31st May 1728

Royal Bank of Scotland invents the overdraft

Prior to 1728, it wasn’t possible to legally withdraw more money from a bank than you had in your account. That changed on the last day of May when the Royal Bank of Scotland devised the overdraft.

On that day, it allowed one of its customers, William Hogg, to withdraw £1000 that he hadn’t yet earned on the understanding that he would pay it back at a later date.

A financial game-changer

Lending unearned money is now the basis of the global financial system. It allows banks to keep back a small proportion of the total deposits they hold, and invest the rest in businesses, mortgages or loans.

When the debtors pay back the loan, they are charged a rate of interest so that, over time, they end up paying back more than they borrowed. This surplus represents the bank’s earnings. It can be kept by the bank as profit, re-lent, or paid to customers with a positive balance in their account in the form of credit interest.