The limitations of celluloid led to the next major advance, known as "phenolic" or "phenol-formaldehyde" plastics. A chemist named Leo Hendrik Baekelund, a Belgian-born American living in New York state, was searching for an insulating shellac to coat wires in electric motors and generators. Baekelund found that mixtures of phenol (C6H5OH) and formaldehyde (HCOH) formed a sticky mass when mixed together and heated, and the mass became extremely hard if allowed to cool and dry.

He continued his investigations and found that the material could be mixed with wood flour, asbestos, or slate dust to create "composite" materials with various improved properties. Most of these compositions were strong and fire-resistant. The only problem was that the material tended to foam during synthesis, and the resulting product was of unacceptable quality. Baekelund built pressure vessels force out the bubbles and provide a smooth, uniform product. He publicly announced his discovery in 1909, naming it "bakelite". It was originally used for electrical and mechanical parts, finally coming into widespread use in consumer goods in the 1920s.

Bakelite was the first true plastic. It was a purely synthetic material, not based on any material or molecule found in nature. It was also the first "thermoset" plastic. Conventional "thermoplastics" can be molded and then melted again, but thermoset plastics form bonds between polymers when "cured", creating a tangled matrix that cannot be undone without destroying the plastic. Thermoplastics are tough and temperature resistant.

Bakelite was cheap, strong, and durable. It was molded into thousands of forms, such as radios, telephones, clocks, and of course billiard balls. Phenolic plastics are still in widespread use. For example, electronic circuit boards are made of sheets of paper or cloth impregnated with phenolic resin.