Modern banks were founded in the nineteenth century. Unlike Gerschenkron and, more generally, the Saint-Simonian approach to credit, which views the origins of these banks as a response to industrialization, I argue that these banks were the outgrowth of an innovation in the payments mechanism. It consisted in the gradual displacement of commercial paper, traded at a discount in a centrally located market, by drafts and deposits, offered by a handful of joint-stock banks, each running a countrywide network of branches. This transformation began in earnest in the 1820s in Britain, and in the 1860s on the continent, reaching its present format by 1900.

The rise of deposit banking signaled a rise in financial agglomeration, for it triggered a trend toward branch banking. Joint-stock banks headquartered in the center threatened to turn local banks into local branches. Deposit banking also meant a concentration of the banking sector, though not necessarily the financial sector as a whole, as the consecutive expansion of the market spawned new functional specialization in the areas of issuing, brokerage, market making, and so forth. Branch banking did not develop uniformly across countries. Branch banking met the political opposition of local banks. In decentralized countries, local governments used their political power to stem branching, restrict deposit banking to the local economy, and stem the flight of local savings to the center.