1. How Banks Receive Checks

A bank clearing house is one of the most noteworthy of all modern business inventions, as an economizer of time, effort, and money. It is an institution for exchanging and settling checks.

Banks receive checks, drawn either on themselves or on other banks, in four different ways that may be briefly explained.

First, they receive from their depositors, who leave the larger number of them.

Second, a bank may receive them for a debt due itself. Thus a man, who may or ma)' not be a depositor, borrows money of a bank and in paying gives a check for the amount.

Third, often checks are received by a bank from the maker, indorsers, or guarantors of notes left there for collection. Every bank is doing business of this kind, collecting notes for its customers or others, and receiving checks in payment.

Fourth, a bank, especially in a large city, receives checks for collection sent by its correspondents. A bank customer in Philadelphia deposits a check received in pay ment for a bill of goods that is drawn on a bank in Newark. Instead of sending the check to the Newark bank and demanding payment, the Philadelphia bank sends the check to its correspondent bank in New York, knowing that, as Newark is only a few miles, away, it probably has an account with the Newark bank on which it is drawn, or with another in that city, through which it can more easily obtain payment than by a direct presentation through the mail or by express.

In these four ways, therefore, a bank is constantly receiving checks. It is a great reservoir into which they are always flowing.

2. Checks Classified

The checks thus received by a bank may be divided into three classes: those drawn on itself; those drawn on other banks in the city; those drawn on outside or country banks. The first class of checks are at once liquidated by crediting the amount to their depositors and making a corresponding charge to the drawers. Furthermore, when this is done, the act is final, unless some mistake has been made in the operation, and the entries can not be changed. The unwelcome discovery of an insufficient balance to pay a check will not justify a bank in withdrawing the credit. In such a case, therefore, if the bank can not recover the deficiency from the drawer, it must be the loser. Thus checks drawn on a bank that are presented directly for payment or for credit do not pass beyond itself for settlement.

3. Economy Of The Clearing House

A bank deals with the second class of checks very differently. These must be presented to the bank on which they are drawn for payment. But, instead of doing this directly, the operation is conducted through the clearing house. As every bank in a city receives checks daily drawn on almost every other, it is evident that the easier way to settle them is to exchange them and pay the balance in money, or in some other agreed manner. Thus, suppose $100,000 of checks have been deposited during the day in the First National Bank of New York, drawn on the Fourth National, Chemical, Park, Chatham, and Central banks, $20,000 on each; also, that in each of these banks there has been deposited during the day $20,000 of checks drawn on the First National Bank. Let us suppose that six persons representing the six banks should come together bringing all of these checks, amounting to 5200,000. By the simple process of exchanging them, all would be liquidated without the payment of a dollar. On this idea is founded a bank clearing house. It is an expeditious method of liquidating checks, not by paying, but by exchanging them. Let us now explain how the work is done.