ABSTRACT
What is the role of financial development in economic development? Surprisingly, this is a question that did not pique the interest of many economists until relatively recently. For over 100 years, the conventional wisdom on this question was that financial development would happen automatically and by itself, but only after macroeconomic development had already occurred. The economist Joan Robinson (1952) summarized this “laissez-faire” view of finance as: “Where enterprise leads, finance follows.” This thinking is still implicit in the way that many historians have told the story of economic development in the United States and Europe, including the Industrial Revolution, where the role of financial development is typically down-played and the role of technological development (that somehow takes place magically with little investment in research and capital accumulation) takes center stage.
