The positive contribution of finance to the process of economic development has been debated ever since Joseph Schumpeter famously argued in 1911 that services provided by finance are essential for technological innovation and growth. A substantial theoretical literature has produced increasingly sophisticated economic models endogenising the role of finance into the growth process, while empirical studies have put forward data to detect the link between the two. Yet a large part of the empirical surveys operate with macroeconomic or cross-section data and have little to say about the channels through which finance affects growth. This is where this dissertation comes in. It provides firm-level data from Bulgaria and Yugoslavia from the period 1919-1941 to tackle a number of questions related to finance, banking, and economic performance of the European economic periphery. The analysis is broadly divided into three parts – capital flows and the effects of international investment on domestic firms, banks and the real sector during the Great Depression, and the political economy of government intervention during the Depression and post-Depression period. The first substantive chapter (chapter 2) contributes to the literature on growth and capital flows by testing the hypothesis that foreign direct investment brings about productivity improvements to host economies via the channels of technology, liquidity and know-how transfer, as opposed to market access or increased competition. Chapter 3 revisits the prominent debate over the origins of the banking crises during the Great Depression and the effects these had on the real sectors. Evidence is provided in support of the debt deflation theory of banking crises, but the broad effects of the Depression on banks’ and firms’ balance is also explored. The higher the involvement of banks with industry both directly (via interlocking directorates or equity ownership), and indirectly, via the lending channel, the greater the negative effects of the crisis on banks’ balance sheets. The evidence points to negative feedbacks from bank distress to firms’ output losses in the form of a credit crunch. Chapter 4 uses a political economy framework to analyse the state interventions in the Balkan economies during and after the Depression. The data suggests that direct and indirect bailouts of banking and industry defined the role of the state. Government cronies from the financial and economic elite, as well as the agricultural sector ended up as winners from the process, while semi-skilled and unskilled labour paid the tax bill. These quantitative findings are in agreement with the broad conclusions of transaction cost economics where finance can play an important sorting role. They also support the empirical literature that rejects the contributions of portfolio investment but argues that direct foreign investment is a source of technological progress. The conclusions of the thesis, however, call for caution as market failure in the financial sector was abundant and political economy frictions could cause lasting damage to development.