The Evolution of Banking: From Passbooks to Instant Communication

The Challenges of Banking in the Past

In the past, banking was a complex and challenging process. It was difficult to get credit outside of your hometown, and local banks wouldn't pay you until your check was mailed to the branch of the bank where you held your account. Paper money from untrusted banks was not necessarily accepted, as it was privately issued during that era.

The Role of Trust in Banking

Trust played a crucial role in banking during earlier times. Having a letter of credit from a trusted bank allowed individuals to get paid despite being a stranger, as the other party would be responsible for it. Multinational companies created their own systems that were easier to trust than local banks, such as traveler's checks from companies like American Express.

The Impact of Instant Communication

The advent of instant communication through telegraph revolutionized the banking industry. It allowed local banks to communicate with bank branches on other continents with only a few minutes' delay, if the customer was willing to pay the steep fees for that service. This enabled faster and more secure transactions, bridging the gap between distant branches and customers.

Overcoming Challenges and Ensuring Security

To ensure security and prevent fraudulent practices, banks implemented various measures. Withdrawal limits based on total account balance were implemented to prevent people from overdrawing by withdrawing money from multiple branches. The bank branches would make lots of phone calls to verify a customer's balance before allowing a withdrawal. Transaction records from each branch were sent to the central office for updating the ledger.

The Role of Passbooks

Passbooks were commonly used during this era. Customers had to present their passbook when making a transaction, and the transaction and updated balance would be recorded in the passbook. While passbooks could get lost, it was possible to prove your ID and make a withdrawal without one, typically at your registered branch. This system provided a tangible record of transactions and balances for customers.

Combating Fraudulent Practices

Fraudulent practices, such as floating a check, were common in the past. People would write bad checks in the hopes that it wouldn't be processed until after funds were deposited. However, if caught writing bad checks with insufficient funds, individuals risked arrest for writing fraudulent checks and could be put on a list with the store to not be able to pay via check. The threat of going to jail served as a deterrent for most types of fraud, including overdrawing from multiple branches.

Building Trust and Global Connectivity

With limited travel opportunities in the past, local banks played a significant role in establishing trust. The people at your local branch knew you, and if you visited another branch, they would likely require verification before allowing you to withdraw your whole balance. However, with the introduction of traveler's checks from trusted companies like American Express, local businesses began to trust the issuer. These companies knew how to verify their own checks from other branches and could clear them more easily. Additionally, the local bank could communicate with your bank branch on another continent through instant communication methods like telegraph.

As banking evolved, the challenges of the past were gradually overcome through technological advancements and improved security measures. From the reliance on passbooks and limited communication to instant global connectivity, banking has transformed into a more efficient and secure system. Today, we enjoy the convenience of online banking and digital transactions, making financial management more accessible than ever before.