The original idea of a clearing house was an institution designed to facilitate the settlement of daily balances due to and from a number of banks. It is thus a labor saving device, arising from the payment of checks on each other, and the transaction of other business. It would be almost, if not quite, impossible to transact the volume of business which daily passes through our banks were it not for this ingenious institution. In the New York clearing house alone the daily clearings frequently run above $300,000,000, and this vast volume of business is settled by the payment of about five per cent. of actual money as balances. The scheme of the clearing house is merely to offset one debit against another credit. Were there but one bank in New York, no clearing house would be necessary, since the debits and credits would be offset against each other on the books of the bank and one indebtedness would cancel another, to a large extent, but where there are numerous banks and vast numbers of checks to be settled, the clearing house effects an enormous saving by bringing them together. The clearing house with its gigantic operations cancels obligations arising between banks, the same as the banks do for the individuals composing a business community.

The use of checks and drafts in the transaction of business has grown in this country to a very wide limit, much in excess of their use in any other country, and as the United States becomes older and better banking facilities are provided, people are gradually educated to the use of commercial paper, and the volume of actual money - coin or paper currency - as compared to the volume of business transacted, grows proportionately less. The increase in the use of checks and drafts has more than kept pace with the increase in the volume of business of the country, hence the volume of actual cash in circulation has grown proportionately smaller. Again the proportion of checks and drafts to money is less in the parts of the country distant from the money centers and in small towns where banks are scarce. Such communities need more money in proportion to the volume of business done, and must have the ready cash in hand to cover the numerous small transactions occurring. But in the large cities and great money centers of the country substitutes for money in the form of commercial paper are more extensively used, and the transfer of credits upon the books of the banks constitutes the method of payment in a large proportion of instances. The clearing house encourages and facilitates the use of substitutes for money by furnishing a safer and more convenient method for settling exchanges between banks.