This section is from the "Practical Banking" book, by Albert S. Bolles.
The payment of the balances being completed there remains the duty of making up a record of the day's business for preservation and future reference. This is a matter the importance of which is sometimes overlooked. However small the transactions of a Clearing-house may be they are destined to be of value in the future as a means of measuring growth, if nothing else. There are, too, many problems of interest to bankers, on which light would be thrown by a study and comparison of Clearing-house data carefully and intelligently prepared. In the interests of philosophic inquiry it is worth while to preserve all facts relating to operations of so interesting a character as those of the Clearing-house. At New York, where the volume of business justifies it, very full and elaborate records are kept, showing every important fact connected with the business, and it is possible to learn there many particulars of which no record is preserved at other Clearing-houses. A ledger is kept in which are posted the daily footings of the proof, "exhibiting a continuous history of the aggregate dealings of the banks." The entire proof, also, is transferred into a book kept for that purpose. "In like manner, the daily debit and credit exchange of each bank is posted to its account, and shows not only the extent of its business, but measurably its character also. This is the most essential of all the records. It is that which brings the banks separately within the supervision and control of the Clearing-house —a necessary complement of the joint responsibility created by the organization."* If the daily records of its transactions show that its reserves are undergoing constant depletion without any known source of replenishment, its credit at the Clearing-house is affected, and it may be subjected to an examination by a committee consisting of the Clearing-house committee and a committee of five bank officers, which joint committee has power to suspend any bank from the privileges of the Clearing-house, "in case of extreme emergency," until the pleasure of the Association is ascertained. To effect a suspension a majority of each committee must be present and the vote must be unanimous. The Association alone has the power of expelling a member.
* Gibbons' Banks of New York and the Panic of 1857.
A summary book is made up from the daily postings, showing the total receipts and payments by each bank for the week, and also for the month and year. The adverse balances of one period may be compensated by the favorable balances of a succeeding period, and thus the state of the reserve of each bank is followed up with unfailing precision. "If at the end of a month it appears that a bank has paid in to the House one million of dollars more than it has received, and if it has no foreign sources of replenishment, the conclusion is that it has supplied itself by purchase. If the same result should be shown at the end of another month, without signs of recuperation, and so on continuously, it becomes evident that the institution is carrying a forced average of loans, and it will receive a call from the committee... But this extreme case is most unlikely to happen. The credit that every member derives from the Association is too valuable to be cast off or treated with lightness. The action of the Association is too impartial and just to give offence, or to admit excuse for disregarding its advice."
"A positive principle, or rule of financial government, has been demonstrated by this action of the Clearing-house on the city banks, that is, the restriction of loans by the necessity of maintaining a certain average of coin [or legal tenders] from resources within the bank. Borrowing from day to day will no longer do. It cannot be concealed. The records will show conclusively whether the average is kept up by a healthy business, or by a forcing process."*
"The limitation imposed does not stop at the bank loans, but passes through them into the commercial system. The loans rest on the coin (or legal tender) average, this rests on the deposits, and the deposits rest on the means of trade. The Clearing-house has not created any new dependence of this kind, but it has brought the facts into a manageable shape, and established something like an axiom in the banking business. It is not a mere arbitrary requirement that a specific average of coin (or legal tenders) must be maintained, but it is the constitution of that average as a result, and the control of it by an organization which permits no escape and works no injustice—and what that organization is for the City of New York, the city is for the country; a restrictive power over the general currency of trade must be exerted through this channel to its remotest sections."
* Gibbons' Banks of New York and the Panic of 1857.
Weekly publication of bank statements had been required by law even before the establishment of the Clearing-house, but many ways of doctoring such statements were devised, so that the objects of the law were only partially realized. Each bank in the Clearing-house is required to furnish to the manager every Saturday, on or before 12 o'clock m., a statement showing the average amount of loans and discounts, of specie, of legal-tender notes, of deposits, and of circulation, for the preceding week. These statements are tabulated by the manager and given to the public. They have this advantage over the statements made under the law, that the daily operations of the Clearing-house furnish a means of testing their accuracy. Deception may still be practised, but it is likely sooner to come to light than it would but for the searching test afforded by the daily settlements.
"The improvement in the character of its loans is consequent upon the fact, that if a bank becomes embarrassed by their imprudent extension, it can get a good class of paper rediscounted, and thus obtain immediate relief; whereas if its discounted paper is of a. low grade, or if the assistance required is to help the directors only, and not its dealers generally, it loses sympathy and reputation. The character of its discounted bills is, therefore, its sheet anchor in a storm. In fact, the credit of the Clearing-house Association would itself be impaired if it should allow one of its members to fail from inability to convert good assets into cash funds."* One of the ways by which relief is afforded in such cases is by the issue of Clearing-house certificates against a deposit of securities, such certificates to be available in the settlement of balances at the Clearing-house. In the late crisis at New York some $ 25,000,000 of such certificates were thus issued to different banks against accepted securities, certificates in no case being issued to an amount exceeding seventy-five per cent, of such securities. This measure afforded substantial relief, and the certificates were mostly withdrawn within sixty days. The same plan was tried with good results in 1861-2 and in 1873.
Other records of Clearing-house operations may be made possessing practical value. Says Col. W. M. Grosvenor, in a paper which was read at the Convention of the American Bankers' Association in 1882 : "In the mere observation of the course of exchanges in different sections and at different localities, many business men affirm that they have gained important advantages. They have been warned in season, when the business of a distant city was being diverted to others, or depressed by social or political influences. They have been advised in season, by gradually expanding exchanges, that industry in a distant region was reviving, and prompt effort in that direction has been rewarded. Investors have been guided in the choice of securities by evidence of rapid growth in the business of cities. Lenders have been warned by unnatural expansion and violent fluctuation in the exchanges at a particular city, that excessive speculation was approaching its climax there, so that loans were 'extra-hazardous.' Information of more general importance has repeatedly been obtained. The inquiry is yet in its infancy, and comparatively little is known of the meaning of records which, in due time, will enable men to note the coming of many financial storms as surely as the march of an area of low barometer across the country is traced by the signal service."
At the last meeting (1884) of the Bankers' Association, Mr. Comegys, President of the Philadelphia National Bank, suggested that the Clearing-house might keep another record, with a brief explanation of which we shall close this chapter. The risks and losses growing out of the purchase of one-name paper are well understood, especially among bankers. To lessen the risk thus incurred, he proposed that a credit-ledger should be opened in the Clearing-house of any city, in which should be kept a record of the names of payers and endorsers, and dates of maturity of all notes amounting to one thousand dollars, or more, held by the banks, purchased of brokers. The reports of such paper, he further proposed, should be made to the Clearing-house anonymously, and information concerning such names should be given only to members of the Clearing-house. Large sums of money, he declared, might be saved to banks by means of this information.