This section is from the "Practical Banking" book, by Albert S. Bolles.
At London, as already stated, the country Clearing-house has been in operation since 1858. But in this country clearing methods have hitherto been applied only to transactions among banks situated in the same place or its immediate vicinity, though susceptible of extension to transactions between different monetary centers and possibly even to international settlements. The establishment of some system for the more speedy and economical collection of country checks is a matter of growing importance owing to changes in the methods of doing business. Mr. C. B. Patten, Cashier of the State National Bank of Boston, furnishes some interesting facts in this connection in reference to New England, which doubtless hold good elsewhere. Formerly under the State bank system it was the aImost universal custom for merchants in the interior to pay their bills in Boston by sending the money or a check on a Boston bank which they obtained from their nearest country bank, paying for the same the usual charge for exchange. But in later years a different practice has been growing up. The country trader now sends his Boston creditor a check upon the country bank where he keeps his account. The country banks, of course, expect to pay these at par at their own counters, but they will not as a rule provide funds to meet them in Boston without a charge for exchange, varying from one-tenth of one per cent. on the larger checks to one-quarter or even one-half of one per cent, on the smaller ones. So keen is the competition among traders, however, that these checks are taken by them at par, and the banks driven also by competition usually do likewise. To avoid the charges made by the country banks, checks are frequently sent home by the most circuitous routes, travelling about from city to city and from bank to bank for several days. An instance is given where a check for $48 on a bank in Mt. Gilead, Ohio, deposited at Columbus, was sent successively to Cincinnati, Cleveland, Urichsville, Coshocton, Newark, back to Columbus, and then to Cardington, before reaching its destination, being out eight days and traveling 650 miles when sixty miles would have sufficed. As the check was not paid it had to be sent back through the same channels. Another case has been given of an item returned protested nineteen days after it started for presentation toward a paying bank twenty hours distant. It is easy to see how by these delays endorsers may be discharged to the serious loss of some holder of the check, not to mention other contingencies. It would be difficult to show that due diligence was used in presenting a check by such a circuitous route. It is said, too, that these cases are by no means unusual.
The growing importance of the subject led to the consideration of the remedies to be adopted at the annual meeting of the Boston Clearing-house Association, April 9, 1877. A committee was appointed consisting of Messrs. George Ripley, John Cummings, Edward Sands, Edward L. Tead and Geo. R. Chapman, representing respectively the Hide and Leather, Shawmut, Traders', Exchange and Merchants' National banks. This committee in August made a majority report signed by Messrs. Ripley, Cummings, Sands and Chapman, and minority report signed by Mr. Tead. From the majority report it appears that the daily outstanding balances due to fifty of the fifty-one associated banks on account of New England country collections then amounted to $2,187,329. This had increased in November, 1883, to $4,300,000. The number of checks daily sent out in 1877 was 4,080, probably increased in like proportion, and the number of letters sent daily was 1,670, although there were only 272 towns in New England which had National banks. The amount paid yearly for exchange and expenses was computed to be $119,647, and interest on the outstanding balances at five per cent, reached $109,366, making a total annual cost of $229,013, increased to $398,000 in 1883. The cost of collecting each check was found by the committee to be, for exchange, .045 of a dollar; other expenses, .048; interest, .085, giving a total of .178 of a dollar, or about nine times the United States stamp tax on a check, which was justly complained of by business men and banks alike. The cost for each letter was forty-four cents—eleven cents for exchange, twelve for expenses, and twenty-one for interest. Under the arrangements then and still existing, remittances from country banks vary in frequency from once a week to once a month, in exceptional cases perhaps oftener. It was believed that by a consolidation of the business the amount of the outstanding balances might be reduced one-half by more frequent remittances; that the item of exchange largely made up of charges upon small checks of less than $200 could be very much reduced by having the remittances made in larger sums; and that the sending of 272 letters daily, one for each town having a National bank, would suffice, thereby saving 1,400 of the 1,670 letters daily sent out, and largely reducing the clerical expenses. The danger of loss resulting from delay in presenting checks would also be reduced to a minimum by the introduction of a better system. The majority of the committee reached the following conclusions:
"1st. That the business of making collections throughout New England, as now conducted, is attended with great unnecessary labor, risk and expense.
"2d. That its extent, though now large, will inevitably increase with the growth of our city.
"3d. That the only way materially to reduce the labor, risk and expense connected with it is to consolidate the business."
To this end they recommended the establishment of a National bank to be used as an agency in making such collections, the stock of the bank to be subscribed by members of the Clearing-house Association.
The minority report combats the proposed plan as exposing too much the business of each bank, and as not reducing the expenses as much as the majority anticipated. It was shown that ten banks having the largest foreign bank accounts, made more than one half of all the New England collections at an expense of 5 3/8 cents each, exclusive of interest, and that the superior facilities acquired by these banks after years of experience, could not be transferred to the proposed collection bank, but would be irretrievably lost to-themselves by the proposed change. The indirect advantages derived by the banks from their collection business, in enlarged acquaintance and the maintenance of a more lively interest between, the Boston banks and those of the country, were deemed a full equivalent for the necessary labor and expense involved.