How could banks with multiple branches work in a world without quick communication?

Question

If a bank wanted to operate branches in multiple cities, possibly separated by large distances, how would they prevent a fraudulent customer from double-dipping on a withdrawal?

For example, if I have $200 in the bank in Town A, I could go in and withdraw it. As soon as I get it, I rent a horse (/some other form of transport) and go to Town B, where there is another branch of the same bank. If I also try to withdraw my money there, how will they know that I don't have the money in my account anymore?

Electricity has not been discovered yet, and so clearly electronic forms of communication can't be used. Is there any way for the branches to keep their records synchronized in order to prevent this kind of fraud?

One thinks perhaps of communication system like flags or other visual signals, but in this case the bank is sending rather complex information, and I think it would be difficult to encode this sort of info into a simple, visually-based communication system.

Answer 1

Fortunately for you, to answer this question, we can simply turn to the past, instead of reinventing the wheel.

Fortunately for me, people have already typed up fantastic, simple explanations of the previous systems, so I won't have to reinvent the wheel.

Jacob VanWagoner on Quora already provided us with the following:

People transacted in bank notes. Long before the creation of currencies like the dollar, back when all money was gold, they still had banks. When you deposited your gold in the bank, the bank extracted a small fee for the use of their service, then handed you a note or set of notes that would allow you to come back and exchange the note for that specific weight of gold. It became much more convenient to exchange the notes, since they were ostensibly equivalent in worth to the gold since they could be quickly exchanged for it.

On the other side of the counter, how the bank kept track of who had what, all accounts were written in a ledger. When you made a deposit or a withdrawal, the bank's book-keeper would write in a note about the transaction including how much was deposited/withdrawn and the total remaining in the account.

Without long-range instant communication, the accounts were tied to the local bank branch and you had to physically go to the bank to exchange money out of it, and without being able to do so you would have to just carry the bank notes or other currency.

For exchanges between banks, it got more interesting and required the formation of fungible currency -- that is, notes that would be accepted by multiple banks. When there was a transfer of funds requested by bank notes, often there would have to be a physical transfer of property done at a later date. With fiat currency, such physical transfer was unnecessary, only the transfer of the notes. With invention of the telegraph, one could instantly communicate over a wire to "transfer" "money" (hence the terminology "wire transfer"). (I put the words in quotes because there was no physical transfer at all, just writing down the amounts from one account to another. Since most of the money was just stored in the bank, the bank didn't actually need to physically hold all the money in the accounts).

In response to your other questions: "If there are recorded booklets to carry, would those be easily fraud?" Yes, it would be easy to falsify information in a ledger. It was therefore required by law to keep accurate ledgers, and they would be audited periodically. If a clerk misplaced a ledger, that could spell legal doom for a merchant or a bank, since it contained a record of all transactions. They were checked as often as could be permitted for fraud.

"Since the tellers of the banks directly handles moneys given to them, would it be prone to corruption from stealing money?" Yes, they could be prone to corruption from stealing money. That's what ledgers were for, incidentally. People feared their money would be stolen, or that the notes could be counterfeited. Any suspicious behavior from a banker (such as being ostentatious) would draw attention, and the law would be swiftly applied, quite possibly by a lynch mob or vigilantes, to any banker who could be shown to be messing with the books. Further, they feared 'runs' on the bank where more people would come in and demand their money / gold than the bank actually held, which would happen if any of those rumors started circulating.

It gets even more interesting when you consider the process of loaning money, in which an account is created and money "deposited" in the loan account. Given the circulation level (how many exchanges are actually done with money held at the bank), many bankers found they could create as much as 9x the money they actually held without being found out. This practice still exists today in the form of fractional reserve lending, and it is codified in law.

Thanks Jake from State Farm.

Answer 2

Nex Terren answered well, but I also want to mention fraud protection. Until the late 1800s, international banks were family banks. From the Peruzzis and Medicis of Florence in the Renaissance, to the Fugger's that bankrolled Hapsburg wars of the Reformation, to the Rothschild's and Barings of the Industrial revolution, banks worked on families.

Since all the bank branch managers were sons, brothers or cousins, they tended to know all the other branches customers, personally or through correspondence. For example, when Salomon Rothschild wanted to arrange a British loan to a Prussian client, he wrote his brother Nathan, in London, a letter saying so. Then when the Prussian showed up with a bank note, Nathan was confident he could honor it.

For the first 400 or so years of banking, it was a private, family oriented, interpersonal affair.

Answer 3

The answers on previous bank systems (I refuse to say "old" since they're within my lifetime!) are good. I want to add one aspect to history: modern cryptography.

The question asks us to forego high-speed comms. But we could still advance mathematics. Many of the old ledger systems could be vastly improved with some cryptographic signing. Letters of credit of yesteryear were authenticated by hard-to-forge signatures and seals, but they could have been mathematically signed. You need electronic computers to handle the giant bit strings we use today, but you could get away with much smaller keys if you only had humans as computers (yes, that used to be a job title).

Crypto keys could allow a person with a line of credit at one branch to get a key from that branch and then redeem it at another branch much more securely. The banks themselves would worry about reconciling hard currency every few months.

Answer 4

This is pretty much what "cheque kiting" is. This was basically the operation of all banks up to the invention of the ATM and real-time transaction processing.

Turning it into actual cash depends on the exact operation of the bank. You can write out a cheque to 'cash', but most banks won't hand over the cash unless you present them with ID. So suppose you do that at bank A, and bank B. What happens? Nothing, until the cheques clear. "Clearing" is the process of updating the account status with the transactions as the cheques make their way back to the originating bank by post.

Once the cheques clear you have -\$200 as a balance. This is an unauthorised overdraft. You've not even committed a crime at this point, and most banks will just let you do it so long as you pay back the \$200 and some fees.

Doing it without intention to pay back the bank is fraud, but that's why they have your ID on file.

A little detail from a historical novel, Walter Scott's Rob Roy. At one point the protagonist goes to the post office to pick up his mail, having been sent to rural north England. He recieves a letter from his father with a "goldsmith's bill" attached, which is effectively a bearer cheque that he is able to turn into gold in a nearby town to fund his continuing adventures. Just like Western Union avant la lettre.

Answer 5

The simple way this was done historically was that you had a small book which was a record of the transactions going through your account. Every time you pay in or withdraw money it it's noted in the book so it is essentially a manual equivalent of a debit card. Even relatively recently building society accounts often had account books.

The earliest proto-banking systems used letters of credit which were essentially a written confirmation that you had deposited x amount of money or valuables with a bank. These eventually evolved into banknotes and cheques.

It's also worth bearing in mind that in the early days of banking bank accounts were really only for the moderately wealthy and a lot of store was set on personal reputation and informal credit with individual tradesmen and shopkeepers was a lot more common. It's also not that long ago that you could be put in prison indefinitely for a bad debt.

The other aspect of this is that when you first open the account you have to prove your identity and bona-fides so even if you get away with the fraud at the time you're going to get caught eventually.

Equally it is entirely possible even now to write a cheque that you don't have the funds to cover, but it is illegal to do it knowingly and the bank will know that you have done it sooner or later.

Similarly, historically individual bank branches had a lot more autonomy so any transaction which was even remotely unusual may well have been passed to the manager who was most likely very experienced and would make a decision based on their own judgement.

Answer 6

If you are planning to devise a banking system for a world without quick communication, historical record show how banking systems used to work.

First thing to understand is that ordinary people would not use banks, nor generally coins. In a given area (village, town), shopkeepers (and sometimes families) would use tally sticks to keep track of who bought what and when. You would go to the baker, take your weekly stock of bread, and they would notch the tally stick. When the baker goes to the mill, the miller records a notch on the baker's tally for each flour sack. And so on so forth. Once a year, generally on St Martin's day, everyone would reconcile the accounts, and settle the outstanding debt. The one who had coins could use them, the one who didn't could use anything to settle the debt - maybe they would give a pig, or anything of value they would have.

Only wealthy people and merchants would use banks. But again, not like we are used to think about it. Let's say I'm a wealthy individual, and I need to travel. I know that at my destination I will need funds to sustain my standard of living. But, I don't want to travel with money, by fear of being robbed. Then, I can go to a bank branch, deposit some value (coins, or a few bullion of precious metal for example). The bank will issue a note, telling the remote branch that it has to pay the bearer of the note the same amount of money in local currency. When reaching my destination, I can then go to the bank branch, give them the note, and withdraw the written amount of money in local currency.

Deposit accounts (i.e., accounts you described where you would deposit money and withdraw it at any time, anywhere) could only work in a local branch, where employee knew who you were were and would keep track of deposit and withdrawals on a local ledger. If you were to go to another bank branch in another town, they wouldn't know who you are and there was no way you could withdraw any money.

Also, keep in mind that until late in the 20th century, there was no government issued IDs. There was absolutely no way to know if you were who you pretended to, unless by chance someone well known in the area could vouch for you. That is why introduction letters existed. For example, if you planned to go to a specific town, you would look around for someone who knew you well enough, and personally knew someone in this town. They would then write you an introduction letter. Upon arrival, you would go to their remote contact and give them the letter. If convinced by the letter, they would they be able to vouch for you, and confirm to locals that you were who you pretended to, because they trusted the person who wrote the letter.

In summary, a world without quick communication is exactly our world a few centuries ago, and you can draw from historical records to devise your system. If you want firsthand accounts of how it worked, Casanova's memoirs for example are a good place to start.

Answer 7

This is a very interesting thread. Sorry, my reply is short but have you thought about homing pigeons? Banks could keep a pigeon aviary and routinely dispatch some to all their sibling branches. At the end of every day, or maybe twice a day, every sibling branch got updated with account modifications for the day, from every other sibling branch.

The banks would have to maintain aviaries at every branch, and cover the cost of deploying these pigeons to every other branch, every so often.

Rothschild had a pigeon aviary, and in fact, used a homing pigeon to intimate himself about the result of the battle of Waterloo a full day (or two) before the rest of Britain. This was how he was able to manipulate the stock market and become the richest man in the land.

Answer 8

Whenever you want money from your account, you have to bring in the receipt with the current balance from the last time you accessed it, in exchange for a new receipt.

To commit a fraud, you'll have to forge the receipt, which is heavily punished in any (pre-)modern state. If you loose it, you have to wait until messages have been requested and come in from all dependencies about your last transaction.

Answer 9

(from Wikipedia)

Some banks (still) use passbooks to record all transactions.

They are are passport-sized booklets recording all the transactions in your account; they are normally used for savings, rather than day-to-day accounts. IIRC, they used be authoritative on the how much money is in your bank account; nowadays they are a copy of the computer record.

There is no reason why a medieval bank could not use a combination of passbooks (kept by the customer), and ledgers (kept by the 'home' branch, with weekly reconciliation from other branches).

Answer 10

The solution given by Nex Terren was used in the common law (England and its former colonies) territory.

Elsewhere, they used the equivalent of a money order. The bank would confirm that you had the money, then remove the money you were transferring from your account, then you would send the money order to somebody else, who could deposit it at their bank. The receiving bank would then only bear the risk of forged instruments and of a default by the sending bank which would generally be much more credit worthy than the customer. Cashier's checks, certified checks, money orders, electronic funds transfers, and giros are all essentially different ways of describing this same transaction.

A similar device which also trades the creditworthiness of the bank for that of a customer is called a "letter of credit." In a letter of credit the bank promises to pay a certain amount of money upon the meeting of a condition, normally the presentation of some sort of document such as a release of lien or a warehouse receipt or a bill of lading showing that good have been dispatched to the buyer. The customer satisfies the local bank that he is good for the money (perhaps even depositing it in a special account that the bank controls for that amount of money) and the person induced to take action by the letter of credit only has to know that the bank is good for the money, not that the customer is good for it.