The clearing house is an association which provides a common meeting place and facilities for collection messengers to exchange their reciprocal claims on each other and settle the net balances only. Suppose, for example, that in a city with five clearing banks, the claims on a certain day are as follows:
Due from ...
$ - 1,699,161
$ - 1,206,474
Then the equation of debit and credit balances is: (1,249,491 + 532,452 + 1,123,692) = (1,699,161 + 1,206,474) = 2,905,635
The banks A and E are net debtors to banks B, C, and D, and the payment of $2,905,635 balances settles their combined clearings of $11,505,066.
The economies of this clearing plan are evident. The items can be more expeditiously handled if put into one messenger's box and carried a short distance to the clearing house than if put into many boxes and carried to the respective drawee banks. Only the net balances of the day's exchanges need be paid in money and carried in the street, thus reducing risk and expense, and this expense may be further reduced by depositing funds with the clearing house for clearing house certificates which may be used to settle balances. Each bank needs to carry a much smaller amount of till money, for the sums due to and due from the bank are offset synchronously and the bank does not have to provide in advance cash enough to pay the whole of the sums due to other banks. Finally a great economy of time results, inasmuch as system and uniform rules are devised for the prompt exchange of items and settlement of balances. The effect of the whole process is to offset indebtedness and conserve the use of money.