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:

Claims By

Bank A

Bank B

Bank C

Bank D

Bank E

Total

Against

Bank A.....

$1,285,434

$1,492,398

$ 923,619

$ 99,645

$3,801,096

Bank B.....

$ 663,957

482,337

537,948

113,151

1,797,393

BankC.....

559.S27

651,735

292,119

454,638

1,958,019

Bank D___

724,788

912,954

327,972

54,468

2,020,182

Bank E.....

IS3.663

196,761

187,764

1,390,188

1,928,376

Total:

Due to.....

$ 2,101,93s

$3,046,884

$2,490,471

S3,143,874

$ 721,902

$11,505,066

Due from ...

3,801,096

1.797,393

1,958,019

2,020,182

1.928,376

11,505,066

$ - 1,699,161

$1,249,491

$ 532,452

$1,123,692

$ - 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.