The previous chapter established that centralized countries registered relatively high levels of financial agglomeration. Without regulatory and legislative power, local governments in centralized countries could not – nor did they want to – stop center banks from opening a branch on every local “Main Street.” The reasoning, however, rested on an autarkic model – one without an international dimension. This chapter brings the international dimension into the picture, asking whether it ran parallel to or mitigated the process of agglomeration at work in the domestic economy. Theory and historical evidence both suggest that internationalization happened simultaneously with agglomeration, and more markedly in centralized than in decentralized countries.

Consider a country with two regions – the basic model of chapter 2. Graft onto it another country with a similar structure. Allow capital to flow freely between regions of a same country but not across countries. Burden the exchange of financial products with information asymmetry so that the losses incurred are lower between two financial cores than between a given core and a foreign periphery. The rationale for this differential in asymmetric information is that nineteenth-century foreign investors had an overwhelming preference for large, central, visible assets in foreign countries – mostly government bonds – over small, peripheral, and unfamiliar ones. It is reasonable to expect from such a model that the core–periphery pattern within a country and the degree of internationalization of the financial sector in that country would be mutually reinforcing.