Here's an academic paper that I thought was kind of interesting (in a dry, historical way) because it describes how bank checks worked before the Fed centralized it. It sounds like Internet...
Here's an academic paper that I thought was kind of interesting (in a dry, historical way) because it describes how bank checks worked before the Fed centralized it. It sounds like Internet routing, but a lot slower:
[I]n the United States prior to the existence of the Fed, clearing was affected by the different legal treatments accorded to different forms of delivery. While a paying bank was obligated to make payment (remit) at par for checks presented in person (over the counter), there was no such obligation for checks presented through the mail. Banks were free to extract a presentment fee (exchange charge) from their payments on such indirect presentments. [...] The prospects of receiving less than par for a check gives a collecting bank an incentive to find a way of getting the check to the bank on which it is drawn without mailing it directly. Alternative means of transport and presentment will be used, presumably, if the total cost does not exceed the presentment fee.
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In the larger cities a number of banks typically would have frequent business with one another, making it worthwhile for them to form cooperative clearing organizations such as clearinghouses. In such an arrangement, the banks’ representatives would meet daily at a designated location to exchange items drawn on each other, avoiding the duplicative cost of bilateral contacts. By mutual agreement among participants, presentment at the clearinghouse was taken to be equivalent to presentment in person [...]
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The clearing of out-of-town, or interregional, checks was accomplished via a network of bilateral agreements on clearing terms that generally took the form of correspondent banking relationships. This relationship involved a bank in a larger city serving as a correspondent bank for a bank in a smaller city or town.
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If a correspondent received from a respondent a check drawn on a paying bank with which the correspondent did not have a relationship, then the correspondent would typically send the check to one of its correspondent banks located near the paying bank. In fact, to aid routing, bank directories listed each bank’s correspondents; the bank holding the check could look for correspondents it shared with the paying bank. The next bank receiving the check might present it directly to the paying bank. Such indirect routing had two advantages for the correspondent. First, it avoided having to pay a presentment fee to a paying bank from which it received no compensating benefit. Second, it saved the cost of sending a single item to the paying bank instead of bundling the item with others being sent on a normal shipment.
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Concerns about the operation of the check clearing system prior to the founding of the Fed focused largely on these irregular interregional checks. In such a system, there were inevitably cases in which the next bank to receive a check was not a correspondent of the paying bank. Hence, the process of sending the check to a correspondent might be repeated more than once. Furthermore, some mistakes in judgment and in handling of items were inevitable. Accordingly, there are documented examples of checks traveling circuitous routes, through the hands of many banks, in making their way from the bank of first deposit to the paying bank
Here's an academic paper that I thought was kind of interesting (in a dry, historical way) because it describes how bank checks worked before the Fed centralized it. It sounds like Internet routing, but a lot slower:
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