What does finance do? A comparative and historical perspective, 1850-2020

This paper develops a functional and historical appraisal of finance. We start by proposing a taxonomy of three core, theory-driven functions of the financial system—intermediation, entrepreneurial, and accumulative—that coevolve throughout the history of capitalism. We build an empirical counterpart of the theoretical taxonomy by constructing a new comparative long-run database covering Western Europe and the United States over 171 years of modern economic history. New measures of the long-run evolution and functional specialization of finance are derived, accounting for the functional shift of finance from intermediation and credit creation to market-based accumulation over the long-run. Functional homogenization toward a market-based accumulation motive has occurred over time and across countries, highlighting the predominant mode of the current face of finance.