What would stop people from withdrawing money from multiple banks and over drawing before all bank branches could be updated on the person’s balance?
In: Economics
Withdrawal limits based on total account balance and lots and lots of phone calls
Imagine you have $500 in a bank with branches in City A and City B.
Day 1: You go to the branch in City A and withdraw $300. Your balance at City A is now $200, but City B’s ledger still shows $500 until updated.
End of Day 1: City A sends a record of all transactions to the central office.
Day 2: Before the central office updates City B’s ledger, you try to withdraw $400 in City B.
Verification Process: City B calls the central office (or City A directly if suspicious) to confirm your balance. They find out you only have $200 left, preventing the withdrawal.
I don’t know if this was universal, but my old Building Society account used a passbook that you need to present when making a transaction (actually, they still offer them – I saw recent billboards where they’re trying to lure customers of a competitor that recently phased them out).
When you make a deposit or withdrawal, the transaction and updated balance is recorded in the book. That said, passbooks can get lost, so it must be possible to prove your ID and make a withdrawal without one (being issued a new one in the process), but they could insist you do that at your registered branch.
At a basic level, the same thing that stops most kinds of fraud – threat of going to jail.
Further, people didn’t travel much. The people at your local branch knew you. If you went to another branch, they would likely not *let* you simply draw your whole balance. You would have to wait for verification, which could take days.
In the past it was a lot harder to get credit outside of your hometown. If you brought your check from a faraway bank, the local bank wouldn’t pay you until it was mailed to the branch of the bank you held your account at and it paid the check. That could take a long time. Even paper money wouldn’t necessarily be accepted from an untrusted bank, in the era it was privately-issued.
But if you did have a letter of credit from a trusted bank, then you could get paid despite being a stranger because that other party would be responsible for it. Just like today, people sometimes abused it and got into trouble for fraud.
Multinational companies invented in their own systems that could be easier to trust than local banks, for example this was the point of buying traveler’s checks from a company like American Express. The local business trusted the issuer of the traveler’s check, the company knew how to verify its own checks from other branches and could clear them more easily. Also remember we had instant communication long before we had electronic banking. With the telegraph, the local bank could communicate with your bank branch on another continent with perhaps only a few minutes’ delay–if you were willing to pay the steep fees for that kind of service.
Back before ATM’s and just a bank book many banks you could only withdraw at your own branch. You could not go to another branch and withdraw money. Some would let you write a check to yourself and cash it and then if it bounces you are on the hook for bank fraud.
Used to people would write bad checks. Sometimes in the hops it wouldn’t be processed until after funds were to be deposited. Such practice was called floating a check. If you were getting paid on Friday and needed groceries on the Wednesday before. You’d write a chack you knew wouldnt be able to be cashed that day. Hopefully you’d get your paycheck and be able to deposit it before those floating checks came in.
If someone went around writing bad checks with insufficient funds and was caught. Then there is the risk of arrest for writing fraudulent checks. Usually you’d be put on a list with the store to not be able to pay via check.
Banks would issue an instrument shows what you were good for; think a bearer bond or even money order, if you like. They write a letter saying what you’re good for, but you still had to get that letter from your main bank.
This is actually how many of the Crusader Orders started as; the Knights Templar would issue you a letter of credit for your journey to the holy land. The disruption of this credit system/revenue stream was one of the major causes of the Crusades.
Depends on how far into the history you want to go.
Before electronic banking: telephones and meticulous records. There are actually some goofy outfits the ledger handlers used to wear to prevent themselves getting inked. A lot of people were employed just to make sure this system worked and was not abused (by unauthorised abusers at least)
Before telephones: you could just deposit and withdraw in your local bank which kept the records.
A really long time ago this wasn’t an issue even for current accounts, at least in the US, because states either didn’t allow branch banking at all or severely limited the number of branches any one bank could have.
They couldn’t. Obviously, it was after the fact they would realize what happened and go after anyone who commit such fraud
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