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
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.
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