1 A statement of the working of the check system, under circumstances of different degrees of complexity, is given by Jevons, Money and the Mechanism of Exchange, pp. 252-257.

2 For a further notice of the Clearing House system, see note on p. 57. The transportation of cash referred to in the text is reduced to its minimum by the practice sometimes adopted of using "Clearing House certificates" instead of money or legal-tender notes. These certificates represent money or notes deposited with the Clearing House, or with some bank which is its representative for this purpose, and are payable on demand; prohibitive amount of labor and expense, both for the sending and the remitting banks. It is necessary, therefore, for each bank to employ other banks for check collection purposes. The banks of each city are employed as collection agents, receiving checks drawn on banks in the vicinity from other banks throughout the country and from these neighboring banks checks on banks in other sections. If the check is drawn on a bank at a great distance from the bank in which it is deposited, it will ordinarily pass through a number of city institutions while in process of collection. Thus, for example, a check drawn on a rural bank near Des Moines, Iowa, and deposited in a bank in Manchester, New Hampshire, might be sent by it to a Boston bank, then to Chicago, whence it would be forwarded to Des Moines, and then finally to the bank on which it was drawn.

Where, as in England, banking is conducted by institutions with head offices in large cities operating numerous branches throughout the country, all checks can be handled without difficulty through Clearing Houses. Checks on other banks deposited at a branch are forwarded to the head office or to branches in the more important cities and are then cleared in the customary way. Aside from the mailing expense and the necessary entries on the books of the various branches the procedure is similar in all respects to that followed when a check is received drawn on a bank in the same place.

In the United States, Where banking is conducted by thousands of local banks, the collection of checks drawn on a bank in one place and deposited in a bank in another place involves greater complications. To send directly to all other banks the checks drawn on them would require a being made in convenient denominations they are used in payments between the banks and for the purposes of reserve are recognized by the law of the United States as the equivalent of the cash which they represent. These certificates must be distinguished from Clearing House loan certificates described below, Ch. XI.

In London banks and bankers keep large cash balances at the Bank of England and settle with each other by transfers made there. A similar method was adopted by the banks of Boston upon the opening of the Federal Reserve Bank of Boston in 1914. Banks in other cities in which there are Federal Reserve banks will probably make settlements in this way when all members of the various clearing houses become members of the Federal Reserve banks.

If the collection of checks drawn on banks in other places had been developed in the United States without reference to other banking activities, doubtless the most economic possible arrangements for handling this business would have been everywhere adopted. In Boston an arrangement for handling checks on New England banks through the Boston Clearing House was adopted in 1899. All checks on New England banks deposited in Boston banks may be sent by them to the Clearing House for collection. Checks on each bank are there assembled and sent in a single letter, remittance being made in a single draft payable to the manager of the Clearing House. Banks in a few other cities have adopted similar arrangements, but in most parts of the country the keen competition of city banks for balances of country banks has proved an insuperable obstacle, in addition to interest at the customary rate of two per cent, city banks offer various services in return for bank balances. The most important of these services has long been the collection of checks. Taking advantage of the competition for balances, country banks in many parts of the country have made excessive exchange deductions in remitting to banks elsewhere in settlement of their own checks. Often these deductions have been far in excess of the cost of shipping currency, which indeed, it may be added, it is seldom necessary to send. The city banks have absorbed these exchange charges but to recoup themselves have required the maintenance of compensating balances far larger than it would have been necessary for country banks to maintain for other purposes. At the same time, wasteful time-consuming methods of routing checks have been resorted to by the city banks, in order to reduce to a minimum the exchange charges which they were absorbing.

Under the operation of the Federal Reserve banks, the system of check collections is being rapidly unified and improved. Each reserve bank collects for its members, and also for non-member banks within its district checks drawn on all banks throughout the country which will remit to any reserve bank at par. A charge is imposed to cover the cost of the service, but, through the reduction of balances with other banks and of clerical expense and postage made possible by concentrating the business of check collection, the system is likely to prove in the long run of advantage to most banks, even to those which have been reaping profits through exchange charges.

The bank deposit, circulated by means of checks, is the most convenient medium of payment yet devised. A stroke of the pen transfers it in whatever amount is needed for the largest transaction, and this transfer instantly becomes the basis for fresh operations, with as complete security against accidental loss as can be imagined. In the strict economic sense this medium no doubt has rapidity of circulation in a high degree, while in the sense of actual activity of movement in a given time it far outstrips money or notes, and has been well said to be the most volatile of all the mediums of exchange, Of the entire circulating medium of this country it forms incomparably the greatest, although the least considered, part. Depending for its efficiency solely upon convention, it for the most part eludes the regulations which legislatures so industriously enforce upon the other constituents of the currency. Indeed, beyond the requirement of a minimum reserve made by the law of the United States, and of most of the several States, we may say that the subject is not touched by legislation, in this country or elsewhere. The necessity for payment in specie or legal-tender paper upon demand, the chief safeguard of value, is the result of general provisions for the payment of debts of any kind. And the chief assurance against excessive expansion on the part of any single bank or banker is given by the certain demand for prompt and frequent settlement, occasioned by the voluntary establishment of the clearing house, or by the habits of the community but not by law.