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SRC Insights: Fourth Quarter 2006 - Expanded Year-End Issue

Influenza and the Financial Services Industry:
A Case Study of the 1918 Spanish Flu

by Andrew Kish, Banking and Economic Analyst; Timothy Mochan, Intern; and Todd Vermilyea, Assistant Vice President

There has been a great deal of discussion and media attention recently surrounding avian influenza, commonly referred to as bird flu. Some of the discussion has been useful and has lead to concrete steps that could mitigate the effects of a pandemic should one occur. For example, the U.S. government has budgeted $3.8 billion for pandemic influenza preparedness for the year 2006 alone.1

Also, on March 15, 2006, the Board of Governors of the Federal Reserve System, in conjunction with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS), issued an interagency advisory on Influenza Pandemic Preparedness.2 The supervisory letter is intended to raise awareness regarding the threat of pandemic influenza and also to alert financial institutions of the need to address this threat in their crisis response and contingency strategies.

However, some cataclysmic media accounts of the possible consequences of a pandemic may leave the public unduly fearful. Irrational fear, including a lack of public confidence in the financial system, could have potentially disastrous effects. This article presents a historical analysis of the deadly Spanish flu of 1918 and its effect on the U.S. economy and, particularly, the financial services industry. While the possibility of avian influenza becoming a human pandemic is still uncertain, a historical analysis of the 1918 flu can shed light on how the U.S. handled a serious crisis in the past. In addition to providing a historical account, the facts in this article may be useful in countering any irrational fear and bolstering confidence in the financial services industry should a pandemic occur in the future.

Background on Spanish Flu of 1918
The so-called Spanish flu swept the world during late 1918 and early 1919. This pandemic infected about one-fourth of the global population, and it is estimated that between 50 and 100 million people lost their lives worldwide.3 Some of the first reported cases of the deadly influenza actually came from the United States at Fort Riley, Kansas in March 1918, but the illness quickly showed up all over the world.4 Military personnel incubated and amplified the spreading of the disease due to the constant movement of troops across the Atlantic Ocean and the harsh conditions soldiers endured on the battlefield. The name associated with this pandemic, Spanish flu, was mainly due to wartime censorship and was likely a misnomer. The nations involved in World War I initially suppressed media reports, such as death rates, in an effort to conceal information that could prove valuable to the enemy or could hurt morale. However, uncensored reporters from neutral Spain more accurately reported the deaths from the pandemic, causing people to inaccurately believe the epidemic was more prevalent in Spain than in other countries.

While a new form of influenza strikes annually, the flu of 1918 was especially unique and devastating. A distinctive aspect of the influenza was its disproportionate effect on healthy adults in their prime. During typical epidemics, most of the lives claimed are young children and elderly people, which creates a "U-shaped" death pattern. However, this particular influenza caused a distinct "W-shaped" mortality pattern by also targeting healthy middle-aged men and women with a very high frequency.5

The pandemic struck the U.S. in three waves, with the most horrific and deadly wave beginning in August 1918.6 The month of October ended up being the deadliest month of the pandemic. Overall, it is suspected that 675,000 Americans lost their lives due to the Spanish flu. In a matter of months, the death toll of the Spanish flu in the U.S. was greater than the number of Americans killed in World War I, World War II, the Korean War, and the Vietnam War combined.7

Impact of Spanish Flu on the U.S. Economy
There are very few studies published that analyze the effect the Spanish flu had on the overall U.S. economy, perhaps because it is difficult to find substantial and accurate data from that time period, but also because it is difficult to separate the economic impact of influenza and World War I. Industrial production and the business activity index did dip slightly at the height of the epidemic.8 Correspondingly, the National Bureau of Economic Research (NBER) cites August 1918 to March 1919 as a period of business contraction in the United States, which coincides with the period in which the epidemic had a stronghold on the U.S.9 The Congressional Budget Office (CBO) has estimated that a pandemic similar to the 1918 flu would decrease annual U.S. GDP levels by 5% if it happened in today's economy.

Certain industries were hit especially hard, notably places of amusement and life insurance companies. Pennsylvania, along with most other states, issued the mandatory closings of schools, churches, theatres, and places of public assemblage toward the end of the year in 1918. In his book, America's Forgotten Pandemic, Alfred Crosby estimates that the closing of Philadelphia theatres, motion picture houses, hotels, and saloons cost the city $2.35 million. Crosby also notes that influenza caused "37 out of 48 life insurance companies in the United States to omit or at least reduce their dividends. The number of death claims made against the Equitable Life Insurance Society of the United States in the week of October 30, 1918, was 745 percent higher than the number made in the equivalent week of 1917."10

Effect of Spanish Flu on the Financial Services Industry
The financial services industry proved resilient in the face of the pandemic. As noted, states throughout the country in 1918 were forced to order many public gathering places to shut down. Banks, however, were generally not required to close. In addition to closing down certain businesses, health officials in many areas staggered opening and closing times for many businesses to minimize crowds and decrease congestion on transportation lines.11 However, the New York City Board of Health published a resolution on October 6, 1918, in the New York Times that affirmed that, "The opening and closing of banks, trust companies, and offices of the United States Government are not affected by the provisions of this order."12

Like other industries, sickness of the labor force did impede operations in financial services. An article in the Wall Street Journal on October 24, 1918, states that efficiency at the Federal Reserve Bank of New York had been hindered due to 300 cases of influenza out of a workforce of 2,515.13 Similarly, the pandemic caused the Boston Stock Exchange to close for a day in late September. Nevertheless, most banks and financial markets remained open and continued to function throughout the crisis.

Perhaps most important of all, the payment system functioned normally throughout the crisis. A New York Times article dated October 12, 1918, states, "Clearings through the banks continue to be maintained in noteworthy volume at most of the more important centers in the United States, the total this week, according to Dun's Review, amounting to $5,662,220,053, an increase over the same week last year of 12.2 per cent."14 This growth was achieved despite a peak in influenza cases. The following graph is an illustration of monthly bank clearing amounts from 1916 to 1921. The graph displays a general upward trend in bank clearings during the course of the pandemic. It also shows that, at $31.8 billion, total bank clearings for October—the deadliest month of the pandemic—equaled the largest amount registered of any month in 1918.


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Similarly, most financial markets remained open during the crisis. In fact, stock prices and volumes on the New York Stock Exchange were surprisingly unaffected by the pandemic. By the end of 1918, the Dow Jones Industrial Average was up 10.5 percent for the year and continued its upward climb, experiencing a 30 percent post-war rally in early 1919.15 The Dow also reached its high for 1918 in mid-October, when the pandemic was at its peak. Furthermore, trading volume on the NYSE showed an upward trend during the height of the epidemic. Cooper and Grinder offer three primary reasons why the market was not affected. They suggest press censorship kept investors from knowing the extent of the epidemic, news about the war overwhelmed influenza news, and government officials downplayed the severity of the disease to the public. The lack of immediate public awareness to the pandemic's severity and the impact of World War I are two factors that may have diminished the effects of the pandemic on the financial markets.

Bond markets also continued to function. A major government bond issuance (the Liberty Loan campaign, in which the Federal Reserve played a major role) raised nearly one billion dollars more than its $6 billion quota during the height of the flu pandemic.16 Even more notably, the Boston and the Philadelphia Federal Reserve Districts, two cities that were hit extremely hard by influenza, were first and third, respectively, in percentage raised over quota. When referring to the October loan campaign, the secretary of the Treasury at that time stated, "It was the largest flotation of bonds ever made in a single effort anywhere or at anytime."17

The level of banking failures in 1918 and 1919 is perhaps the most telling indicator of how the financial services industry fared during the course of the pandemic. The following graph illustrates the number of banking failures by year in the United States as reported by Dun's Review. With only 20 bank failures, 1918 had the fewest failures of the nine-year period examined. Additionally, the total amount of liabilities of the banks that failed in 1918 ($5,131,887) is not even half as much as any other single year from 1914 to 1922. These data suggest that the pandemic did not greatly affect the safety and soundness of the banking system. Bank failures also remained low in 1919.


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Conclusion
The Spanish flu was the third deadliest pandemic in history, trailing only the plagues of the sixth and fourteenth centuries.18 At the peak of the influenza, much of the nation's resources were simultaneously being directed toward the war effort in Europe. Under these conditions, the U.S. economy contracted, and GDP dipped. However, the evidence suggests that the payment system and financial services industry weathered the pandemic well. For more information on influenza pandemic preparedness, please see the federal banking agencies' interagency advisory located on the Board of Governors' website.External Link The advisory also includes a list of websites for locating additional information and resources.

  • 1   United States Congressional Budget Office, A Potential Influenza Pandemic: An Update on Possible Macroeconomic Effects and Policy Issues, 2006.
  • 2   SR 06-05, Influenza Pandemic Preparedness.External Link
  • 3   "1918 Spanish Flu Timeline," Twoop.com External Link, June 20, 2006.
  • 4   Sara Francis Fujimura, "Purple Death: The Great Flu of 1918," Perspectives in Health External Link, Vol. 8.3, pp. 28–30, 2003.
  • 5   E. Brainerd and Mark V. Siegler, "The Economic Effects of the 1918 Influenza Epidemic," Centre for Economic Policy Research Discussion External Link, February 2003.
  • 6   Alfred W. Crosby, America's Forgotten Pandemic, 2nd Ed., Cambridge, U.K.: Cambridge University Press, 2003.
  • 7   See footnote 5.
  • 8   International Monetary Fund, Avian Flu Working Group, The Global, Economic, and Financial Impact of an Avian Flu Pandemic and the Role of the IMF, 2006.
  • 9   See footnote 5.
  • 10   See footnote 6.
  • 11   See footnote 6.
  • 12   "Revise Time Table in Influenza Fight," New York Times, October 6, 1918: 1, 8, ProQuest Historical Newspapers.
  • 13   "Reserve Employees Number 2,515," Wall Street Journal, October 24, 1918: 10, ProQuest Historical Newspapers.
  • 14   "The Condition of Trade," New York Times, October 12, 1918: 19, ProQuest Historical Newspapers.
  • 15   Dan Cooper and Brian Grinder, "The Flu Pandemic, the Flow of Information, and the Financial Markets of 1918," Financial History, Vol. 83, 2005, pages 8–11.
  • 16   "Almost a Billion Over Loan Quota External Link," Stars and Stripes, 1.40, November 8, 1918: 3.
  • 17   See footnote 6.
  • 18   See footnote 8.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.