This section is from the "Practical Banking" book, by Albert S. Bolles.
Closely connected with the general subject of banking is that of the Clearing-house. This is a comparatively modern institution, the; Edinburgh bankers claiming the credit of establishing the first one. The earliest of whose transactions we have any record, however, is that of London, founded in 1775, or earlier, and of this little was known to the public until it began to publish regular statements of its transactions, May 1st, 1867. The literature on the subject is almost wholly the creation of the last thirty years. Works on banking and political economy, of an earlier date than this, rarely, if ever, notice the subject at all. For more than three quarters of a century after its establishment the London Clearing-house and that of Edinburgh remained the only organizations of the kind known to exist. The monetary systems of most European States, centering around a single great bank, located at the capital of each, found in this a means of effecting mercantile settlements. Furthermore, the use of bank checks in making payments, which chiefly creates the need of the bankers' Clearing-house, has in recent years attained a development previously unknown. The growth of of American banking, decentralized and distributed among many banks, and the increasing use of bank checks as a means of payment, gave birth to the next Clearing-house in the order of time after that of London. The New York Clearing-house was established in 1853, from which date the growth of the Clearing-house system in the United States has been stupendous. Boston followed in 1856; Philadelphia, Baltimore and Cleveland in 1858; Worcester in 1861; Chicago in 1865, all the others are of later date. At present there are thirty-one Clearing-houses known to exist in this country. Each of our prominent commercial cities has one. The United Kingdom has six, Australia one, and they are found in France, Germany, Switzerland and Italy, though checks are so little used on the Continent of Europe that the Clearing-houses of the ( last four countries have comparatively small transactions. The exchanges of American Clearing-houses were $51,827,000,000, in 1883, and in 1881 reached a maximum of $63,414,000,000, adjusted by the payment of balances not exceeding six per cent, of the amoun cleared, the actual cash handled being estimated at about two per cent, of the clearings. From the inauguration of the Clearing-house system in 1853 to December 31, 1883, it had effected settlements amounting to about $880,000,000,000, by paying balances of about $57,000,000, or 6 1/2per cent. of the clearings. The amount of actual cash handled was very much less than this, as balances are to a great extent paid by means of checks or certificates issued from some common depository, without handling actual cash. The Clearing-house is, therefore, one of the most useful agencies called into being by the wants of modern commerce. It is among the most interesting features of our financial mechanism and well worthy of careful study. Susceptible of almost indefinite expansion, the clearing system in its various forms holds in possibility the solution of problems which have long engaged the attention of thinkers.
A glance at some of the more common banking operations will suffice to show the need of a Clearing-house wherever any considerable number of banks are located in the same vicinity. Mercantile establishments are constantly receiving in the course of business not only specie, but usually, to a much larger extent, bank notes, checks, drafts, or other mercantile paper. To present this paper at the counters of the various banks at which it is payable would take a great deal of time. The dealer, therefore, deposits it in the bank with which he keeps his account, where, either at once, or at latest when collected, the amount is placed to his credit and goes to swell his balance. This is the usual way in which a bank receives the paper payable at other banks. It may also be taken in payment of notes payable at the bank receiving it. Although bank notes, as well as the various kinds of mercantile paper, are so received, yet the great bulk of all such receipts, especially in the large cities, consists of checks. When the paper in question is payable at the bank receiving it, the transaction is closed by the simple delivery in the case of bank notes, and in the case of checks by charging them to the drawer, the result being, in the latter case, a simple transfer on the books of the bank from the account of the drawer to that of the drawee. Where most of the transactions of a community center in a single institution, as formerly in the case of the Bank of England, and at present in the case of the Bank of France, the larger part of the check transactions may be settled in this way. Thus at Paris where the Bank of France performs the functions of a great Clearing-house, its clearings or transfers reached $6,008,243,900 in 1883, as compared with $813,238,000 at the Paris Clearing-house. In 1881, the clearings of the Bank of France reached $8,772,000,000, while those of the Paris Clearing-house were only $908,600,000, the former being nine and three-fourths times the latter. To make provision for this class of business, the Bank of France furnishes special books of red colored checks—so-called, "dons de virement rouge"—the object of which is to enable payments to be made by their means to other persons also having an account at the bank without its being possible for any one unlawfully to obtain value for them, since they only operate as orders to the bank to transfer such an amount from the drawer's account to some other account on the books of the bank, and never as vouchers for the withdrawal of funds from the establishment. The Bank of England furnishes no account of its clearing transactions, but they must be a much smaller proportion of the total than those of the Bank of France, banking being less centralized in London than in Paris.