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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXVII

Commerce and Finance - Chapter XXVII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII


The original idea of a clearing house was an institution de-
signed 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
object which daily passes through our banks were it not

for this ingenious institution. In the New York
clearing nouse 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 busi-
ness 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
ami Drafts** 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.

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 Jhe present time. The New

York clearing house was established in 1853, Bos-
History ton in 1856, Philadelphia in 1858, and Chicago in

1865. The clearing house is therefore a com-
paratively 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

A room of suitable size to accommodate the volume of busi-
ness, 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
clearing** ^ 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 coun-
ter and opposite him his companion from the same bank. A
given signal and all of the clerks outside the counter move for-
ward to a point opposite the next clerk, pass the exchanges be-
longing 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
^ave ^ eeu ma de, 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 guar-
antee 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 presi-
dent, secretary, treasurer, manager and a clearing house commit-
tee. In small cities this list of officers is sometimes curtailed
by omitting the office of vice president and secretary and com-
bining the duties of the latter with those of manager. The
duties of the officers are such as usually appertain
Management to similar offices in corporations, with the excep-
tion of the manager, who has charge of the clear-
ings 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 admis-
sion of new members, suspension of members when expedient,
makes rules for the management of the association, and in gen-
eral 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 prac-
Functions tice affecting the banks and the business com-

munity. 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 uni-
form 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 clear-
ing 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.
Eate 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 ^lances due to other members. The first cer-
tificates 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 certifi-
cates 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 aggre-
gate 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."

Several times during the Civil War the New York clearing
house resorted to the use of certificates as a means of relieving
the financial stringency, and the effect in each case was decidedly
beneficial. Banks were thus enabled to discount commercial
paper and make loans to relieve business firms which were per-
fectly safe and solvent, but in distress, and the business situation
at once felt the brightening effects of the policy. Clearing house
certificates to the extent of $22,000,000 were in circulation among
the banks of New York in 1862, and this was equivalent to a vast
increase in the volume of money in circulation. Again during
the panic of 1873 the same course was pursued and about $26,-


000,000 in certificates were issued by the New York clearing
house. Other cities seeing the benefits of the system, adopted
it, and issued certificates for temporary relief, thus greatly reliev-
ing the severity of the memorable panic of 1873, which extended
over the entire country and resulted in severe hardships.

In 1893 a panic of unusual severity spread over the United
States. Banks were forced to close and business houses were
pushed to the wall. Under the restrictions of the national bank-
ing law it was impossible to secure relief by an increase in national
bank notes in time to save the people from the dis-
panic of 1893 asters which follow in the wake of a financial storm.
Banks in the small cities and towns drew heavily
against their deposits in the large cities and money centers,
especially New York, and it became necessary for the financial
institutions, chiefly in New York, to find a means of staying
the force of the panic. The most potent factor in this relief
was the clearing house certificates issued by the associations of
New York and other cities. Forty-one million dollars of these
certificates were issued by the clearing house committee, based
upon the deposits of securities by various banks of New York.
Other cities pursued the same plan, and the amount of bank
money was thereby suddenly increased throughout the country
to the extent of perhaps $150,000,000, greatly to the relief of
business interests generally.

What is and what is not proper matter for clearing depends
upon the rules of each particular association, and these are by
no means uniform on this point. The following paragraph ap-
pears in the rules of a western clearing house: "Proper matter
for clearing shall consist of checks, drafts, manager's certifi-
cates, certificates of deposit, either demand or ma-
tured, and any other matter specially agreed upon,
until notice is given to the contrary, and any bank
clearing paper not proper shall be fined." In some associations
notes and drafts are not sent through the clearings, while


in others they may be cleared. The general rule seems to be
that only such items as upon their face are unconditional de-
mands upon a bank, for payment, are proper material for clear-
ing. Some associations keep near this rule, while others seem to
broaden it to the full limit of expediency.

The clearing house associations in a number of the large
cities have enacted rules forbidding matter to be cleared which
bears a restrictive endorsement. It was formerly the custom
for depositors to endorse "For Deposit," "For Account of," "For
Collection," etc., above the name of the depositor,
Endorsements thus ^tending to transfer possession but not title
to the paper. This is now forbidden, as a measure
of self-protection, by many large associations, unless the clear-
ing bank specially guarantees the paper. Paper then to pass
through the clearing house should be endorsed either in blank
or full, as "Pay or order." Before sending its ex-
changes to the clearing house, each bank stamps a receipt upon
the back of each item, with its number, and the words, "Ee-

ceived payment through the clearing house." or

otherwise, as the rules of the association prescribe. This in-
dorsement though made unofficially and by means of a rubber
stamp, is regarded as authentic, and guarantees all previous
indorsements After the clearings are made, items which are not
honored by the bank on which they are drawn are returned by
messenger and "bought back" by the bank through which they
were cleared.

Banks and trust companies not members of the clearing house
association may clear through a member-bank, but the latter is
liable to the association for such exchanges the same as for its
own, and they usually exact proper security as well as compensa-
tion from the bank or trust company for performing the service.
In Boston the clearing house association has put in operation a
system for collecting checks on out-of-town banks which is
certainly a material saving in expense as well as labor. Instead


of each bank collecting its out-of-town checks, these are all sent
to the clearing house at a fixed hour daily and there assorted by
towns and banks. All of the checks on each country bank are
then li^ed and forwarded to that bank in one


and country package. This is a decided advantage also to the

country bank, since payment can be made to the
Boston clearing house for all of these checks at one time, in-
stead of having to remit to several different banks. The remit-
tances are then put through the regular clearings by the
manager of the clearing house, very much the same as other

No doubt the clearing house, which was originally intended
merely as a labor and time saving device, and which has since
developed into an important factor in our financial system,
assuming new functions from time to time, will further expand
and add to the efficiency of the financial machinery of our
country. In his valuable treatise on clearing houses, Mr. James
G. Cannon, president of the Fourth National Bank of New
York, says: "Clearing houses are gradually becoming a welding
force that ultimately will bring to the banking business of this
country the centralization which it so greatly needs. In the
clearing- course of time rates for money in the United States

houses of the will become more and more on a par with those
prevailing in European money centers, and then
the clearing houses of the various financial centers of this country
will be obliged to undertake functions which as yet they have
only discussed."

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