How have the costs of financial intermediation evolved over the long-run? Why has the financial sector share in total output grown so substantially over the long-run? This research project has traced the inputs and outputs of the financial intermediation sector over the long-run and established a number of important stylized facts that have laid the foundation for further research. Most importantly, we have compiled aggregate balance sheets and profit and loss accounts for the banking sectors of 17 countries over the past 150 years.



The concept of globalization has revolutionized the way we conceive of the world across academic disciplines. It has been used in the social sciences to This proposed research project documented a parallel transformational trend, explored its consequences and studied its potential to influence the future debate across the social sciences: financialization. Unlike its cousin globalization, financialization is not yet a widely used term in the social sciences, even less so in economics. The way I use the term, it designates the strong increase in financial leverage – measured by the ratio of private credit to GDP – in many OECD economies in past decades. The core thesis for my research project was that this financialization of the economy named a historical trend with substantial, far-reaching consequences—not only for economics and economics policy, but also for politics and society.



The core objective of the research project “Finance and the Welfare of Nations” was to study the risks and benefits of financial deepening in advanced economies. Advanced economies saw a steady increase in financial intensity, measured by the ratio of credit to output, after the Second World War. Whereas financial deepening until the 1970s could be interpreted as a normalization and a return to pre-war levels, the sharp acceleration in the growth rate of financial intermediation in the past 30 years stands out as a structurally new development in 20th century history. The view that a bigger financial system is automatically better as it benefits the economy by efficiently allocating capital was shaken to its core by the 2008/09 financial crisis. The leading questions that flowed naturally from these observations: Was finance promoting growth or was financialization of the economy allowed to proceed to unsustainable, inefficient, and ultimately destabilizing levels?


Collaborators: Òscar Jordà and Alan Taylor