how did banks clear checks and get funds from other banks before computerization?
In: 6540
By hand. They send it to your local branch where they had written records of your details and they would confirm or deny that you had the funds, were a customer etc and then send that back.
The physical check was taken to the bank. They then contacted the appropriate bank (if it was from a different bank) with the account on the check to notify them of the transaction. Both banks updated their ledgers for that account.
Auditing was extremely important (and still is) to make sure that all the numbers added up and no shenanigans were happening.
This is why checks were able to “bounce”. The person wrote a check for an amount of money they didn’t have in the account. So when the check is deposited the bank finds out there isn’t enough money in the account to cover it. The bank then notifies the depositor that the check wasn’t good and they didn’t get the money. The process took time to complete.
Businesses would have to individually track if people wrote them bad checks.
Every night after the close of business, there were scores of airplanes carrying paper checks from one city to the other. Had to spend the night once at a small hotel at the Greenville, NC airport and was shocked at the number of planes taking off and landing at night. Turns out Greenville was a regional center for check clearing.
Thanks for the awards. Makes not getting any sleep that night worth it.
Cheques are delivered to a clearing house, and then presented for payment to the bank they’re drawn on, who adjusts their ledger appropriately. The banks would then workout who owed what to whom and settle the balance between them.
There were institutions called clearing houses (still are but they obviously operate quite differently) so rather than banks physically sending cheques (sorry Canadian spelling) to a large number of other banks a large group of banks would get together and agree to all send cash and cheques to a clearing house, clerks would meet with clerks from other banks and exchange cash and cheques, at one point they would literally sit on both sides of a long table and the two clerks would exchange cash and cheques between their two banks then when everyone was finished everyone would stand up and move one seat over and now they were facing a different bank’s clerk, repeat the process until every bank had a chance to sit across from every other bank, the table at the Clearing House Association in New York was 70 feet long.
In the US this evolved into the Federal Reserve.
Banks accepted a certain level of risk, if I cashed a cheque with a small value they might give me that cash right away, a larger amount they would wait until the clerk had returned from the clearing house and confirm that the other bank had accepted the cheque, for even larger amounts they would wait until the issuing bank had enough time to completely process the cheque and return it through the clearing house system if there was a problem, the member banks of the clearing house mutually agreed to a time limit for contesting a cheque so once that limit had passed then the cash could be safely paid.
Watch Catch Me If You Can. Back then everything was manual so if you wrote a check or even cashed a check in LA, that check had to be physically mailed to your home branch and when they got it, they would deduct the funds from your account.
Fun story. When I was a kid my parents shopped at an Air Force Base commissary, back when they had great prices and no tax. Cigarettes were around $10/carton so they did a ton of business.
Well, one day they got robbed and the thief took off with a huge bag of checks (accidentally I assume)
Everyone who wrote a check that day essentially got their groceries for free because there was. I way to process missing checks.
Funny story. Dublin, 1997. I had an account with Ulster Bank. Went in to withdraw cash one day and noticed that, after signing the piece of paper with all the details, the cashier placed the slip on a sticky-uppy pointy thing (like a big needle attached to a wooden base), so figured that withdrawal would only affect my account at the end of the day.
A few weeks later, I was going away to Kerry, for the weekend, with my buddy. Went in and withdrew my last £200 (punt at the time) and then went straight to the ATM outside and withdrew the same amount, so my account went £200 into overdraft. Never went back to the bank again. Never heard from them. Had a great weekend.
Checks are negotiable instruments, which are basically a documents that say “the payee of this document can go to this bank and demand this much cash from this account. Signed, account holder.”
So the bank would process each check by comparing the signature to the accountholder’s signature, and check to see if there was enough of a balance in that account, and then pay it out (and deduct that amount from the balance).
But who wants to go to a different bank for every customer you have?
So the system was designed so that any payee (whose name is in the “pay to the order of” line) could assign the right to be paid to someone else, to go to the issuing bank for them. They’d endorse the check to someone else, who would be the “bearer” who could then take the check to the bank to be paid.
And for most people, they would rather just sign their checks over to their own bank to credit their deposit accounts, and let their own bank do the work of finding the payor’s bank and settling that amount. As /u/annoyinghack notes [in his comment](https://www.reddit.com/r/explainlikeimfive/comments/tz3t8b/eli5_how_did_banks_clear_checks_and_get_funds/i3wl86n/), banks arranged for their representatives to meet daily at clearing houses, so that all the banks could get together in one place and exchange payments for all the checks all at once. Each bank kept a ledger with the other banks, and lots of the transactions going both ways could cancel out so that they’d only need to send periodic payments to each other to settle their ledgers (rather than making a separate payment for every single check). They’d bring the checks back to the bank and process them there. If a check bounced, the issuing bank could come back the next day and let the other bank know, and claw that back in the ledger.
That’s why, for a time, lots of stores refused to accept “non-local” checks, because they knew that the time it would take for a check to bounce could be pretty slow if their own bank had to wait to clear/settle with an out-of-town bank.
The states also all passed the Uniform Commercial Code, which has an Article 3 about negotiable instruments and an Article 4 for bank deposits, so that all states were basically following the same rules for checks, so that interstate transactions would be predictable, when it came to who was on the hook if a check bounced, or if an account didn’t have sufficient funds, or if a forgery gets in the mix.
A certified check is the bank promising that the check would be honored, even if the customer’s account didn’t have sufficient funds (so the issuing bank is guaranteeing that it will not bounce). A cashier’s check is the bank issuing the check itself, so that it’s coming from the bank’s own account (so it won’t bounce unless the bank itself becomes insolvent). In both cases, the bank generally takes the money out of the account when issued, so that it can’t run into the problem.
So you can see that computers or even telephones are not required for this system to work. It’s just that computers make it way easier to do quickly without mistakes.
I used to run a magnet over the routing number and account number on my car payment check so that they’d have to manually enter it. Bought me an extra day or two
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