I see a three-part post here and will take each section separately:
Hopefully you will find everything you are looking for. IF not, please feel free to repost.
This site has a early history of the Catholic Church.
Briefly, no, bishops did not always live within a diocese.
Remember the Bible was not an official part of the religion for many years. Many religions still do not interpret it "literally".
The question of literal interpretation is sort of a hard question to answer. As long as writings and literary styles have been available, groups of people have always taken many of them literally. (Not to say it was intended to be that way).
So, in a sense, ever since the stories were written or even told orally, there were likely people that took them literally.
What you might be asking about is more the rise of fundamentalism in America, which has a lot of implications to what the (for lack of a better term) "pop-culture" view of Christianity is.
Look up William Riley and John Nelson Darby. Dwight Moody is another person to look into.
Many of the doctrines of the Catholic and Orthodox churches were the results of agreements made at the Council of Nicaea (also spelled Nicea), a small town in present day Turkey, in A.D. 325. The meeting was convened by Roman emperor Constantine to resolve ongoing disputes among the clergy. About 318 of the 1800 who were invited attended. Their travel expenses were paid by Constantine. The decision of which Gospels would become part of the Bible was among the topics of the Council of Nicaea.
I recommend further reading about the Council of Nicaea and the history of Byzantium to help answer your question. I found the book "The Short History of Byzantium" by John Norwich particularly illuminating