Government, Openness and Finance: Past and Present

We explore the role of government in the nexus of finance and trade starting from the earliest days of organized finance in England and then broadening the analysis to 84 countries from 1960 to 2004. For 18th century England, we find that government expenditures and international trade did have a positive effect on financial development when measured as the value of private loans issued at the Bank of England. For the wider panel of countries with more recent data, we find that government expenditures and trade have positive effects on financial development for countries that are in the mid-ranges of economic development as measured by their per capita incomes, but have little effect in poor countries and strongly negative effects for the wealthiest ones.