Most important among the city cash items are checks drawn on other local banks which are also receiving checks from their own customers. Banks in the same community are thus mutually engaged in presenting and at the same time paying claims. As the amount of checks deposited by a customer is credited immediately to his account, the bank seeks payment for these claims from the drawee banks as quickly as possible. In order to present these items to other banks for payment and at the same time to receive in exchange other items on which reimbursement is due, banks have organized themselves into clearing-house associations. A clearing house maintains a meeting place where the clerks of banks which are members of the association exchange reciprocally checks drawn on one another and settle differences in the totals of these claims.

The handling of the city cash items inside the bank involves the preparation of the claims due to the bank and the payment of items owed by the bank. These operations may best be explained by tracing the course of a check from the time it is drawn until it is finally paid. B draws his check on the Y Trust Company in favor of A, who deposits it with the X National Bank of New York. The receiving teller sends the deposit slip to the bookkeeper, who credits the amount to A's account and turns the check over to the department preparing items for the clearing house. The first step is to stamp on all checks an indorsement which reads, "Received payment through the New York Clearing House, prior indorsements guaranteed, December 1, 1921, The X National Bank of New York." This is an unqualified indorsement by which the bank guarantees the validity of all the previous signatures written on the instrument, and further acknowledges the receipt of payment from the drawee bank. It may happen that a signature proves invalid and payment is eventually refused by the bank on which the check is drawn. As this contingency arises so seldom among the thousands of checks which are daily exchanged, the above indorsement is stamped on all items sent through the clearing house. To the usual indorsement is added the special clearing-house number by which each member is designated rather than by its full name. Next the checks are sorted according to drawee banks, or really according to their respective clearing-house numbers. The check on the Y Trust Company is placed with the others drawn on this bank. When the distribution has been completed, the checks on each bank are then placed in a large envelope to which is attached the exchange slip showing the amount of each check. At a given time in the morning all the envelopes are brought to the clearing house, where the items are exchanged among the banks. The delivery clerk of the X National Bank hands over the proper envelope to the settling clerk of the Y Trust Company, which by this act of acceptance acknowledges the total debt as evidenced by the checks contained in the envelope.

With the checks now in the possession of the drawee bank the next operation is that of verification. This procedure is about the same as that required for the examination of a check brought by the holder to the bank for cashing, for there is really no difference between the presentation of instruments directly by the holder at the window or indirectly through the clearing house. If the check meets all tests satisfactorily it is then sent to the bookkeeper, who deducts the amount from the account of the drawer of the check. Not all banks in a community are associated with the local clearing house, and checks drawn upon some must be presented by messengers. In the same way, other city cash items, such as bills of exchange and promissory notes, are collected, for these are not necessarily presented to a bank, but may also be payable at the business address of the acceptor or maker. The messengers may be employed by the bank itself, but smaller institutions are able to dispense with the cost of maintaining this force where the local clearing house operates a department for collecting the city items of its members. In New York City, the Federal Reserve Bank also conducts a department which presents local items for payment. Thus New York banks have a choice of three systems for collecting their city items: by their own messengers, and by the staff of either the clearing house or the Federal Reserve Bank.