If you've ever forgotten your password on Google, and you try and reset it, it asks you for the last password you remember
Does what you input besides your original password effect the next screen.
If it does, surely Google hashes its passwords so how can it check if a password is close.
Im am sure that Google does not store your plain password. They do (they have to, actually) store your password encrypted. When you enter your "previous" password, they encrypt it and compares to what they have stored in the DB.
Hope this makes sense.