Investment bankers originated in the Middle Ages, when governments and kings received long-term loans for conducting wars and maintaining courts. Notable among the early money lenders were the Hansa merchants who supplied funds to many of the European kings and emperors, but usually with assurance of return. The ruler received a certain sum of money in the form of gold or silver bullion, and in return he gave the lender the rights over revenue derived from tariffs or taxes for a certain period of years. Loans were also extended on real property such as mines, fisheries, and forests owned by the government, and the products of the mines were applied to the payment of principal and interest. These early magnates were also merchants, and they were able to use their own money directly in granting loans, and in this way they differed from the modern investment bankers who act as intermediaries in gathering the funds of others for making advances to borrowers. With the close of the Napoleonic wars financial supremacy shifted from Amsterdam and the Continent to London, and with this change the modern investment bank as an intermediary institution between borrower and lender was developed.

The same general evolution was repeated in the financial history of the United States. During the first quarter of the nineteenth century American states and municipalities secured whatever capital they needed from merchants. During the second quarter, the westward movement caused an extension of such internal improvements as canals and railroads, and capital for these purposes was raised mainly from investors in England and in other European countries. Securities marketed in this country consisted largely of municipal bonds which were sold, usually without public notice, to local bankers who in turn marketed them among insurance companies, savings banks, and private investors. In order to secure a better price for bonds, municipalities began to advertise their new issues and their sales were conducted on a competitive basis. Blocks of these bonds were purchased by individuals for the purpose of selling them on a retail basis, and these individuals thus performed in a small way the mediation function of the modern investment bankers.

The development of free banking encouraged the organization of many banks, and until the opening of the Civil War there was considerable investment of capital in bank stock. After the Civil War the growth of transcontinental railways led to the issue of large blocks of bonds which were absorbed by American and European investors, whose contributions of capital made possible also the organization and development of great industrial trusts at the opening of the twentieth century. The war changed the movement of capital between Europe and America. At first a large proportion of American railroad and industrial securities held abroad were repurchased, and later the war obligations of the European governments found a market in the United States.