This section is from the "Practical Banking" book, by Albert S. Bolles.
In this country no one bank concentrates in itself the larger portion of the business. Free banking and competition keep the banks more nearly on an equality. The larger part of the checks received by any bank, in the course of business, are likely to be drawn on some other bank, of which they must be collected by the receiving bank. As business increases in any locality, each bank is likely to have a larger number and amount of demands upon most of the other banks in the place, and they eventually become too large and numerous to be conveniently settled between the individual banks. Before the establishment of a Clearing-house in this country this method was pursued in New York long after the inconvenience became so great that it would now be considered quite intolerable. Mr. J. S. Gibbons, in his very interesting and instructive book, The Banks of New York and the Panic of 1857, gives the following graphic description of the difficulties attending this mode of settlement:
"During the few years following 1849 the number of banks in New York was increased from twenty-four to sixty. To make the daily exchange, one half of them must necessarily send to the other half. But this plain division of the service was not convenient or economical. It was found better for all of them to do a part of the distribution, and thus the whole sixty porters were in motion at the same time. Each carried a book of entry, and the money for every bank on which he called. The paying teller of the receiving bank took the exchange and entered it on the credit side of the book; then he entered on the debit side the return exchange and gave it with the book to the porter, who hastened to the next bank in his circuit. The porters crossed and recrossed each other's footsteps constantly; they often met in companies of five or six at the same counter, and retarded each other, and they were fortunate to reach their respective banks at the end of one or two hours. This threw the counting of the exchanges into the middle and after part of the day, when the other business of the bank was becoming urgent.
"Instead of attempting a daily adjustment of accounts, which would have consumed several hours and caused much annoyance, it became a tacit agreement that a weekly settlement of balances should be made after the exchange of Friday morning, and that intermediate draft drawing should be suspended. The weaker and more speculative banks took advantage of this by borrowing money on Thursday, which restored their accounts for Friday, and its return on Saturday threw them again into the debit column. In this way the banks distant from Wall Street managed to carry an inflated line of discounts, based on debts due to other institutions. It became an affair of cunning management by some to run a small credit of two or three thousand dollars each with thirty or more banks, making a total of one hundred thousand dollars, on which they discounted bills. Consequently, the Friday settlements proved to be no settlements at all, but a prodigious annoyance. As soon as the paying teller or his assistant completed the exchange balance list the cashier of each bank would draw checks for every debt due to him by other banks, and send out the porters to collect them. A draft on one in favor of another might settle two accounts at once, but there was no understanding that made it possible to secure that small economy; or, if there was, it was disregarded. The sixty porters were out all at once, with an aggregate of two or three hundred bank drafts in their pockets, balking each other, drawing specie at some places and depositing it in others, and the whole process was one of confusion, disputes, and unavoidable blunders, of which no description could give an exact impression.
"After all the draft-drawing was over came the settlement of the Wall Street porters among themselves. A Porters' Exchange was held on the steps of one of the Wall Street banks, at which they accounted to each other for what had been done during the day. Thomas had left a bag of specie at John's bank to settle a balance which was due from William's bank to Robert's; but Robert's bank owed twice as much to John's. What had become of that? Then Alexander owed Robert also, and William was indebted to Alexander. Peter then said that he had paid Robert by a draft from James, which he, James, had received from Alfred on Alexander's account. That, however, had settled only half the debt. A quarter of the remainder was canceled by a bag of coin which Samuel had handed over to Joseph, and he had transferred to David. It is entirely safe to say that the presidents and cashiers of the banks themselves could not have untangled this medley. Each porter had his tally, and by checking off and liberating first one, whose account was least complicated, and then another, they finally achieved a settlement.
"This scene was reenacted on every Friday. In consequence of the porters being withdrawn from their regular service in the bank, extra labor was imposed on others, responsibilities became mingled together, and the officers were kept for the whole day in a state of distraction and anxiety. The paying tellers were subject to frequent interruption, as they were obliged to receive and deliver all specie.
"Not the least irritating feature of the case was that a single small draft by any one bank on any other induced a general drawing, and all became involved in commotion and 'war' upon each other. If time were allowed, the debtor banks would finally be obliged to pay the liquidating balance; but three o'clock arrested the process, and the banks where the demand was then in force were obliged to disburse the coin. It was not unusual for a debtor bank to add fifty thousand dollars to its specie at the close of the day, with its debt doubled, while a creditor bank to half a million in the general account, would find itself at three o'clock depleted of one or two hundred thousand dollars in coin."
This, it will be noticed, was when the bank settlements at New York could not have reached to one-sixth of their present amount. It may be safely affirmed that the vastly larger transactions of the present day could not be settled in the old way. It was not until after much deliberation and considerable opposition that a Clearing-house was established at New York, but the success of the experiment soon dispelled all doubts of its utility and necessity, and led to the adoption of the system in other cities.