A History of Failure

The current economic upset is proving bad enough for small business, but even the best of times often turn out to be no picnic either. Paradoxically enough, business failures are as much associated with a booming economy as with one that is slumping, and frequently high interest rates have nothing to do with the problem at all.

This year's casualty totals threaten to rise no higher than the peaks of the ten-year period between 1957 and 1967, which began with a mild recession under Dwight Eisenhower, encompassed John F. Kennedy's famous expansionary tax cut in 1964, and ended just as the Lyndon Johnson boom years of Viet Nam were beginning to fire up domestic inflation. In 1957, 13,739 firms went bust. In 1967, near the zenith of the go-go years, 12,364 companies went under. The highest number of failures registered during the entire period, 17,075, came in 1961, the springboard year of the boom. By comparison, business failures in 1981 now seem set to rise no higher than 17,000 or so for the year as a whole.

The roller-coaster 1920s were particularly bad times for small business. Economic growth gyrated wildly, but the overall trend was briskly upward. In 1922 the economy expanded at an extraordinary rate of nearly 16%, but business failures also leaped up, to 23,676 for the year, or 120 per 10,000 firms. In 1924 economic growth declined by .2%; and business failures eased back too, totaling 20,615 for the year. In 1929, the year of the Crash, the total stood at no more than 22,909, a modest decline from the previous year's 23,842. The worst year for failures in this century was 1932, the year of the Great Depression, when 31,822 businesses shut their doors.

One obvious reason why businesses succumb when the economy suddenly, and unexpectedly, jumps up is that firms get caught off guard or are unable to adjust to the changed circumstances. During business booms, companies often are unable to raise prices fast enough to offset increased costs. The result is a crippling cash squeeze that can drive a firm into insolvency. Another way of saying it all, of course, is one of the eternal and lasting verities of the capitalist system: risk-taking involves risks.

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