpower of some 2363 men in the artillery regiment, half were involved in keeping the horses operational. Together with planned and expected reinforcements, an infantry division employed 3200-7000 horses for a total planned wartime horse strength for the Army of 60,000 horses with a daily consumption of some 6000 tons of fodder - a far heavier burden for logistics than for example a daily ration supply for the troops. As a result of the rapid increase in trucks (Army mobilization plans called for the requisitioning of a large percentage of available heavy transport), in 1939 the new TO&E could replace most of the horses with motor transportation in the Army Field Infantry Divisions destined for the fairly well developed Karelian Isthmus. Troops destined for Northern Finland retained more horse transportation, although in many cases horses were supplemented with agricultural tractors. These changes liberated some 15% of the military from the care and maintenance of horses and allowed the Army to add three more Divisions to the Field Army. An even more important aspect was that as a result of the expansion of logistical assets, the operational mobility of the ground forces was significantly improved and the dependence on the rail network was lessened.

Part 1-C - Initial Steps towards a Maritime Industrial Complex

(Note that parts of this are not original and were lifted from an earlier alternatehistory.com thread by Jukra - I've reused them as they fit my alternate scenario rather nicely).

Finnish Maritime Construction - Background

By the late 1920’s, there were three major firms involved in the shipbuilding industry in existence in Finland – Crichton-Vulcan and Hietalahden Laivatelakka were shipbuilders, while Wärtsilä, an iron, steel and construction company, was the major maufacturer of marine diesels. Following independence and the drying up of the Russian market, the shipbuilders lacked any major construction contracts, hence there was major pressure on the government to place major shipbuilding contracts in order that the companies remain in business. With the legislation passed in the late 1920’s, the Finnish maritime construction industry expanded steadily, at the same time becoming increasingly innovative. Not only the large companies benefited. Starting from 1934, smaller shipyards were awarded ongoing contracts for the construction of high speed wooden torpedo and gunboats as well as large numbers of small Coastal Motor Torpedo Boats.

I - The Crichton-Vulcan shipyard

Crichton-Vulcan was established in 1924 by the merger of AB Crichton Ab and Oy Vulcan Ab into Crichton-Vulcan Oy. The Crichton-Vulcan shipyard in Turku had been the cornerstone of the Finnish shipbuilding industry. The first shipyard in Turku was established in 1732 on the eastern bank of the Aura River. The first foundry and metal workshop was established in 1842. After the Crimean War the workshop was acquired by William Crichton. Crichton built a new shipyard near the mouth of Aura. Soon a joint-stock company, Wm Crichton & Co Ab was established, merging with a number of smaller shipyards. In 1913 Wm Crichton & Co Ab went bankrupt, and a new company AB Crichton was established in its place. During World War I, the shipyard served the Imperial Russian Navy. Åbo Mekaniska Verkstads Ab was founded in 1874 and later merged with another workshop that changed its name to Oy Vulcan Ab in 1899.

Crichton-Vulcan was one of two major beneficiaries of the Finnish Government’s support for the development of the Maritime Industry, constructing icebreakers, submarines, naval warships and merchant ships.

II - Hietalahden Laivatelakka shipyard

The Hietalahden Laivatelakka shipyard in Helsinki was in decline following independence but became the second major beneficiary of the Finnish Government’s support for the development of the Maritime Industry, constructing icebreakers, naval warships and merchant ships. Hietalahden Laivatelakka did not build submarines.

III - Wärtsilä

Founded in 1834, Wärtsilä was established when the governor of the county of Karelia approved the construction of a sawmill in the municipality of Tohmajärvi. In 1851, the Wärtsilä ironworks was constructed. In 1898, ownership of both the sawmill and the ironworks changed hands, being renamed Wärtsilä Ab, then becoming Ab Wärtsilä Oy in 1907. In 1908, the Saario rapids power station started operating and Wärtsilä became a modern smelting plant and steel mill running on electricity generated from the power station. Wärtsilä was a major beneficiary of the government’s economic policies. In the late 1920’s a galvanization factory manufacturing magnetically galvanized wire was completed. In 1929, Wärtsilä acquired a majority holding in Kone-ja Siltarakennus Oy (Machine and Bridge Construction Ltd), a company which manufactured machinery for the paper industry machinery. Wärtsilä's headquarters move from Karelia to Helsinki. In 1930, Wärtsilä acquired the Onkilahti engineering workshop in Vaasa and in 1931, the Pietarsaari workshop in Pietarsaari. In 1932, the Kone-ja Siltarakennus Oy group was merged into Wärtsilä, along with the just acquired Taalintehdas Steel Mill (est’d 1686) and the Turku, Pietarsaari and Vaasa subsidiaries.Wärtsilä-Yhtymä O/Y (Wärtsilä Group Ltd) was established under chief executive Wilhelm Wahlforss.

In 1927, Wärtsilä signed a licence agreement with Friedrich Krupp Germania Werft AG in Germany to manufacture diesel marine engines. The first Finnish-constructed marine diesel engine saw the light of day in Turku in November 1929. Wärtsilä went on to become the major manufacturer of marine diesel engines for the Finnish shipbuilding industry, supplying all the marine diesels used in the construction of the Finnish icebreakers, merchant marine and the Finnish naval construction programs.

Development of the Finnish Maritime Shipping Industry

I – The Icebreakers

In 1927, the Finnish icebreaker fleet was based on six icebreakers with a total power of 23 000 horsepower. The five older ships all were coal-fired and lacking range for continuous operations. The oldest, Murtaja, was of 1890 vintage and even lacked a keel propellor. The newest one, Jääkarhu, delivered by the Dutch firm of P.Smit&Co in 1926 was the darling of the fleet. With a breadth of 19.3 meters, 9200 horsepower and tilt tanks it was a powerful addition to the icebreaker fleet and could single-handedly aid ocean going liners and tankers in and out of Finnish winter ports. Her triple-expansion steam engines were oil-fired, providing far greater endurance than with the older generation of coal-fired icebreakers. Even though the Soviet icebreaker Krasin was even more powerful, Jääkarhu was clearly among the best icebreakers in the world.

However, in some respects the Jääkarhu was already obsolete. Diesel electric propulsion, to be introduced to the Finnish Navy in submarines, provided the capability to direct power easily to pumps, keel or stern propellors or whatever else was the need and also allowed for greater endurance and more economical operations and was clearly the way of the future. Bubble shrouding of the hull was also lacking. The Swedes were already considering diesel-electric propulsion for their "Statsisbrytaren II", to be named Ymer.

The Finnish Maritime Authority foresaw a need for two separate classes of ice-breakers. First would be an 8000 horsepower, 4000 ton class of 14 meters beam to be used to keep sealanes in the Gulf of Bothnia open for large transoceanic cargo ships. Projected performance was to be 15kts in open waters and 6-8kts in 50 centimeter ice with a maximum capability of 120cm of solid ice. The projected names for the class would be Karhu, Otso, Kontio and Mesikämmen, all synonyms for bear, the traditional "King of the Forest" in Finnish folk mythology. Ordered in 1928, the ships were scheduled to be delivered between 1930-1931. The second class would be even more ambitious. The Sisu class was to be of 6000 tons and 10,500 horsepower with 19.5 meters beam and was to be used to assist shipping for Kotka, Viipuri and Helsinki, keeping the routes open for large ocean-going tankers and liners. This ship was to be delivered in 1932.

Inspired by the use of icebreakers in the Civil War and the First World War, the new icebreaker classes were designed from the outset to be armed if deemed necessary. The armament for both the "Karhu" class and "Sisu" was to be four 4"/60 1911 pattern guns, four 40mm Bofors guns and depth charge racks.The projected wartime role for icebreakers in the summer season was to be convoy escorts. Additionally, the icebreaker "Karhu" was to be designed to be used as a tender for the Navy's submarines.

II - The establishment and initial operations of Merivienti Oy - 1928-1932

Maritime Shipping was to be organized under two business arms – the Finnish North American Line (SPAL) and the Finnish South American Line (SEAL). For SPAL operations, a hodge podge of ten pre-WW1 cargo ships were bought to startup the initial operation, operating once in a week service to North America, initially to Boston, New York and Baltimore.

For SEAL, there was a need for faster and larger ships and the decision was made to purchase a uniform class of twelve fast cargo ships. The ships decided on were Hog Islanders, constructed en masse to replace the Allied shipping losses during the First World War for the Emergency Fleet Corporation of the US Shipping Board. The ships operated a two weekly service between Finland, Brazil and Argentine. Hog Islanders were fast and, from the Finnish perspective, quite large ships. Although the ships were almost ten years old, their method of their construction was studied carefully by Finnish firms as the orders for a uniform class of ocean cargo ships was expected within a short timeframe. Hog Islanders proved expensive to operate as they used manpower intensive steam turbines which had the effect of further directing the Finnish marine engine development effort towards the use of diesel and diesel-electric propulsion.

Hog Islander "Finntrader" of SEAL approaching Kotka in April 1929. Hog Islanders were of 5000brt, 8000dwt and had an operating speed of 15kts. SEAL ships did not gain their white livery until the late 1930's - to promote cleanliness of Diesel propulsion

The initial operations of Merivienti were unprofitable for a number of reasons. Cargo operations started at the beginning of 1929, just as the Great Depression was about to shake Finnish export markets and seriously disrupt the whole international trade system. The Ships were purchased just before the international slump for what were high prices. The purchase of the expensive and expensive to operate Hog Islanders was heavily criticized, but in fact the goodwill gained was important later on when neutralization of the Smoot-Hawley Tariffs became essential. Another element was the hostility of cargo shipping cartels in which the established shipping lines shut out the new state-funded competitors until 1930, when the solidarity of shipping lines evaporated under the pressures of Great Depression. Finally, while Finnish forestry companies had operated the Finnpap export association to promote Finnish forestry products succesfully in United States and Britain since 1918, other Finnish industries did not follow suit very effectively until state funds were allocated and state guidance provided to address the issue.

The alleged corruption and seemingly overambitious plans gained political attention, especially from the far left and, somewhat surprisingly, from the far right. For the far left, as mentioned before, Finnish plans to strengthen export industries were a threat to similar Soviet efforts. Moreover, any measure strengthening capitalist Finland was seen as a threat to the Soviet Union. For the far right, the so called Lapua Movement (Lapuan Liike) also criticized the maritime infrastructure program. This was due to the implied threat of factories, ports and high technology to the traditional agrarian lifestyle that the Lapua Movement would have preferred for Finland.

Hostility towards business interests was one of the factors which resulted in the Lapua Movement losing popularity with the Finnish electorate and this resulted in the movement being outplayed in the political field even before it's total crash after the 1932 coup attempt. The coup attempt was not the beginning of a new era of political instability, but rather end of the instability. After threats from both the left and the right ends of the political spectrum had been effectively defeated, the unpredecented economic boom which ended the Finnish Great Depression earlier than in most countries (just as in OTL) was a powerful antidote to extremist idiocies which were gaining power all over the world. Unfortunately for Finland and other democratic countries the domestic threats for democracy were not the only threats, as was seen during the late 1930's.

III The Icebreaker Sisu in service between 1932-1939

While the initial plans for the "Sisu" were rather traditional, the new "Super-Icebreaker" created large-scale public interest and thus in addition to having the most modern technology incorporated, the ship was also to have sleek modern lines, as can be seen in the picture below. One might argue that the modern design was a symbol for Finnish modernization, creating a break from the past, just as various Finnish public buildings of the era were spectacular examples of functionalist architecture.

Icebreaker "Sisu" in a 1939 promotional picture. The antenna in the foremast is not a radar but an experimental direction-finding antenna

Public interest in the project created an another requirement: “Sisu” was already designed to be among the most powerful icebreakers in the world. As a result of public interest and in response to the nationalism that was inspired by the ship, the specifications were rewritten for "Sisu" to become the most powerful icebreaker in the world, ahead of Soviet "Krasin". Ultimately, in terms of engine power the "Sisu" was surpassed by the Soviet nuclear icebreaker "Lenin" in 1959. However the post-war Finnish, Swedish and Soviet icebreakers of the "Voima"-class were more powerful in terms of icebreaking capacity due to improvements in design. The diesel-electric machinery of "Sisu" was a challenge for Finnish industry, but it was a challenge the meeting of which proved to be useful as the demand for electrical machinery grew significantly in the 1930's for both domestic and export use.

Thus the final specifications of "Sisu" were as follows:

Displacement: 6100 tons GRT

Length: 90 meters

Beam: 20 meters

Draft: 7.6 meters

Propulsion: Diesel-electric with six generators, totalling 13 000 IHP.

Armament (wartime): 4x 105/50 DP guns, 2 40/40 Vickers AA-guns, DC racks

Other: Fitted with airplane hangar and crane

In addition to regular operations during winter, the ship was also used for state propaganda purposes during summers. Of these trips, the Greenland expedition during the summer of 1937 gained widespread publicity outside Finland. However, the best-known trip was the visit to the New York World's Fair in the summer of 1939, where she had a large number of visitors. "Sisu" was a rare sign of peaceful engineering during the period in which storm clouds were already gathering over Europe. Following the New York World’s Fair, “Sisu” continued on to Brazil and Argentine, carrying a Finnish export show designed for South American markets. In August 1939, with the danger of war with the Soviet Union looming ever larger on the horizon, orders were sent for "Sisu" to return immediately. However, due to a collision with a British vessel, “Sisu” had to be repaired in an Argentinian shipyard. Repairs were completed by late October 1939 and with war looming with the Soviet Union, “Sisu” was directed to proceed to Narvik.

IV Naval Construction between 1928-1933

Finland first obtained a navy of sorts during the Finnish Civil War of 1919, when a number of elderly gunboats and torpedo boats of the Russian Tsarist Navy fell into White Finnish hands. Almost all of these captures came in shipyards and harbors where the vessels had been laid up without crews, and not of active warships. By the early 1920s, these ships had become thoroughly worn out and most of them went to the scrapyard in Turku. The fleet’s first commander, Commodore Hjalmar von Bonsdorff, presented a plan in 1919 for a navy based around a division of armored coastal defense ships, with a squadron of large destroyers and 40 torpedo boats, plus submarines and minelayers. It went nowhere at the time, but the basic concept, heavy guns supported by submarines and torpedo craft, stayed with the next generation of Finnish naval planners.

In the mid-to-late 1920’s, the Finnish High Command saw two specific direct naval threats and a third, indirect threat, requiring naval forces: a possible Soviet landing around Helsinki, and another Swedish attempt to seize the Åland Islands (repeating their 1918 adventures in the Finnish archipelago, driven off by German threats). A third more indirect threat of lesser importance was from the Soviet Navy fleet based out of Murmansk which could threaten Petsamo, Finland’s only Arctic port or the alternative access through the Norwegian port of Narvik. As part of the strategic naval planning that went on in conjunction with the development of the “Naval and Merchant Shipping Act,” it was determined that the objective of the Finnish Navy was to protect the Finnish coast and Finnish shipping against the Soviet Baltic Fleet and any Soviet Naval Forces based at Murmansk, which provided the major conceivable naval threat. Although the Navy leadership initially preferred coastal monitors armed with 10" guns, (OTL Väinämöinen-class) the support for large naval ships had waned due to the Merchant Navy law which produced lucrative large civilian orders for the Finnish shipyard industry almost immediately. The order of large ships, construction of which would demand special techniques of little use in civilian shipbuilding was no longer considered necessary by the shipbuilding lobby.

Icebreakers were the initial government-funded "masterpieces" of the Finnish shipbuilding. Smaller ships, on the other hand, would allow government funded work to be spread out over more shipyards. And in this, the Finnish Navy made a number of strategically sound decisions. The 1927 Naval Construction Plan put the emphasis on fast submarines, a strong destroyer flotilla, mine warfare and a strong anti-submarine component with the tactical objective of both bottling up the Soviet Baltic Fleet in Krondstadt and neutralizing the Soviet submarine threat in the event of war. A secondary objective was to deal with any Soviet naval elements in Murmansk. The Finnish parliament finally approved the details of an ambitious naval construction program in September 1927 in the “Naval and Merchant Shipping Act." This program was later updated in 1934 as part of the overall ongoing restructuring and rebuilding of the Finnish Armed Forces to face a potential invasion from the Soviet Union (updates in 1934 saw the addition of large numbers of small wooden Motor Torpedo Boats, Motor Gunboats, Fast Minelayers, Anti-Submarine Patrol Boats and a large number of small Coastal Torpedo Boats).

In 1927, the Crichton-Vulcan yard in Turku began construction of the first three submarines of what was planned to eventually be a total Flotilla of nine Submarines. The first three, the Vetehinen, Vesihiisi and Iku-Turso, were 705-long-ton submarines designed by Ingenieurskantoor voor Scheepsbouw, based on the German Type UC III .

The three Vetehinen class submarines side-by-side in the specially built construction shed

The Iku-Turso at sea on pre-war exercises, commanded by Lt-Cdr Pekkanen

The design work and the supervision of construction for the first three boats was done by Germans (the submarines incidentally served as a step in the design of the German Type VIIA submarines). The Vetehinen, the Vesihiisi and the Iku-Turso were commissioned in 1930 and 1931. With experience gained from the construction of these submarines, a subsequent order was placed for the remaining six submarines in 1930, with one submarine per year to be delivered through the period 1932 to 1937. Improvements were progressively added to the design, with the next two submatines, Vesikko and Saukko, being rather larger, with a more powerful engine and much larger fuel tanks, enabling offensive patrolling to be undertaken. The next two submarines, delivered in 1934 and 1935, were identical to the German Type VIIA Submarines (they were in fact prototypes for the German Type VIIA) were fitted with four bow and one stern torpedoe tubes and carried eleven torpedoes and were capable of 17.7 knots surfaced and 7.6 knots submerged. The remaining two submarines, delivered in 1937 and 1938, were similar to the German Type VIIB, with an additional 33 tons of fuel in external saddle tanks adding 2500 miles of range when surfaced and with two rudders for greater agility. They also carried fourteen torpedoes.

Type VIIB Submarine

The two Type VIIB’s were based out of Petsamo and, in the Winter War, took the Soviet Navy completely by surprise with their repeated torpedo attacks on Soviet transport ships carrying the infantry intended for the attack on Petsamo (indeed, some accounts therorize that the Soviets never even realized the submarines were there as the Ilmavoimat attacks from the air seemed to be the focus for their defensive efforts – in point of fact, it is unlikely that the truth will ever be determined as there were no survivors from the Soviet task force – those survivors from sinking ships that made it into boats were repeatedly attacked from the air by Ilmavoimat aircraft until all boats were sunk. Survivors in the water died within minutes from hypothermia).

V Construction of the Finnish Cargo Shipping Fleet - 1933-1939

After the built-up of modern ship-building facilities and experience gained in modern shipbuilding technologies through the construction of the Icebreaker Fleet and the first series of naval construction projects (including the building of submarines for Germany), SPAL and SEAL placed large scale-orders with the Finnish shipbuilding industry in 1933, with deliveries planned to begin in 1935. The long lead time had ensured that the cargo ships to be built would incorporate the latest technological advances. Due in large part to the state’s taking part, development risks were taken and the designs were very advanced for the period. The shipbuilders also took full advantage of the state funding provided to introduce new constructions technologies, such as welding, into commercial use. The promise of a series of orders had already motivated Wärtsilä Oy to purchase a license to produce Burmeister & Wain diesels in Finland.

Due to increased trade volumes, the plan was to order fifteen cargo ships for both the South American and North American traffic. These ships were to represent two different standard classes. For North-American traffic the choice of ship type was to be a 7300 DWT ship, capable of operating from most of the shallow ports of the Bay of Bothnia without significant additional investment in dredging and capable of being effectively supported by Karhu-class icebreakers. As required for Finnish conditions, the class was ice-reinforced to class 1A.

SPAL-class specifications:

Displacement: 4700 BRT / 7300 DWT

Length: 140 meters

Beam: 17.5 meters

Draft: 7.2 meters

Engine: One 7000 ihp Wärtsilä diesel

Operating speed: 16,5 kts

M/S Berny of SPAL in Mäntyluoto harbor during the summer of 1936. The livery color of SPAL was changed to white to mark the new shipping era. Berny was the second ship of the SPAL-class and did not have the electric cranes for which the SPAL and SEAL-classes became well known

The fifteen SPAL-class ships ordered were delivered between 1935-1937. From number three of the class forwards, the design was improved by the installation of new cargo space and loading arrangements to make full utilisation of the development of ports in both the USA and Finland. The introduction of electric cranes instead of derricks, and the use of steel cargo covers, all helped to optimize cargo handling significantly, thus reducing cargo costs. Electric cranes were installed on all newly constructed SEAL ships as well. The SEAL line was to be served with slightly larger and faster ships of circa 10 000 DWT class as the distance from Finland to South America was significantly longer. Following the Japanese fashion, the ships had a single shaft and sleek lines. They also had a white livery similar to SPAL ships. The fifteen ships ordered were delivered between 1937-1939.

SEAL-class specifications:

Displacement: BRT 6000 / DWT 10000

Length: 141 meters

Beam: 19.6 meters

Draft: 8.3 meters

Propulsion: Two Wärtsilä diesels on single shaft, 11 000 IHP

Service speed: 18kts

M/S Arica of SEAL just after trial runs. She reached a speed of 21kts in trials.

Both SPAL and SEAL class ships were equipped to take 12 passengers, as was usual for cargo ships of the time. Also in line with customary practice of the era, the ships were prepared for possible wartime use through the inclusion of armament: a 105/50 DP gun in stern and bow positions, and positions for four AA-machineguns, two on each side. The purchase of armament and the training for gunnery crews was funded by the respective shipping companies and arranged by the Navy.

In 1936, due to the success of the SEAL and SPAL Lines, a new state-subsidized line to the Far East was inaugurated (Suomen Kauko-Idän Linja, SKIL), mostly in order to carry the rapidly growing Finnish-Japanese trade. Initially the line was to operate with six cargo ships similar to the existing SEAL ships. Orders were placed for six ships in 1937, but due to a backlog of orders, construction could not begin until 1939 and indeed did not materialize before the start if the Winter War. SKIL began operations in 1936 using the Hog Islanders as they were released by SEAL and SPAL.

The skills acquired in the construction of icebreakers and large merchant ships also found use in the construction of smaller ships and in the construction of ore/bulk carriers used to carry iron ore from Finland and Sweden to Germany. While in general the Finnish shipping companies operating in European waters used smaller ships, often purchased second-hand and with low crewing costs due to the use of Finnish crews, the situation was changing by the late 1930's. First, as the demand for Finnish sailors and for worker in general increased as the Finnish economy grew, pay scales were on the rise, making the operation of older, smaller, crew-intensive ships not as attractive as previously. A second factor was that, by the late 1930's, shipping in general was a growth sector as governments around the world pumped money into heavy industries and the shipping sector grew increasingly competitive.

VI Soviet Interests - 1936-1939

From 1936 onwards, the expansion of the Finnish metallurgical and shipping construction industries attracted the interest of the Soviet Union. The Third Soviet Five Year plan was to be focused on the building up of armaments and a gigantic Soviet Navy – and it was planned to buy merchant shipping outside the Soviet Union to fulfill cargo shipping needs as Soviet shipyards were filled to capacity with military orders. Finnish shipbuilding, with its focus on ice-reinforced ships, naturally gained attention from Soviet economic planners. Before the the Bolshevik Revolution, the Finnish mining and metallurgical industries had in fact developed to fulfill Imperial Russian needs so the attention was not unsurprising. Still, it represented a drastic change in direction. Before the revolution, 30-40% of Finnish trade had been oriented towards Russia. In the early 1930's it was around one percent.

Unknown to Finns, the development of the Finnish industrial economy also made Finland a more important target for Soviet expansion in order to meet Soviet "security needs". This risk was seen by Finland, although more mildly. During the late 1920's as Finnish industrialization was planned, the risk was seen that Finnish industries might become dependant on Soviet markets and thus orders might be used in future to exert economic pressure against Finland. The risk was countered by the argument that Soviet markets could be used as a testing field for Finnish industrial products which, once established, might be sold more lucratively to the West after new industries were successfully established. Further factors influencing Finland towards closing trade deals with Soviet Union were the need to pay for the increasing amounts of oil being purchased from the Soviet Union and also the acquisition of cheap raw wood for Finnish forestry industries as well as raw materials for industry in general.

The only really negative impacts of these deals were felt only at a much later period. As the Soviets insisted upon old practices (for example, riveting hulls and the use of reciprocal steam engines rather than diesel-electric) the smaller Finnish shipyards which supplied the Soviets with cargo ships did not develop their productive technologies up to a level at which they could have entered the much more profitable Western markets from the 1950's onwards.

Heavy Industry and Development in North Finland

The new Karhu-Class of Finnish Icebreakers which came into service in 1932 were large and powerful enough to keep open sealanes large enough for transoceanic cargo ships to pass through. Prior to the introduction of these icebreakers, North Finland had had to rely on rail traffic (with expensive operating costs during the long cold winters). From 1932 on, Finnish icebreakers were capable of keeping the Finnish ports of Tornio, Oulu, Kemi, Oulu, Kokkola, Vaasa and Mäntyluoto open throughout the winter. This completely changed the economic landscape, offering the potential to expand wood-based exports not only in quantity but in quality. This resulted in increased demand for wood, which was available in abundance in Northern Finland but which had previously been uneconomical to transport. With year-round shipping now available, there was an increased demand for motorized transportation, which in turn led to further expansion of the Ford truck factory in Helsinki (utilizing knock-down kits imported from the USA) as well as a boost in sales for the Finnish SISU truck factory.

Together with the sealanes opened up by the Finnish icebreakers, the Swedish icebreakers Atle and Ymer were able to keep the Swedish port of Luleå open throughout the year. Thus the necessity for shipping Swedish iron ore through Narvik during winter disappeared, as most of the Gällivare iron ore mined by LKAB was destined for German markets. The combination of the modern Swedish port of Luleå and winter navigation in Bay of Bothnia being available opened up a new economic possibility – the establishment of a steel mill utilizing both low transportation costs and the projected hydro-electric power output of the Oulujoki and Kemijoki rivers. This combination was due to fact that the ships fetching iron ore from Luleå for transport to Germany lacked freight to be carried northwards and this offered the possibility of cheap transport of German coal on the return voyage into the Bay of Bothnia.

In Luleå itself the modern ore conveyor belts were reducing loading costs for iron ore, emphasizing transport costs instead of loading and unloading costs. At the same time the international demand for steel was rising and constructing a brand new steel plant from the ground up offered the opportunity to utilize the latest technical advances for high efficiency. Another factor was that Northern Finland was an important voting region for the centrist Agrarian Party which at the time held the primary position in the Finnish Cabinet. To create broad support for the North Finland steel mill project, the Agrarians created an unholy alliance. To the Social Democrats, the Agrarian Party stressed the importance of continuous industrial development and the jobs that would be available for industrial workers. For the National Coalition the importance of industrial strength for national defence was stressed. For the Swedish People's Party, the steel mill was to be a demonstration of Nordic co-operation, which indeed it was. In usual Finnish style, as private capital was lacking, the state provided capital for the venture.

After long and difficult political arm-wrestling it was decided to situate the new steel mill in the city of Tornio on the Swedish border. The location was to take advantage of the short iron ore transport route from Sweden, with a rail connection planned for a later stage and the possibility of using both the Finnish and Swedish electricity networks in the future. Construction was started on May 1931 and the first steel was shipped from the mill in August 1934. In addition to producing bulk-grade steel, mill expansion was already being planned to utilize domestic nickel, chromium, copper, zinc and cobolt mines fully in order to produce high quality special alloys. Chromium, zinc and cobolt were available nearby, copper could be shipped from domestic mines in Outokumpu and the nickel mine in the Petsamo area was being developed.

Strategically, a number of other options were also under consideration in preparation for the development of an even larger industrial complex in the Tornio area, of which the Steel Plant and Hyroelectric construction was seen as only the first phase. One option being considered was the the linking of the Finnish rail network to the Swedish line to Narvik. Strategically, this was seen as a way to ensure that in the event of a major European War breaking out, Finland would not be completely cutoff as had occurred in World War One after the Bolshevik Revolution. A second consideration was that the expansion of industrial facilities in Tornio and increased intertwining of industries and infrastructures with Sweden would give Sweden a much bigger interest in assisting Finland in the event of a war with the USSR. A third consideration was that with the development of the Petsamo Nickel Mine, the construction of a rail link between Rovaniemi and Petsamo would both enable year round transport of nickel ore to Tormio and would also provide Finland with yet another strategic outlet outside of the confines of the Baltic.

However, in the early 1930’s, Finland lacked any real capability for the defence of Petsamo and should an attack by the USSR eventuate, a rail line would mean a good access and supply route into Northern Finland. This, while construction was studied, planned and designed, a construction decision was deferred until the Finnish Defense possessed the ability to defend Northern Finland – this was not expected to be achieved until the mid 1940's. By contrast, the route through Narvik was seen as a safe option, and in 1935 the Finnish Government financed the linking of the Finnish rail system to the Swedish line to Narvik. This link was completed in 1938 and was this available to Finland when the Winter War broke out in 1939. It proved to be a link of immense strategic importance both for the s