Beginning in 1905, Schwab sought to make the new Bethlehem Steel Corporation into a large diversified manufacturer, a strategy that led to a dramatic expansion of the plant. Soon Bethlehem moved back into the rail business, this time with new Open Hearth rails that were rapidly replacing Bessemer ones. Schwab's most important venture was to invest in a mill to roll a new kind of steel beam developed by inventor Henry Grey. What would become known as the Bethlehem beam became an important product for the company, which maintained a monopoly on it until 1929. By diversifying the company's product line, Schwab increased Bethlehem's steel making capacity four fold within a decade. To finance this expansion Schwab re-invested profits–instead of paying dividends to stockholders–and borrowed substantial sums of money. For several years, interest on this debt absorbed most of the company's earnings. Schwab's aggressive investment plans left the company financially vulnerable during economic downturns, one of which was occurring in 1914 when world events created a tremendous opportunity for Bethlehem.
After the outbreak of World War I in August 1914, concerns about debt and recession faded as large orders for guns and shells from the Allies poured in. Bethlehem's wartime production was probably essential for the eventual victory of the Allies, who had to take munitions at whatever prices Bethlehem charged. The company profited handsomely from the war, its assets increasing from $85 to $400 million. By the end of the war Bethlehem was the third largest industrial corporation in America behind U.S Steel and Standard Oil of New Jersey.
In the 1920s the steel industry benefited from the overall economic prosperity the country enjoyed. Bethlehem had used some of its cash to buy several competitors raising the company's steel making capacity to half that of U.S.Steel. The Bethlehem plant was kept busy supplying structural steel for urban skyscraper construction, especially in nearby New York City. The burgeoning automobile industry was consuming increasing amounts of steel, but most of it was supplied by Midwestern plants. As more and more people and goods moved by road rather than by rail, the railroads, historically the steel industry's best customer, began to decline.
The implication of this trend for the steel industry was lost among the general collapse during the Great Depression of the 1930s. From 1931 through 1935, the company operated at below 40% of capacity, hitting a low of 17% in 1932. During that same period employment dropped only by 20%, but workers hours and wages plummeted.
By keeping its skilled workforce intact during the lean years of the 1930s, Bethlehem was able to rapidly expand production after war once again broke out in Europe in 1939. The war years restored the company's prosperity, but government regulation and taxes kept profitability far below World War I levels.