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I don't know a lot about paper checks because I have never seen one, and I don't live in America.

Suppose person A gives person B a check for $100,000 in payment for something in a shop. How can B be sure that A has enough money in the bank account to cover the check amount, and is not scamming?

How is this known now, and how was it known before use of computers in banking?

Ellie Kesselman
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Artem
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16 Answers16

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The bottom line is you don't.

Checks are rarely written for that amount, currently the average checking balance in the US today is around $6,000 or so. Traditionally, checks were written for much smaller amounts. Perhaps $200 at the grocery store, $100 at the restaurants, $50 at other merchants.

Many business would black list those that wrote bad checks.

Checks have decreased in frequency because of problems for both sides of the transaction.

However, in larger transactions one can have a "guaranteed" checks, often known as a bank, cashier's, or teller check. In that case the bank would withdraw the money ahead of time from the payor, issue a check, and that payor could then give the check to the payee. Those kinds of transactions happen with home purchases and the like.

Community
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Pete B.
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    I would also add that writing a bad check is a crime, potentially a felony depending on the frequency or the amount, and is, in essence, nothing other than stealing – Kevin May 30 '18 at 12:36
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica May 30 '18 at 22:13
  • Would changing the answer to say "average checking account balance" be wrong, per US terminology? (Or better yet adding a parenthesis saying what a checking account is!) – gsnedders Jun 01 '18 at 00:57
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    @BillK there is no reason, including wealthy people, to have much in checking. Why keep money in checking and earning next to nothing when one can earn a decent rate in an online savings account, and can be transferred in 24 hours? – Pete B. Jun 01 '18 at 18:02
  • @PeteB are you saying you think the average of 6000 is wrong, or that there is another explanation for it? – Bill K Jun 01 '18 at 19:52
62

In the UK, in the 1980s, if you wrote a cheque to the seller of an item and didn't have the money in your account, the bank would bounce the cheque (and charge you a fee) but the seller would have lost their money and their item.

To give slightly more protection to the seller we had the concept of a "cheque guarantee card" - which looked like an ATM card (and was often the same actual physical card once ATMs became a thing) and the seller would ask to see your card, typically for purchases up to £50 or £100 (depending on the amount specified by the card). They would then write your card details on the back of the cheque and also your address. If you paid for something with a cheque and gave the seller your cheque card details, the bank would honour the cheque even if your account couldn't cover it (protecting the seller), and then pursue you for the money if you didn't have enough.

The "bank cheque" or "cashier's cheque" mentioned in the earlier answer https://money.stackexchange.com/a/95893/739 is one further step up in protection for the seller.

There is a good overview of the history of payment cards in the UK at http://www.theukcardsassociation.org.uk/history_of_cards/index.asp, specifically see:

1969
UK domestic cheque guarantee scheme is established.
...
1989
£100 and £250 UK cheque guarantee limits introduced.

Vicky
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  • When I had my first cheque card (around 1980) it could be used to guarantee payment up to £50. Over the years this limit was raised to £100 and then £200 or £250 for certain account types (premium accounts with a high monthly pay-in requirement) – uɐɪ May 30 '18 at 13:16
  • The bank could still choose to honor the check but still charge you the fee, basically a very-high-interest-rate-loan you were expected to pay back. Stores typically had an additional fee if the check bounced as well, and also had blacklist books that cashiers would check before accepting checks. – phyrfox May 30 '18 at 14:38
  • @ʎəʞouɐɪ oh you're quite right - I'd got the limit the wrong way round. It was guaranteed up to, not guaranteed over. That makes much more sense. – Vicky May 30 '18 at 17:05
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    Just to add to this, I remember having these cards at least into the early 2000s, and I always knew them as cheque guarantee cards (I never heard them referred to as merely cheque cards - perhaps this was a regional thing). – JBentley May 31 '18 at 05:25
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    Address wasn't usually writen on the back, just the card number. – JCRM May 31 '18 at 05:40
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    https://en.wikipedia.org/wiki/Cheque_guarantee_card – JCRM May 31 '18 at 05:42
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    As a shopper in the UK in the 70s and 80s, I remember this process well. About the address; your address wasn't on the cheque guarantee card. The shop could ask you to put your address on the back of the cheque. You could comply - using your real address, or a phony address, or you could refuse, in which case the shop could refuse the sale, or back down and accept the unaddressed cheque. The whole thing was a mess. I'm amazed cheques are still a thing in the US shopping environment. – Oscar Bravo May 31 '18 at 06:37
  • The concept of a cheque card existed in a whole bunch of European countries using so-called "Eurocheques". – mastov May 31 '18 at 10:39
  • And of course, if you bought something bigger, like a car or a washing machine, the dealer would hold on to the goods until they had confirmation that the cheque had cleared. – Michael Kay May 31 '18 at 17:27
  • Why not just use contactless? – Cloud Jun 01 '18 at 06:31
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    @Cloud what? We're talking about the 1970s and 1980s here, way before contactless (or even debit cards) was a thing. – Vicky Jun 01 '18 at 09:55
  • @Vicky I didn't know it was a modern thing. Been around since I remember – Cloud Jun 01 '18 at 10:34
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    @Cloud, Contactless in the UK came in in 2007. – Vicky Jun 01 '18 at 10:56
  • @Vicky that early? has only been available where I live for about 1-2 years – WendyG Jun 04 '18 at 15:48
  • @OscarBravo Well, the credit cards that were recently still the common alternative to cheques in the US weren't much better, really. They just put more responsibility on the bank than the shop - while also giving all new interesting ways to scam (e.g. chargebacks). Even in Europe today, a payment terminal running in offline mode will not verify account balance - the main difference is that if you overdraw your account, the payment still succeeds - you just end up with an overdrawn account, usually with rather severe fees/interest on the debt. – Luaan Jun 06 '18 at 08:11
  • @JBentley "cheque card" was common when I got used to using such things (90s) – Chris H Jun 06 '18 at 09:03
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It was also common to call the bank and ask if funds were available.

It was legitimate to call the number printed on the front of the check and say, "Hi, I have this check for $300 from Artem, account number 1139391874. Is it good?"

The bank would either verify funds or say that no, that check would bounce.

Shawaron
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    It was also common to ask for ID (drivers license) before accepting a check and write down the DL#. Also to not accept out-of-town checks, and to not accept checks with low numbers (indicating a recently opened account). That last was a really imperfect measure since you could always just order checks starting with whatever number you wanted. – The Photon May 30 '18 at 16:47
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    However this "call for verification" technique was very vulnerable to a "double-spend attack". You could have $200 in the bank and spend that $200 multiple times in the day... each time a merchant called that day, the $200 would still be there. – Bart May 30 '18 at 18:34
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    I did something this when working in a small business - when we got back official copies of returned checks, I would go to the issuing bank (usually the same as the business's bank) and ask if the account had funds before attempting to deposit it again. We still had to go after the writer for the fees but at least we were able to get the amount of the check as soon as they had funds in their account again. – R.. GitHub STOP HELPING ICE May 30 '18 at 19:28
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    @ThePhoton Something that's always stuck with me: I remember reading in ~1995 that half of all bounced checks were numbered less than 200 - i.e. within the first 100 checks of account opening. – Shawaron May 31 '18 at 13:59
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    @ThePhoton The whole "out of town cheque" thing always seems weird to Europeans, where essentially all banks are regional or, more likely, national in scale and have been for decades. – David Richerby May 31 '18 at 17:24
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    @DavidRicherby, like lots of things in the US, it's an aspect of our federal system that individual states are responsible for much bank regulation, leading to (at least historically) different banks operating in each state. And it's been decades since using checks for day-to-day transactions was common in the US. – The Photon May 31 '18 at 18:07
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    @DavidRicherby, note that "national" in a European sense is (very roughly) around the size of "state" in an American sense. American businesses tend to be wary of out-of-state checks. – Joe May 31 '18 at 20:49
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    @ThePhoton That last one really got to be an arms race - I recall at one point seeing a place that wouldn't accept checks numbered lower than 5000 (!) –  May 31 '18 at 22:16
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    @ThePhoton Regulation isn't the issue. The issue with out-of-state checks are that, if the fraud was done right, the check has to clear by being sent through at least two FRB clearinghouses, which adds several days each way. That would allow a week to misuse or kit funds before detection. Check 21 ended that. (They still travel, but electronically) – user71659 Jun 01 '18 at 04:37
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    @user71659, that was a reply to the person commenting on how there are so many small banks in the US compared to Europe; it wasn't meant to have anything to do with why stores won't accept out-of-state checks. – The Photon Jun 01 '18 at 04:39
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    @Joe I fully agree that US states and European countries are somewhat comparable (at least in terms of size; European countries tend to be much more populous). But I've definitely seen "no out-of-town checks" signs and I don't actually recall seeing one about out-of-state cheques. (Which isn't to contradict your comment.) – David Richerby Jun 01 '18 at 11:06
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    @Joe only for the largest states. Using current figures US, Europe, California and Texas are comparable to the 6th largest country in the EU, with Florida and NY a couple of spots lower. Or to put it another way 12 out of 28 EU countries have a population over 10 million, compared to 9 out of 50 states (a similar pattern occurs for other arbitrary large numbers – Chris H Jun 06 '18 at 09:14
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In addition to the other answers, there were people that relied on the delay of cheque settlement - you could make a purchase with cheque on Thursday, get paid in cash on Friday, put the money in the bank and it would cover the cheque next week when it cleared.

It was also possible to "post-date" cheques, with a date in the future. This was supposed to defer it until that date, but this wasn't something that banks would always honour.

For very large payments, there are "banker's drafts", which are pre-cleared. The bank effectively takes the money out of the sender's account on issuing the cheque.

pjc50
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    While post-dating cheques was relatively well known and common - it was never legally protected in any form as the date on it was supposed to be the date you signed it - and there was never any onus on the bank (or receiver of the cheque) to hold payment until that date. – Rycochet May 31 '18 at 09:21
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    Post-dating never actually meant anything. A singned cheque is valid immediately and ceases to be valid six months (in the UK, at least) from the date on it. So writing a cheque dated, say, a month in the future just allows the recipient seven months to cash it instead of six. – David Richerby May 31 '18 at 17:27
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    Post-dating has always been more of an "honor system" thing. It's just a way of letting the recipient know that if he cashes the check too soon it will probably bounce and he won't get his money. – Barmar Jun 01 '18 at 00:21
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    Post-dating a cheque in Canada seems to be 'legally' binding as in the banks agreed to rules that don't allow them to pay out the funds before the date specified on the cheque. If they do, the cheque writer can ask for the money back https://en.wikipedia.org/wiki/Post-dated_cheque#Canada – user2705196 Jun 01 '18 at 13:28
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    Simply post-dating the check may not be effective, but checks can be marked with additional disbursement requirements. "Void after" is the most common that I've seen, followed by "deposit only" and "endorsement required". "Not valid until" would likely be honored as long as the processing system noticed the irregularity, but banks tend to start charging the check writer extra fees when a human being has to actually look at it. – Perkins Jun 04 '18 at 20:27
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    Here in Israel a bank will refuse to deposit a post dated cheque until that date. They do supply a service (at a fee, of course) where you can deposit the cheque and they will credit it on the specified date. – theblitz Jun 05 '18 at 22:16
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Lots of answers, but none that focuses on the example presented by the original poster:

Suppose there is person A who gives another person B a check for $100,000 in exchange for something expensive in a shop. How can B be sure that A has the money and it's not a scam?

If someone gave me a check for $100,000—nowadays or in the past—I would hold onto the item they are paying for until that $100,000 check has cleared. No exceptions.

Anyone spending $100,000 much who wants something “Now!” yet they cannot provide cash, credit or a cashier’s check (bank check) is attempting to scam someone. Or they are insane; same difference as far as my personal liability goes.

And based on that fact, you need to understand where credit comes from: Reputation. If you have a solid financial record and have little to no debt, guess what? You have good credit! The fact you pay your debts is the reason a company will then allow you to purchase things on credit.

Now if you are a small merchant? Others have discussed this, but unless you are really hard up for cash, you will not risk bouncing checks for small amounts. The long term damage to your financial stability is much more risky than the amount you might be able to “con” away from a scam like this.

Giacomo1968
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    The check can "clear" and still bounce later. For example, a cashier's check will typically clear overnight, but if if it's counterfeit, the bank it was purportedly issued against can still refuse to pay it. – Michael Geary Jun 03 '18 at 20:43
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The simple answer is that you don't know that you'd get paid, just as you don't know that you won't get mugged and have your cash stolen, or have someone steal your credit card and run up a bunch of charges. But all these things are crimes (in the US, at least), and someone who does them faces the prospect of fines and possible prison time. (With checks, if it's just accidental, you'd only get a significant "bad check" fee from your bank...) As others have mentioned, for large sums there are things like cashiers' checks that are guaranteed. Though people do occasionally write fairly large personal checks, e.g. this one for a divorce settlement: http://money.cnn.com/2015/01/09/luxury/billionaire-divorce-check-cashed/index.html

Really, it just comes down to the fact that most people are fairly honest - either inherently, or because they recognize the consequences of dishonesty. Credit cards really aren't much different: I could easily run up $100K or so in credit card purchases, then just not bother to pay the bills. Though I think it would be the card issuer that would suffer the loss, not the merchant.

jamesqf
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    I'd venture that credit cards are a bit different - If you write a bunch of bouncy cheques, you have several small shop owners and restaurant managers chasing you for minor amounts of money. Chances are most will write it off. If you run up a credit card bill and don't pay, the merchants are all refunded but you now have a single, large credit card firm, with a specialised debt-recovery department on your tail. – Oscar Bravo May 31 '18 at 06:43
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    @Oscar Bravo: OTOH, if you write a bunch of bouncing checks, you're likely to have your local police department on your tail :-) E.g. https://www.washoecounty.us/da/Departments/fraudcheck.php – jamesqf May 31 '18 at 17:27
  • And it should be noted that the credit card fees the shop owner has to pay can easily be far higher than his losses from people simply not paying for what they buy. It's like really expensive insurance, and your premium increases if your customers cheat too often anyway. – Luaan Jun 06 '18 at 08:20
  • Also, if someone steals your CC (or its information) and runs up a bunch of charges on it, you can contact the issuing bank, explain that the charges were unauthorised, and have them reverse the charges (and brick the card, if necessary). – Vikki Jun 08 '18 at 13:54
  • @Sean: But that just passes the cost of the bad charges on to the credit card issuer, which has built them into is overhead, so everyone who uses or accepts the card pays part of the cost. – jamesqf Jun 08 '18 at 18:06
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There are still countries using cheques today; they are still common in France for example, and every time I've gone to the supermarket there I've seen people (generally older) using cheques to pay.

There is generally no guarantee for the vendor, when paid with a cheque, thought they have a few recourses:

  1. It is illegal to pay with a cheque without having the money, so the law is on the vendor's side and they can recover it (though at some cost).
  2. Banks have no obligation to issue cheque books to their clients, so clients whose cheques are bounced too many times will not be issued cheque books any longer.
  3. In France at least, vendors will usually ask for 1 or 2 forms of ID, which they check against the cheque, and write the details at the back of the cheque to protect against fraud claims (my cheque holder was stolen!).
  4. For larger amounts (> 1,000 €), cheques are refused.

I would note that cash has similar issues (counterfeit money), yet is still accepted in most places. And while credit cards are more secure, they incur vendor fees.

Dmitry Grigoryev
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Matthieu M.
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    4: Checks may not be refused, but the item will not be released before the check clears, which can take a week or two ;) So you can pay a new car by check, just do not expect to get posession of it immediately. – TomTom May 31 '18 at 08:33
  • I would disagree about credit cards being more secure. Perhaps for the vendor, but they open up whole new avenues for fraud. basically most of what's miscalled "identity theft". – jamesqf May 31 '18 at 17:46
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    @jamesqf Actually, credit cards provide a lot of protection for account owners - they are almost never liable for the fraud if they respond in a reasonable time. Frank Abagnale was mentioned above - he said in a 2017 talk at Google that he only carries a credit card for personal use, and never a debit card, because of the protection it provides. – brichins May 31 '18 at 19:24
  • Did you mean "clients whose cheques are bounced too many times will not be issued cheques any longer"? Not sure how relevant it would be if they have something to put it in. In any case, #2 probably has not been useful for a long time, at least as long as you have been able to purchase checks from anywhere besides your bank. –  May 31 '18 at 22:20
  • @brichins: The card holder and perhaps the merchant are protected against credit card fraud, at least to a considerable degree. That doesn't mean that fraud doesn't happen, it's just the card issuer who takes the hit - and of course passes the cost on to the customers. (And I don't use a debit card myself, not because I'm worried about fraud, but because I get better cash back &c.) – jamesqf Jun 01 '18 at 04:05
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    @Michael: Sorry, bad translation. I meant "cheque books". – Matthieu M. Jun 01 '18 at 06:36
  • In France, most supermarkets have machines that checks are run through; I have always presumed that they did basic checking against the blacklist published by the French central bank (I'm fairly certain they don't check the balance). – Law29 Jun 05 '18 at 09:19
  • @jamesqf My understanding is that the card issuer pulls the money back from the merchant because the charge was fraudulent, since the issuer has no agreement to pay for purchases of anyone who is not the card holder. The merchant therefore ends up without their product or the money. – brichins Jun 07 '18 at 05:13
  • @TomTom True. Sellers which have to provide a customer with purchased goods immediately (e.g. grocery stores) will refuse cheques for much lower amounts (> 100€), while car sellers accept much bigger cheques, but you typically get your car in one week or so. – Dmitry Grigoryev Jun 07 '18 at 06:48
  • @TomTom: I'm having trouble seeing how a several-day wait wouldn't be the case even with other methods of paying for the car... – Vikki Jun 08 '18 at 13:50
  • @Sean Really? Bank transfer prepaid, finished. Put cash on table of seller, finished. Both do not require waiting periods as the seller is sure to have the money. – TomTom Jun 08 '18 at 13:56
  • @TomTom: I was more thinking of the stuff that needs to be done with the car itself (getting it checked out by the mechanic, fuelling and oiling it, topping up the tyres, installing the interior selected by the customer, registering it, pressing and programming the keys for it, checking the internal computers for software updates, pairing the immobiliser with the new set of keys, painting and drying the car, [un]installing any optional components, transporting the car to the customer's selected address, etc., etc., etc.) that would impose a multi-day wait regardless of the method of payment. – Vikki Jun 08 '18 at 14:08
  • Not really. Been there - buying a car 900km away. Went in day 1 wih a colleague (so we had 2 drivers, picked up car in the afternoon, drove home next morning. Car had transfer number plates prepared (changing country) and came with an independent mechanic certifying the condition. – TomTom Jun 08 '18 at 14:16
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Law, particularly criminal law

Bouncing a check is a crime. When buying merchandise at retail, the retailer will swear out a complaint! Even for a little one, lest word get around that they don't enforce. First time, a cop will call you and say "settle this today or else". Third time, they won't call, they will put out a warrant and you are a fugitive. You are going to jail.

That... Is why the retailer wanted your driver license number. So he could put it on the police blotter.

If you're thinking "my atm card declines all the time, I'd bounce checks that often!" No. The checkbook has a check register where you log each check, debit and deposit, so you always knew what you had. Auto-debits didn't exist, so they weren't throwing grenades into your checkbook.

If you bounced one, the bank would call, you'd contact the seller and got in front of it. It's what you did.

Also in my day, 95% of checks were to pay mailed bills like the electric bill, where you already have a limited line of credit. In those cases, they choose not to treat it as a crime, just a failed payment. Make another payment by the due date, you are golden except for the bounced check fee. Otherwise the normal late fee also applies.

Don't underestimate the importance of the fact that check law has been maturing for 200 years. The law ( police, courts, civil litigation ) know exactly what to do with paper check fraud of every kind. They've seen it all. They know when it's a crime, who to blame, and who carries liability. In particular, hundreds of years of case law - it's unlikely for any "new case law" to be developed around paper checks simply because everything that could happen has happened. Contrast to electronic payments case law, which is only now starting to be written, and things like Experi-Metal v. Comerica can suddenly change the game.

Know Your Customer

The world was a bit smaller and most check transactions were small and/or with "regulars" - people the retailers knew. And retailers sized up whether they'd take a check on that basis. Wasn't always fair.

But yeah. We have taken 5 digit checks from people we knew, and knew the transaction was typical for them. Springfield ISD wants another $50k of Macs, okay... Green Hills Country Club, no way.

Harper - Reinstate Monica
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  • "The checkbook has a check register where you log each check, debit and deposit, so you always knew what you had." Assuming, of course, that you never made a mistake somewhere along in the plethora of additions and subtractions... – Vikki Jun 08 '18 at 13:57
  • @Sean that leads to the other ritual of owning a checkbook, the monthly reconcile against the mailed bank statement; or simply asking a teller if there's any reason to doubt. I've never made a math mistake over $100; I know people make mistakes with abstract, meaningless math in school, but this is your money. When your money is at stake, nobody makes a mistake like $8861.55 - 431.14 = 4550.51... when half your money evaporates, you notice. – Harper - Reinstate Monica Jun 08 '18 at 14:04
  • ...which means that, if you do make a mistake, you have up to a whole month before going "hey, why are the chequebook and the statement $95.31 off from each other?". – Vikki Jun 08 '18 at 14:13
  • @Sean correct, but infrequent. And far above carrying around rubberbands of banknotes and gasp mailing them. But even then, a checkbook gave you something just unavailable in the modern e-debit world: actual responsibility for your money. You knew every cash in and cash out because it flowed from your pen. You had actual control of your money, not just a bunch of automatic systems whizzing money every which way. You were the driver of your checking account not the passenger. – Harper - Reinstate Monica Jun 08 '18 at 14:30
7

There were many ways, but in the end, you don't actually know.

  • List of bad accounts - Most people that accepted checks also had a system to check for a list of known bad accounts. You could get banned from using checks, or even banned from ever shopping at that store again, should you write a bad check. Once you have written a bad check it can be hard to get your checks accepted. As this list grew more and more companies used it, until writing a bad check at the tire shop could me not being able to use checks at the grocery store. An example is the "ChexSystems" reporting system: See Check First.
  • Calling the bank. To this day, you can call a bank with an account number and ask if that person has enough to cover X amount of money. So you would Call "Does Bill Smith, account number 1234567 have $400 to cover this check"
  • Honor System. To be frank, people were just more honorable and accountable. You wrote a bad check at your local diner then you would have to face the waitress you stiffed next time you went. It was not ok to write bad checks. At least around here the "you owe me" and "let's screw the "man"" sensibilities are very new. More and more this is, IMO tied to the decline of small business. You didn't write a bad check at the produce stand because you didn't want them writing bad checks at your tire shop.
  • Legal action. Writing a bad check can be a criminal offense. And it can often time trigger odd consequences. All of the sudden that bad check at the car shop is now a federal crime because the home office of the shop and your bank are in different states. Many states have laws like "After 30 days you get twice the amount of the check plus attorney fees" That could make your $45 bounced check have you in debt for thousands. In FL for example you could get 5 years in jail.
Harper - Reinstate Monica
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coteyr
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    Regarding the Honor System, I think the point is actually the word "local". In a small community, word of mouth and reputation can indeed be a potent force. – MauganRa Jun 04 '18 at 11:45
  • I thought the reason cheque fraud was a federal crime was that banks were federally-insured institutions? – Vikki Jun 08 '18 at 13:59
6

You said "without computers", but the general case with them is still interesting.

In the US, since 2004, there is a system called Check 21 that allows businesses (and maybe individuals?) to scan and instantly process checks, in much the same way that debit transactions are processed. This alleviates most, but not all, of the types of issues you are worried about.

TREE
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UK: Our window cleaner still gets a cheque. He doesn’t know if we have the money, but he knows where we live.

gnasher729
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In Germany, cheques were usually guaranteed by the bank up to 400 DM per cheque. Cheques fell out of use around 2000.

J Fabian Meier
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    If I remember it correctly (I was very young back then), that guarantee worked only in combination with a "cheque guarantee card", like Vicky mentioned it in their answer. – mastov May 31 '18 at 10:43
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For transactions involving transfer of valuable assets and a lot of money, such as real estate, a process known as "escrow" is used. Escrow is a process where a disinterested third party, who is paid for their services, collects all the documentation and money from both the buyer and the seller, holds it until it's shown that everything necessary has been delivered, signed, etc, and then delivers the money to the seller, gives the deed and any other necessary documentation to the buyer, notifies the governmental agency which records property transfers, etc, etc, so that the property is properly transferred, the seller is paid, and so forth. When it comes to transactions such as these there is actually very little "trust" involved - the escrow process which has been developed over many, many years has replaced "trust" with procedures which are intended to guarantee that the transaction is completed properly.

Bob Jarvis - Слава Україні
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How did people deal with checks before computers and other things that made it easier to verify?

The same way they handled the precursors to checks, which were promises to pay. Kind of like running a tab at the bar, that privilege is reserved for trusted parties or those so well known that the hit to their reputation would be more damaging financially than the amount being floated.

Imagine you live in a area where everyone knows where everyone else lives. We know your address, what job you have, and roughly how well you're doing financially. There's no such thing as checks. You stop by the store, want to purchase some items and won't be coming into "town" for another week, but aren't carrying negotiable instruments with you and don't have the time to get them for the purchase now. What happens? Well, if you're well known, with strong ties to the community, and have been honest in your dealings in the past, and the store can tolerate not having payment for a week or two, the store may decide to record your debt in their books with the expectation that you'd pay it later. If you didn't pay, you may expect a visit later from the authorities or you'd find yourself blacklisted not only from the merchant you stiffed, but using such services at a wide range of other merchants.

So, given that you need to live and trade with these people, you are established in the community, moving somewhere new would be problematic, not to mention much more expensive than whatever it was you wanted to buy, why would you skip out on the debt? Or even take it on if you had a strong likelihood of not being able to cover it?

But this system is problematic. It requires you to physically come back to the town with the money (potentially dangerous) or go to the bank, withdraw the funds, then pay the merchant (time consuming). And the merchant is essentially giving everyone who takes advantage of this an interest free short term loan (not necessarily good business).

The next month, the banks announce a new innovation - the "check". Which is now a piece of paper that when presented to the bank, results in a transfer of funds from the payer's account to the payee's. This reduces the amount of time the merchant needs to float funds from days/weeks/more to just business days. This removes the need for the customer to return to town, which saves them time. But it changes nothing else. You still only conduct such transactions with people you trust or people you can leverage into paying up.

If anything, the ability to defer trust to an electronic system is likely what enabled even more fraud. Since you don't need to exploit personal connections and trust, the threshold to scam someone is much lower.

So, TLDR - this worked due to tight communities and some amount of trust which predates the invention of checks. For you to pass a fake check, you needed to be able to execute a confidence scam - convincing someone you were trustworthy or person of importance/reputation, or convince someone who already has those qualities to either vouch for you or put up their own money while accepting your worthless check.

iheanyi
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  • +1, though I'd caveat that there is a distinct advantage to the merchant of giving customers an interest free loan: It encourages business. If you use a credit card, the clearing house charges the store a fee, typically around 2 or 3%. So why should the store accept a credit card and pay this fee rather than demanding that all customers pay cash? Because they know that people are more likely to buy if they have the convenience of using a credit card. – Jay Jun 02 '18 at 20:03
  • @Jay It's worth noting that for most businesses running with cash isn't free either (you have the cost and inconvenience of running a float, cashing up, etc, while making yourself a tempting target for robbery or employee theft). – origimbo Jun 04 '18 at 14:23
  • @origimbo Sure. I used to be treasurer for a non-profit organization. I remember once going to the bank with $30,000 in cash and checks in my briefcase, and as I walked across the parking lot, I thought to myself, this would be a really bad time to get mugged. – Jay Jun 04 '18 at 14:33
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    In places such as farming communities, where cash was a scarce commodity that was available only every few months when something was harvested, stores had to carry customer accounts "on their books" or they'd have no business. My daughter found an old ledger-book from the store run by my wife's great-to-the-Nth-grandparents, and it's kind of interesting to go through and see each purchase recorded neatly, along with the running balance for that customer. Every once in a while someone would come in to pay off their balance, and then there'd be a notation with a zero balance. Happy day! :-) – Bob Jarvis - Слава Україні Jun 08 '18 at 14:35
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You Don't

A personal check can be cashed for up to the amount written on it (so in your example, if the writer of the check had $4,000, you could clean out their account by cashing it, but would not be able to get more than that), but generally speaking, if a check is written for more than the writer has in the account, upon cashing it will 'bounce' and the person cashing the check will not receive anything.

Bouncing a check usually carries a penalty or fee as well as potentially earning yourself a blacklist from certain shops (I falsely assumed that bouncing a check would also hurt your credit, but @ThePhoton set me straight). As an individual receiving a check from another individual, you are essentially out the money, and will have to take legal action to recoup either the money or the item you sold.

Bob Jarvis - Слава Україні
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GOATNine
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    Bouncing a cheque is also a criminal offence in some jurisdictions, which is a further deterrent to writing bad cheques. – Mike Scott May 30 '18 at 11:59
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    Bounced checks aren't considered by the major credit bureaus for determining credit score in the US. They are tracked separately by a different company, ChexSystems. – The Photon May 30 '18 at 16:50
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    @ThePhoton Thanks for the heads up, I'll edit that in – GOATNine May 30 '18 at 16:54
  • The law around checks goes back hundreds of years. Bouncing a check is itself a crime (misdemeanor meaning jail time is on the table) and the underlying intention to defraud is also a misdemeanor or felony (jail time probably). Crimes the DA will be happy to overlook if it looks, walks and quacks like a plain error, as indicated by bouncer reaching out to the merchant to square things. – Harper - Reinstate Monica Jun 08 '18 at 14:51
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As already stated, you don't know in advance if a cheque will clear - it is a paper promise to pay, and is only as good a promise as the customer's word. Vendors will more readily accept cheques when the vendor has recourse of some kind - the goods sold can be readily repossessed (like a car), the tenant can be evicted (apartment etc. rentals), a lien can be placed on the customer's home or car (repairs, etc.), or there is enough time from payment to delivery to cancel the transaction (such as a deposit on a car purchase). Businesses will also accept personal cheques from customers with whom they have had reason to build trust.

Vendors often refuse personal cheques in situations where there would be significant finanacial exposure. They will usually require cashier's cheques, certified cheques or bank drafts (all amount to the same thing) - placing trust in the issuing bank rather than an individual.

Example: I just sold my car privately - I required the buyer to pay by certified cheque or bank draft before I signed over the ownership and handed him the keys. I would have been foolish to accept a personal cheque.

But... if a family member was giving me money for whatever reason - gift, purchase of something, etc., I would accept a personal cheque because of the trust present in the family relationship.

Anthony X
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