Amid the fallout from Covid-19, what can we learn from parallels with the Spanish flu pandemic a century earlier?
Present-day banking has its roots in Renaissance Italy. The trade has witnessed many plagues over the centuries since, with the most recent outbreak, of course, being the Covid-19 pandemic.
Just over a century earlier, the 1918 Spanish flu pandemic killed more than 40 million people around the world, and a data comparison of the two pandemics may throw up some interesting insights. But there seem to be few empirical studies, so attempts at systematic analysis or trend extrapolation are difficult. What does the available research tell us about banking history and the Spanish flu?
Most of the data comes from the US. In early months after the outbreak of Covid-19, some journalists were too quick to draw conclusions. Andy Haldane, the chief economist of the Bank of England (BoE), was quoted in an article in The Guardian in May 2020, claiming that a UK recession following the pandemic might not be that serious.
Only a decade after the Spanish flu had been contained did the Great Depression begin; however, tracing causes and effects among the economic consequences of the First World War can be controversial.
The optimism of May 2020 has receded after successive lockdowns and it is now obvious that economic contraction will be severe. It is reasonable to say that the economic measures implemented by the BoE and the UK government amid the global economic crisis of 2007–2008 appear limited next to the present policies, which carry huge, far-reaching, potential consequences.
When the Spanish flu was at its peak, banks in New York witnessed a significant withdrawal of deposits. Writing in January 2021 about Covid-19, Neeltje van Horen, a senior research advisor at the BoE, observed that local banks with access to central bank liquidity have continued to lend or even expanded their lending, while those without such access cut it back.
This suggests that the Covid-19 pandemic has damaged many banks’ capacity to originate loans at a time when demand for credit is probably high, as many businesses and individuals face liquidity concerns. Conversely, the demand for savings products is also high, as individuals’ expenditures have often reduced.
Technology and liquidity
Despite bank runs, the financial sector avoided disaster in 1918. However, the economy then does not resemble that of today. Modern technology and economic interconnections provide more information, and more ways to check it, than the markets in 1918 did. Today, central banks have more corrective tools at their disposal; for example, the liquidity the UK government has offered to industry.
That does not mean that banks have not struggled against liquidity pressures. So much, of course, depends on their continuing ability to extend credit. In 1918, although public gatherings were forbidden, the New York City Board of Health kept banks open; this practice has also been adopted by the BoE and the UK government in the present crisis.
In October 1918, The Arkansas Gazette reported that merchants in Little Rock claimed their business had declined by 40%; others were saying by as much as 70%
Pockets of financial disaster were noted in 1918 and are being reported now, for example in the hospitality and travel sectors.
In October 1918 The Arkansas Gazette reported that merchants in Little Rock claimed their business had declined by 40%; others were saying by as much as 70%. Banks were unable to sustain the persistent low demand, forcing businesses into bankruptcy. Perhaps surprisingly, in the wake of the 1918 flu, retail and business failures were not that widespread, outside certain sectors and areas.
Recent concerns that very high government borrowing will drive inflation out of control are difficult to evaluate. Are we talking about the short or the medium term? If the latter, neither the fall in the demand for goods and services during the Great Depression, nor the increase in unemployment, led to rising prices.
However, the expansion of the national debt and lending to finance unplanned state expenditure is rising to unprecedented and alarming levels. After 12 years of heavy reliance on quantitative easing, is this tool still available to the BoE?
During the same period ‘base rate’ has been non-existent, which many argue has held inflation down. When Covid-19 comes under control, production in the economy and increasing confidence by consumers (who might deploy their billions of pandemic savings) may cause a short-term boost to gross domestic product.
To draw parallels with a pandemic from a century ago is to compare apples to oranges. Instead, let us hope that economic collapse can be avoided by the expertise and astuteness honed by the banking community over the past 100 years.
Richard Willis is a visiting professor at Sussex University.
