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Small Business Management Article

1918-1930-2020

By

Raymond D. Matkowsky

We are now in the middle of the first previously unknown virus pandemic of the 21st century. The similarities of now to 1918 flu pandemic are just as striking, the disagreements are the same, the mistakes have repeated themselves, and it has both a public health and economic components. The economic Depression of the 1930s was notable because it not only caused severe economic pain, but also lasted for over ten years. Only when World War II substantially increased industrial production did it end. The economic solutions of each are not comparable to today. The economies of the world will require unique solutions and exceptional patience before commerce will return to a semblance of normalcy during 2020.

A Different 1918

The flu pandemic of 1918 lasted from January 1918 to December of 1920. It came in three waves. Influenza pandemics have occurred regularly every 30 to 40 years since the 16th century. The Spanish Influenza, as it was called, came towards the end of World War I. This pandemic resulted in the deaths of mostly 15 to 44 year olds of prime employment age. There were 550,000 to 675,000 deaths in the U.S. and about 50 million deaths worldwide. The death toll was greater than that suffered by all forces during the war.

People’s life spans were much lower in 1918. The flu, of course, lowered the average 1918 life span to 42.2 years. For 1920, the average life span was calculated to be 54.6 years (world-wide). It is therefore no mystery that it attacked people in their prime employment ages.

The fact that this occurred towards the end of World War I was significant because not only did returning soldiers spread it around the world but many in the U.S. medical profession were already redirected to the war effort and served overseas. The U.S. and probably much of the world were deprived of needed medical professionals during the crisis. A great many deaths were probably as much a result of inadequate medical care as of the virus itself. Also, at that time in history the nature of viruses was unknown and the sole cause of the influenza was assumed to be bacterial. This led to useless treatments. It appears that cities could not do much more than take community disease containment measures, make victims comfortable, and allowed the pandemic to blow over on its own. However, even the strictest quarantines proved ineffective in preventing the pandemic from coming to a certain area.

During the pandemic many cities closed churches, schools, dance halls, pool halls etc. However, after about three to five weeks churches and entertainment spots were reopened against the advice of professionals. Schools were reopened later. Americans wanted to return to normalcy.

One lesson that can be garnered from the flu of 1918 was that cities were opened too fast. Many cities saw a spike in flu cases when crowds gathered after restrictions were lifted. Some cities did not have enough cases originally for population immunity. A population is always susceptible until a vaccine is available or that you have enough people that have recovered and have immunity. Some cities had to re-implement restrictions.

Very little economic data from the era was written down for history. Much of the information was pieced together from various sources. Newspaper accounts primarily. According to the Wall Street Journal, some parts of the United States lost as much as 50% of its production. What is clear is that the return to “normalcy” was slow.

What is also clear is that cities reacting to the pandemic ten days earlier saw a 5% increase in manufacturing in the post pandemic period when compared to those that started controls later over the same time period. Implementing city restrictions for an additional fifty days over the average increased manufacturing employment by 6.5%

The Depression Of 1930

Some people will say that the Depression of the 1930s was caused by the stock market crash in October of 1929. Actually, much of the losses of 1929 were recovered before the end of 1930. What then caused the depression? It was the lack of investment and over-leveraging in the 1920s. Individuals bought stocks on margins, companies borrowed for areas other than investment, banks loaned money to over-leveraged companies without adequate collateral. When it came time to repay these loans, the funds were not available. Panic ensued, bankruptcies were common and 50% of U.S. banks closed. Home values soured. The unemployment rate went from 3.2% to 25% in little more than a year. It lasted for ten years. If it wasn’t for World War II, it could have lasted longer.

It was feared that once the war ended the economy would go back to the depression state. That didn’t happen. The Korean War started at the end of June 1950 and ended three years later. The war boosted U.S. Gross Domestic Product through federal government spending. The war cost US$30 Billion or US$276 Billion in today’s dollars. From that point on pent up demand propelled the economy through the fifties and sixties.

2020 and Covid-19

Neither the pandemic of 1918 nor the Depression of 1930 is singularly comparable to health and economic factors associated with the Covid-19 pandemic today. Medical technology has advanced. In 1918 and 1930 the U.S. had a manufacturing economy. Today the U.S. economy is heavily dependent on the service sector for growth.

The virus behind the disease is somewhere between three to ten times as infectious as the flu of 1918. Health and economic factors are inescapably linked. The landscape today is a mixture of factors from both 1918 and 1930 downturns.

There’s an alphabet soup of possible outcomes for the economy. It is almost futile to predict the effect Covid-19 will have on the United States or world’s economy. You cannot model something you have never experienced before. The 1918 and 1930 models don’t fit the present situation very well.

Economic sentiment is a reflection of human sentiment. In the United States, consumers account for 70% of the Gross Domestic Product. Even a small reduction of confidence in the economy can account for a large loss. Customer must feel safe enough to shop. They must be willing and have the money to spend. The same is true for the rest of the world.

One major problem of 1918 was that people saw right through politicians that weren’t telling them the truth. The same thing is happening now. First the U.S. federal authorities were telling the public in January of this year that everything is under control and the virus would spontaneously disappear by April. At this writing (Mid-May, 2020), the number of U.S. fatal cases are 83,082. Now the administration is now predicting 100,000 total deaths. It has been reported that secret projections put this number at 3,000 a day by June 1st. The public sees death all around them and doesn’t trust their safety to many politicians anymore. People worry rightfully about a second wave.

The United States deaths from the virus represents about a third of world-wide death totals. As of this writing there have been 1,543 U.S. deaths in the last 24 hours and continually rising. United States death totals are projected to be 175,000 to 300,000 before this is over. It is much too early to declare any type of victory against the virus as some states are considering.

Unfortunately, rural America is one area that is letting down its guard. They have been spared much of the crisis that heavily packed cities like New York and Chicago have gone through because their population densities are lower. However, they also have a generally older population that is more at risk. It is very likely that they are only weeks behind other cities plus they have fewer health care facilities to care for those afflicted. An employer needs to be aware of this possibility and have contingency plans for it if their workforce is drawn from rural areas.

Even if businesses open will customers show up? You may have an initial surge, but will it be more than transitory? Will your customers feel comfortable to visit you regularly? If not you may be better off remaining closed. Right now, surveys by the Pew Research Center reveal that 64% of the population believes that cities are opening too fast and endangering their safety.

With Covid-19 the situation is very fluid and changes day by day. However, Germany’s leading disease experts are predicting the second wave of infections is very definite and a third wave is highly likely. They base their conclusions on two facts. First, shutdown orders are “fraying.” The second is that 70% of the population must be immune in order to break the rate of transmission.

On the economic front, in 2020 we do not have a war to jumpstart industrial production as we did in the 1940s and 1950s. I doubt that anyone really wants one. The economy is not the same as in the years spanning 1918 to 1940. In the 2020s, the economy will have to come back on its own. It will come back, but slowly.

One thing is the same. In 2020, we made the same mistakes as in the past. They have come to haunt us again.

What Will The Future Bring? How Can You Protect Yourself?

Reopening the economy will be a lot harder than closing it down. The economy is not connected to a light switch that can be turned off or on. The future will bring a great deal of pain. Some businesses will not survive. We are witnessing the closings and bankruptcies of large companies that have been around for decades. Small businesses will find it even more difficult to survive Covid-19 closings. The economy, however, will survive. The secret is not to conduct business as usual but to change with the environment. Other than a few basic precautions below, there is no road map to follow.

The first thing that you should remember is that your wealth depends on your employees and their health. For most people, without your employees you have a business in name only and without any profits. The second thing to remember is that your customers must remain healthy and confident enough to spend their money. No customers, no sales. In spite of what various officials say the health of the nation is primary. Taking a hint from the opening of businesses in 1918, you might have a better outcome by waiting to open and taking it slowly once you do.

Even before Covid-19 a great number of businesses have ceased to exist because of their debts. If it wasn’t for debt, some of these businesses had a great deal of promise. However, servicing debt ate up all their profits.

I am a debt hawk. Some people will say there “bad” debt and “good” debt. My belief is that there isn’t any “good” debt. All debt is bad.

I am fully aware that many businesses are required to take on debt which is paid back from profits at the end of the year. This does not make it “good” debt. It is a better form of debt. Because of Covid-19 many businesses have a much smaller profit or do not have any profit from which to pay back loans. They will default. What kind of credit future do they have? Make some contingency plans for such a situation. Do this for at least part of your debt and buy yourself more time to weather future storms.

Profit margins will be smaller. This doesn’t mean you will have to accept a smaller profit though. An average supermarket works on a 4.0% profit margin. An average department store works on a 40% profit. Yet some of the most profitable businesses are supermarkets. They have a smaller margin but make it up in volume. You will need to increase the volume of your business. You will need to make your business more attractive than your competitor.

The answer and procedures will be different for every business. Every business owner or manager will have to innovate to make his business more attractive and efficient.


If you have any further suggestions, do not keep it to yourself. Help your fellow readers!

If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.




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