One of the striking changes accompanying – if not helping to cause – economic development is the dramatic increase in financial transactions among firms and individuals, sometimes directly between borrowers and lenders, sometimes involving third parties (financial intermediaries). Over time these third parties played an increasingly important role. In part it is because the type of intermediaries who appeared early on (brokers, banks, stock markets) grew more numerous; and in part it is because of the introduction of totally new institutions (legal institutions and informal rules of behavior) and totally new organizations (savings and loan associations, investment trusts, and central banks). In most societies this expansion of financial intermediation fueled higher rates of savings and investment, more rapid growth of the capital stock, and a higher rate of economic growth.

The big question here is how financial intermediaries facilitate investment. Lance Davis has long maintained that intermediation acts both on supply, the magnitude of investment funds, and demand, the choice of projects these funds will support. In the early stages of growth, the key issue lies in mobilizing the available savings rather than increasing its amount. Mobilization occurs when savers increase the relative size of their financial holdings. The decision to do so depends on financial institutions that provide savers with information and diminish the risk they bear. Such a task is not easy, for savers appear to be creatures of habit.