A Vehicle for Growth: Commercial Banks’ Use of Share-Backed Lending During the Swedish Industrial Breakthrough

At the heart of this chapter lies a dilemma inherent to all financial markets—how to balance financial markets between dynamism and excessive risk-taking. This chapter returns to the modernization of the Swedish financial market of the late nineteenth and early twentieth centuries, to analyse the commercial banks’ use of share-backed lending as a strategic tool to develop its business during the industrial breakthrough. Share-backed lending has hitherto been deemed by research as something that aggravates risk and instability on financial markets. This chapter demonstrates that several of the most successful banks in Sweden used share-backed lending extensively during several decades. By combining quantitative and qualitative evidence it is shown that share-backed lending spread among commercial banks in Sweden during the industrial breakthrough around 1900. Furthermore, in contrast with what has been emphasized in earlier research, the chapter presents evidence that the use of share-backed lending actually increased the chances of survival for commercial banks. The third and final conclusion is therefore that share-backed lending emerged as a strategic tool for commercial banks to achieve a competitive edge in a time when expansion and transformation were dominant features of the Swedish economy. To echo Schumpeter, share-backed lending became one of the most valuable tools for banks to shoulder their role as credit creators during the decades of creative destruction around 1900.