Finance is powerful. As the last few years demonstrate, financial innovations can be used as tools of economic destruction. But the last few centuries demonstrate that financial innovation is crucial, indeed indispensable, for sustained economic growth and prosperity. Financial systems provide vital services: they evaluate, screen and allocate capital, monitor the use of that capital, and facilitate transactions and risk management. If financial systems provide these services well, capital flows to the most promising firms, promoting and sustaining economic growth. Financial innovation—the creation of new securities, markets and institutions—can improve financial services and thereby accelerate economic growth. Moreover, financial and technological innovations are inextricably bound together and evolve together, suggesting that financial innovation is essential for improving the wealth of nations. As described by Adam Smith, the very essence of economic growth involves increased specialisation and the use of more sophisticated technologies. The increased complexity makes it more difficult for the existing financial system to evaluate new enterprises or manage their novel risks. Thus, economic progress itself makes any existing financial system obsolete. Without a commensurate modernisation of the financial system, the quality of financial services falls, slowing economic growth. History provides many examples. Neither Londons capital markets of the 19th century nor Americas mid-20th century financial system could have fuelled the explosion of technological innovations in information processing, telecommunications and medicine that we have experienced in the last 30 years. Indeed, as nascent high-tech information and communication firms struggled to emerge, traditional commercial banks were reluctant to finance them because these new firms did not yet generate sufficient cashflows to cover loan payments and the firms were run by scientists with no experience in operating profitable companies. Conventional debt and equity markets were also wary because the technologies were too complex for investors to evaluate. There was a problem: potentially profitable high-tech firms could not raise sufficient capital because the existing financial system could not evaluate them. So, financiers innovated. Venture capital firms arose to evaluate and fund high-tech entrepreneurs. Staffed by techies, venture capital firms screened potential enterprises and then made large, long-term financial commitments to the most promising ones, which encouraged the blossoming of new technologies that have reshaped our lives. The story of biotechnology in the 21st century provides a natural continuation of this virtuous cycle of financial innovation, technological change and economic growth. The venture capital model of corporate finance did not work well for biotechnology. Venture capitalists could not effectively evaluate biotech firms because of the scientific breadth of biotechnologies, which frequently require input from biologists, geneticists, chemists, engineers, bioroboticists and other scientists, enormous capital injections and expertise with the myriad of laws associated with bringing new medical products to market. It was unfeasible to house all of this expertise in banks or even venture capital firms. So, financiers innovated. They formed new financial and contractual partnerships with the one kind of organisation that has the breadth of skills to screen bio-tech firms: large pharmaceutical companies. Through scientific know-how, legal expertise and connections with product distribution networks, pharmaceutical companies identified promising biotech firms, helped them create valuable products and attracted other investors. While financial modernisation is not the only cause of technological change, the adaptation of corporate financing techniques has greased the wheels of technological inventiveness underlying economic growth. Put differently, without financial innovation, improvements in diagnostic and surgical procedures, prosthetic devices, parasite-resistant crops, and an array of other life-saving and life-improving inventions would be occurring at a far slower pace. The connection between evolving financial arrangements and economic growth did not begin in the 20th and 21st centuries.1 When steam-powered railroads emerged in the 19th century, they too posed a challenge to financiers. While potentially profitable, railroads were technologically complex and spanned large geographic areas. These novel characteristics dissuaded the conventional sources of capital at the time, wealthy investors and banks. Financial innovation helped circumvent these obstacles. Specialised investment banks emerged to evaluate the profitability of railroad companies and new accounting methods made it easier for investors to monitor railroad performance. While other forces also promoted railroads, financial modernisation helped advance this crucial ingredient of the industrial revolution. Even the most conventional components of modern finance, such as debt contracts and liquid securities markets, were themselves once financial innovations that circumvented former barriers to investment and growth. Consider an oceanic expedition or trading voyage in the 17th or 18th century. Such an endeavour required a large injection of capital and did not produce profits for a long time. Investors were reluctant to commit savings to such a long-term, albeit profitable, project because they valued having ready access to their wealth to cushion bad times or switch into other investments. Liquid securities markets eased this problem, allowing investors to sell their financial securities, which are claims on the future profitability of the project, if they wanted access to their wealth. With liquid markets, investors fund the oceanic voyage, but without those markets, economic progress slows. Financial innovation, like all innovation, has risks, which have been unmistakably demonstrated by the current crisis. While government policies and regulators deserve ample blame for permitting, and even triggering, financial abuses, newly engineered financial products are undoubtedly woven into the tapestry of this crisis and past ones as well. The misuse of new products is not limited to finance, however. Information technology eases identity theft. Webcams facilitate child pornography. And, drugs are dangerously abused. But just as we should not conclude that medical research does not promote human health because of drug abuse, we should not conclude that financial innovation does not promote economic growth because of the devastatingly costly crisis through which we are now suffering. Financial innovation is critical if we are to enjoy rapid rates of economic progress in the coming century, but innovation, change and growth can threaten stability. Improvements in financial regulation can reduce the risks of financial crises without curtailing sustained economic growth. In finance, as in medical research, encouraging the healthy application of human creativity requires some regulatory guideposts.