IBM and Lessons from the Great Depression

Kevin Maney writes: IBM has a habit of being a beacon during economic calamity. Of course, its earnings yesterday helped everyone feel for at least a moment that the world wasn't coming to an end. But that pales in comparison to IBM's feat during the Great Depression. Hopefully, we'll see more of the same from the company.

I know about this because I wrote a book about the guy who built IBM, Thomas Watson Sr., titled The Maverick and His Machine. (Earlier this week, blogger Ed Cone picked up on the connection between IBM then and now.)

IBM may seem pretty staid today, but Watson was actually quite the gambler. As the Depression killed off IBM customers and forced others to cut back on orders, Watson pledged that he would not shut a single factory or lay off a single worker. In fact, he recognized that while his competitors were down, he could make investments that would better position IBM when the economy turned around.

In 1932, he announced that IBM would spend $1 million -- an enormous sum for the company then -- to build a stand-alone R&D lab in Endicott, N.Y. Every competitor at the time was slicing R&D. Watson added employees and expanded factory capacity. If no one was ordering IBM punch-card machines, Watson told the factories to keep making machines and spare parts and store them in warehouses.

As sales stalled, this put enormous financial pressure on IBM. Investors started pitching a fit. In 1932, IBM shares fell to 1921 levels. The board of directors started discussing firing Watson, but he held them off. As the late, great Peter Drucker told me about Watson, "He didn't know how close he'd come to collapse."

In 1935, Watson's stubbornness paid off. That year, FDR signed the Social Security Act, instantly creating enormous demand for data processing machines. The government needed them to process claims and companies needed them to gather and send information to the government. IBM had been stockpiling machines and investing in new technologies, while competitors had shut factories and stopped R&D. IBM cleaned up -- and in fact that moment was the slingshot that allowed IBM to utterly dominate the IT industry for the next 50 years.

In the process, Watson got rich during the worst economic despair in U.S. history. In the late-1930s, he was one of the highest-paid Americans, making more than $350,000 a year -- more than $5.2 million in today's dollars.

If today's executives remember that lesson, we'll get out of this economic jam a whole lot sooner.

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