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Aspects of Corporate Finance: Inter-firm Lending

Michel Lescure
Michael Moss

General conclusions

Patrick Verley

Texte intégral

  • 1  Gaston Roulleau, Les règlements par effets de commerce, Paris, Dubreuil, Frèrebeau et Cie, 1914.

1In these essays, the initial problematic questions put by Michel Lescure – regarding the different types of credit, trade and otherwise; the divide between northern and southern countries in their sectoral and national diversity; and the national forms of capitalism depending on the chosen economic structures and objectives – have proved open to investigation. The answers have gradually taken shape. They largely draw on past experience, some of which date back to the practices of the 18th and 19th centuries such as the volume of old credit instruments, the role of the merchant networks and interpersonal relationships. We now know the importance of credit by discounting in France, the “banks’ bread” as Gaston Roulleau1 put it, when the German banks were practising current account advances and even turning short-term credit into long-term credit by renewing these advances over extremely long periods of time. Other legacies are more recent. Although the development of national capitalisms fostered structural convergence in the 19th century and the early 20th century, the crisis of the 1930s created structural divides in that, depending on the countries, the objectives pursued by governments were not the same everywhere, giving rise to path dependencies after the war. Therefore, we propose to leave to one side a difficult and hazardous summing up of all the extremely rich contributions by the different chapters. Instead we propose to look back – no doubt paradoxically for a conclusion – over these old legacies underlying many of the chapters. We will organise these few remarks into three main points, which are obviously far from exhaustive, but may resonate with the realities of the 20th century.

Informal credit and inter‑firm credit

2These two notions do not overlap, even though they tend to be confused, since the studies’ starting points have generally taken the form of a premise that has determined the type of response. As is often the case, the discussion is structured by the archive sources and types of instrument used. There was bank credit, analysed from bank sources and therefore well known: short term and long term, i.e. trade credit by discounting or advances. There was the use of the financial market, which met long-term investment needs (also covered in the German-speaking countries by renewed advances). And there was the rest… called “informal” credit, or anything that did not fit into the first two categories. This term is highly misleading. It suggests that this credit did not observe any conventions, or was not practised in keeping with any kind of formalism. This is obviously not so. The use of notaries, so widespread in the 18th and 19th centuries that the entire French nation was very early on covered by a dense network of credit dots, took the form of deeds that complied with highly formalised rules.

3Personal credit could in fact be relatively informal. Partners’ current accounts in partnerships, the most common form of business, provided a discreet way of dipping into a reserve of credit. This practice was found especially when businessmen did not want their financial situation to be known: borrowing openly could undermine confidence by implying that the business was not sound. In partnerships, the silent partners’ capital contributions recorded in the partnership deeds were often not initially paid: they formed a reserve on which the company could draw, with the utmost discretion, when in need. Vestiges of these practices could still be seen in Italy in the 1950s and 1960s whereby staff surprisingly made loans to businesses, even large companies. These practices were found all the more in family-owned businesses. Interpersonal credit was not exempt from formalisation by notarised deed in a European society that had been a stickler for legal form since the Middle Ages and used notaries even for small transactions.

  • 2  Jean-Pierre Hirsch, Les Deux Rêves du commerce. Entreprise et institution dans la région lilloise (...)

4This interpersonal credit was often hard to differentiate from inter-firm credit when businesses were so highly personalised: the French commercial code did not recognise businesses, but merely traders and companies. France’s northern bosses had taken this family-business overlap to the extreme. In their eyes, as Jean-Pierre Hirsch2 put it, the two basic institutions were marriage and the trading company. They both served to join together capital and competencies. And rather than seeking endless growth for the family business, these bosses preferred growth by cellular division in common with certain basic organisms: once the business reached a certain size – possibly economically optimal – it triggered the creation of new companies established by sons or sons-in-law working in upstream or downstream lines of business. This network of related businesses offered the possibility of financial solidarity in the event of difficulties. This was important to activities with unstable, seasonal markets subject to the dictates of fashion and sales slumps at the slightest economic downturn, as was the case with the textile industry, which represented a good third of the value of industrial output at the time with, in its wake, the sectors that depended on it such as bleaching and dying product chemicals and the manufacture of textile machinery.

5It would not be correct to exclude limited liability companies from these practices, aside from very large companies that only accounted for a minority of economic activity and did not represent the modal structure of capitalism pre-1914. Adopting a limited liability company form did not necessarily betray a desire to gain access to larger reserves. The northern bosses adopted this legal form in the early 20th century, not to raise capital by issuing shares, since the capital remained in family hands without being listed, but to have more flexibility when handing down ownership to heirs or distributing parts of the company among family members.

6Lastly, there was the mortgage, a very important source of long-term credit still in the late 19th and early 20th century, with a great advantage in terms of its term and low cost. Marius Berliet was using it still in the 20th century. Manufacturers prior to 1914 had real estate they could use to secure a notarised or bank loan and that could be a resource of last resort in situations of financial straits. Their tendency to buy mansions and landed estates was often misconstrued as a reactionary practice to blend in with an aristocratic social model instead of investing in future industrial activities, when it was also to guarantee the possibility of obtaining a loan. Mortgages were even more important to small entrepreneurs, craftsmen and traders since they barely had access to other sources of credit. They are worth a mention, because they still made a considerable contribution to the formation of national product. This credit involved diverting an instrument from its initial purpose of purchasing and investing in real estate and land. In the same vein, the failure of the first Crédit Agricole established in 1860 was due to the use of its loans for operations that were not agricultural in the slightest, but were more speculative. This credit was often not an inter-firm credit, but a bank or personal loan. It could nonetheless cover bilateral business relations in the shape of a personal relationship between two entrepreneurs.

7This shows that the nature of a credit should not be judged from an instrument and its primary purpose. It would, for example, be risky to think that all commercial paper was tantamount to a bank loan in that it had to be discounted. As long as it was not discounted, it was a 30- or 90-day inter-firm credit. In fact, not all of this paper was discounted. And even if it had been, it would be risky on the whole to make it a measure of short-term bank lending. Common practice in France in the late 19th and early 20th century was to discount it at the last minute in order to transfer collection to the bank: the discount rate was then the cost of collection by the bank official sent to the debtor and the cost of dispute management. It hence constituted de facto inter-firm credit with the possibility of being immediately discounted with the banks. Note also that commercial paper in the 18th century and still in the first half of the 19th century was virtually hard cash circulating by means of a great many endorsements.

8The diversion of this instrument from its initial purpose is even clearer in the case of the finance bill, which was actually illegal because it was not based on a real operation, but was widely accepted in the interwar period, as a number of chapters have shown. Economic players adapted the instruments to their needs, misusing them if necessary. The analysis of credit based on the instruments and channels used hence reveals its weaknesses. A basic picture of the situation can be painted by a simple categorisation by commercial paper and discounting, issues of shares and bonds, mortgages and notarised credit and then the rest, with their variable and vague instruments.

Symmetry of lender‑borrower relations

9The starting point taken is generally the assumption that there was formal credit, well known because of the archival traces it has left, and that when such formal credit was lacking or unsuitable, more flexible informal and/or inter-firm credit was available that was more suited to particular situations. This informal credit is considered to have been a stopgap measure: the more the environment was lacking, the more they would have developed. Their volume could reveal the economy’s level of development.

10In Greece from 1870 to 1914, the shipowner networks reproduced the 18th century inter-merchant networks’ financing, information and cooperative practices. These practices endured longer in international trade than in each country’s domestic industrial and trade activities. The fact that the terms “merchant” and “merchant bankers” have ended up applying solely to large-scale international trade confirms this. There are many reasons for it. The small number of players was conducive to interpersonal relations, made impersonal by the intervention of the large credit establishments. Information doubtless played a major role in creating solidarity. When information was harder to obtain, success in business smiled on those with the best and fastest access to it, as was the case in the 18th century. Although the cost of obtaining information and the increase in the number of players in the developed countries ultimately tended, in the last third of the 19th century, to transfer responsibility for it to professional organisations such as the chambers of commerce, as can be seen from the Lyon silk trade, and then to the consular networks, the best sources of information remained the prerogative of certain major merchants even in the developed industrial countries. If these interpersonal and inter-firm relations, including credit, were indeed recessionary as they served as a stopgap for gaps in the economic fabric, the issue would then be to understand why inter-firm credit is developing in new forms in contemporary companies, as the conference revealed. Inter-firm credit must therefore have specific advantages.

11A first answer is based on the symmetry of the lender-borrower relation, often obscured by our tendency to believe that a loan is a service granted by the lender to the borrower, who admittedly gains benefits from it. Yet these benefits are not solely in terms of interest rate. The loan is used to underpin market and growth strategies. The fact of supporting a customer can secure a market and sometime guarantees its exclusive capture, as in the relationship between Michelin and Citroën. It is not in the car parts manufacturer’s interest to kill off or put pressure on its customer, but rather to advance its development, which implies guaranteed sales without competition.

12Yet the loan is also an investment possibility for the lender. In the traditional sector, even in the 20th century, businesses did not know how to invest their capital. The forward premium was a major possibility in the 19th century, as was investing in the current account of an active partner if not a friend, relation or colleague. The most common structure of general partnership or limited partnership found in SMEs in the 19th century was as follows: an active partner who had or believed he had new commercial or technical ideas guaranteeing him success was financed by silent partners, a large proportion of whom were former colleagues from the same sector who had retired from business and therein secured their pension. Right up to the height of the 20th century in France, and maybe even through to the 1970s, industrialists and former industrialists preferred to invest their liquidity in the sector they knew, in other words. their own. This also held true for the financial market: the analysis of Parisian stock market portfolios on the eve of 1914 reveals that industrial shareholders were either well-informed bankers or industrialists from the same sector. These practices were based again on the quality of the information, on which the choice of investment placement depended.

13Lastly, there is the question of the seasonal effects of the capital market by sector and the calendar of income, rent and tax payments. In the 18th century and again in the following century, merchants alternated between being lenders and borrowers: the monthly cycle was slow to take over from the old quarterly and half-yearly cycles on the short- and medium-term financial market. The Lyon stock exchange depended on the purchase of raw silk, which called for a large sum of capital once a year, and then the sales of silk fabrics that made money which lay idle until the new raw material purchase cycle. Inter-firm credit, which involved other sectors with the inverse calendar of financial operations, helped circulate this capital to the great benefit of all.

14The main question is therefore to ask who benefits: the lender, the borrower, or both equally? Inter-firm credit says a great deal about the balance of power. It often appears as an instrument of control, servitude and transfer of the risk of shocks to the economy. In the 19th century, this was one of the reasons for industrialists’ extremely long simultaneous use of proto-industrialisation and factory workers: a spread of manpower guaranteed total business flexibility and an absence of social unrest. Sub-contracting as a form of organisation was to provide the same benefits in the 20th century.

15The transfer of economic fluctuations to sub-contractors when business is slow softens the blow to the contracting businesses and abruptly deprives the sub-contractor of orders while imposing longer terms of payment on them, which often places them in a very difficult situation if all their customers are in the same sector. This is one of the reasons for the expansion of sub-contracting in the automotive industry, to whose advantage it was to use credit from sub-contractors to further their development and then adjust their terms of payment according to economic conditions. The same transfer of difficulties can be seen from the leading Swiss watchmakers to the component’s manufacturers 90%, if not 100%, dependent on them in the crisis since 2013-2014. The terms of payment imposed by businesses in a position of strength over weaker partners constitute enforced credit, as important as variations in loans outstanding and the price of credit.

What purpose does inter‑firm credit serve?

It minimises economic and market risks

16This was the main purpose of the family-run business and financial network built by France’s northern bosses in the 19th century, which was highly effective through to its twilight years following decolonisation after the Second World War. It was a flexible grid structure entailing solidarity between all the firms in the textile-chemicals-mechanical engineering sector, underpinned by the same families’ control of the private banks and Banque de France branches and their hold over municipal and political power. What was effectively a closed shop at all levels guaranteed the availability of capital when required to expand markets, resist a crisis caused by a slump in sales and withstand tightening on the financial market. What counts in the construction of an inter-firm network is not to obtain credit now and then, but to have the guarantee that credit can always be obtained if needed, whereas more formal credit, such as bank lending, is often more abundant when the need for it is less pressing, but is lacking when it is vital.

It makes for lower costs, terms of payment and a guarantee of credit

17The question of the comparative cost of the different credit arrangements is key. Discounting, as an instrument in France, benefited from a cost advantage. This explains its long-term priority use, with adjustments and perversions: lengthening of the term, trade-off between the formal and informal such as the tacit loan subsequently formalised by a bill that could be presented to a bank, and a semi-accommodation bill when the drawer and the drawee are part of the same industrial or commercial group.

18The guarantee of obtaining credit is as important as the credit itself, as it was in the case of active and silent partners’ accounts in the 19th century. This guarantee cannot be offered for credit, aside from personal and/or inter-firm credit, as it is based on trust.

19The same holds true for terms of payment. In 19th century industry and trade, terms of sale were determined by a price based on the term of payment – a lower price for payment in cash or in the short term and a much higher price for payment in six months to one year, as is the case in international trade, without specific credit instruments being used in the transaction. And if such instruments were used, such as bills of exchange, they remained in the sphere of inter-firm credit when the parties mutually agreed not to transmit them to the banking sector.

Conclusion: is inter-firm credit indicative of a structure?

20Although inter-firm credit raises the balance of power between businesses when the questions “Who does it benefit?” and “What purpose does it serve?” are asked, the most general function that appears to have emerged from these chapters and that is relevant from the modern era to today is its supporting a production structure, whether past or present. This explains why it does not look like a recessionary archaic practice in the face of the rise of functional specialisation in the economy, but as a flexible form not in decline even in the 21st century.

21The old proto-industrial system was based on inter-firm credit, if the dispersed workers are considered as individual business establishments. These practices continue in the form of sub-contracting. Trade credit is found playing a role as much in the development of the Saint-Gobain group in Germany as in restructuring German industry in the interwar period. In this latter case, cartelisation and concentration involved a network of inter-firm credit flows that benefitted all the elements of the group in terms of credit costs and guaranteeing total discretion. Industrial districts, those regional clusters of family businesses well known to northern Italy, suggest that it is the crisscrossing of credit among the businesses that forms the bonding agent enabling these flexible networks to function. An analysis of the Japanese and Korean industrial structures would undoubtedly reveal the same function.

22The flexibility of inter-firm credit enables it to adjust to all organisational and/or productive structures.


1  Gaston Roulleau, Les règlements par effets de commerce, Paris, Dubreuil, Frèrebeau et Cie, 1914.

2  Jean-Pierre Hirsch, Les Deux Rêves du commerce. Entreprise et institution dans la région lilloise (1780‑1860), Paris, EHESS, 1992.


Patrick Verley has taught at the University of Paris 1 Panthéon-Sorbonne (as Lecturer), Paris 8 (as Professor) and Genève where he held the Chair of International Economic History until September 2009. His research has been in various areas: Comparative Study of Industrialisation, Macroéconomic Analysis of Growth, Role of Luxury Industries in Economic Growth and International Division of Labour, Financial Market of Paris and the International Economic System of the 19th century. In the 20th, he inaugurated new research on the International Economic Systems since 1914, the Economic Functions of International Organisations, the Compensation Systems and the Crises of Sovereign Debt.

© Institut de la gestion publique et du développement économique, 2019

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