Use of Checks and Drafts

History

Bank Clearing House:

The first clearing house was organized in London about 1775, and for three-quarters of a century it and the one established in Edinburgh soon after remained the only organizations of the kind. Prior to the establishment of the London clearing house the Bank of England served as a means of making settlements, and besides the people were not accustomed to the use of bank checks in making payments, as at the present time. The New York clearing house was established in 1853, Boston in 1856, Philadelphia in 1858, and Chicago in 1865. The clearing house is therefore a comparatively recent institution. Every considerable city where banks are numerous now has its clearing house, and the total annual clearings of the United States mount up to fabulous figures.

A room of suitable size to accommodate the volume of business, quiet and centrally located, is the first consideration. The furniture consists usually of a counter or desks over which the settlements are to be made. Each bank, member of the association, sends to the clearing room at the precise hour appointed two clerks, one of whom holds the exchanges of the previous day, including also items received in the morning's mail. These are all listed and those against each bank kept separate. At the tap of the manager's bell a clerk from each bank takes his position behind the counter and opposite him his companion from the same bank. A given signal and all of the clerks outside the counter move forward to a point opposite the next clerk, pass the exchanges belonging to the bank represented by that clerk over the counter, take a receipt for them, and then with a concerted movement all pass to the next. When the clerks on the outer side of the counter have made their rounds and delivered their exchanges they return to their several banks, carrying with them the checks received from other banks, while the settling clerks remain to cast up the columns and ascertain whether their several banks are debtor or creditor, whether they are to receive or must pay a balance into the clearing house. As each clerk completes his calculations he reports the result to the manager, and when all have finished, and the totals agree, the clerks are dismissed.

The total of the debits against the debtor banks must equal the total of the credits in favor of the creditor banks, on the theory that every debit has a corresponding credit. A bank cannot know until its settling clerk returns whether it has a balance in its favor or is owing the clearing house and how much. It may be a creditor one day and a debtor the next. Its officials naturally hope for a favorable balance, for that indicates a temporary increase in its line of deposits. But if the balance is against the bank it must be prepared to meet it promptly at the appointed hour. The payment of balances by the debtor banks takes place at perhaps an hour after the exchanges have been made, a receipt being taken in every case in the regular way. Messengers from the creditor banks call later to receive the balances due their banks. The kind of money used in the payment of these balances is regulated by the rules of the associations, but is usually gold coin and currency. Silver is permitted in restricted quantities in some associations, but owing to its bulk it is not well suited to large payments. The rules of some associations require the money paid in to be assorted and put up in packages of $5,000, on which is marked the number of the bank, as a guarantee of the correctness of the count.

The management of a clearing house association is usually vested in a board of officers consisting of a president, vice president, secretary, treasurer, manager and a clearing house committee. In small cities this list of officers is sometimes curtailed by omitting the office of vice president and secretary and combining the duties of the latter with those of manager. The duties of the officers are such as usually appertain to similar offices in corporations, with the exception of the manager, who has charge of the clearings and is the principal executive officer of the association. The clearing house committee is usually composed of three of the most capable bankers in the association, elected annually by the members. This committee has almost absolute authority, being in effect a board of directors. It decides upon the admission of new members, suspension of members when expedient, makes rules for the management of the association, and in general directs its business.

While the first and primary object of a clearing house is the settlement of exchanges between banks, its functions are not confined to this. By association many benefits have been derived by the banks not contemplated in the original intent, and the tendency has been, in recent years, to include in the scope of the clearing houses many questions of policy and practice affecting the banks and the business community. The most important functions of the clearing house, beyond that of effecting exchanges, is summed up by Cannon in his "Clearinghouses," as follows: "1. The extending of loans to the government. 2. Mutual assistance of members.' 3. Fixing uniform rates on deposits. 4. Fixing uniform rates of exchange and of charges on collections. 5. The issue of clearing house loan certificates." In case a member is found to be in financial straits owing to a panic or false rumor, causing a run of depositors, and is unable to convert its assets into cash with sufficient rapidity to meet its demands, the clearing house committee will examine into its condition, and if its assets are found to be ample and good, and its management not seriously defective, it will extend temporary aid until the strain is relaxed. If the member, however, is addicted to objectionable methods in management the committee will not go far out of its way to lend saving help, preferring to get rid in this way of a weak and ill managed member.

By fixing the rates of interest on deposits, rates for collection and exchange, etc., the committee takes away the incentive of banks to compete against each other in these particulars - a practice which might lead to improper and unsafe banking. Rate cutting is especially objectionable in the banking business. But probably the most important function exercised by the clearing house is the issuance of loan certificates. These are given for temporary loans, usually consisting of good assets, made by members to the association and are receivable for balances due to other members. The first certificates were issued by the New York clearing house at the opening of the Civil War, and were necessitated by the general decline and shrinkage in bank deposits and loans consequent upon the uncertainty attending the election of Lincoln to the presidency. The New York clearing house met and passed the following resolution:

"In order to enable the banks of the city of New York to expand their loans and discounts, and also for the purpose of facilitating the settlement of exchanges between banks, it is proposed that any bank in the Clearing House Association may, at its option, deposit with a committee of five persons - to be appointed for that purpose - an amount of its bills receivable, United States stocks, treasury notes or stocks of the State of New York, to be approved by said committee, who shall be authorized to issue thereon to the said depositing bank certificates of deposit bearing interest at seven per cent. per annum, in denominations of $5,000 and $10,000 each as may be desired, to an amount equal to seventy-five per cent. of such deposits. These certificates may be used in the settlement of balances at the clearing house for a period of thirty days from the date thereof, and they shall be received by creditor banks during that period, daily, in the same proportion as they bear to the aggregate amount of the debtor balances paid at the clearing house. The interest which may accrue upon these certificates shall, at the expiration of thirty days, be apportioned among the banks which shall have held them during the time."