In a small town having but one bank, all of the checks growing out of purely local business are drawn upon that institution. Let us suppose that A and B are both depositors in the same bank. A gives B his check for $100 in payment for a horse. It is not necessary for B to present the check, receive the money and then redeposit the cash to his own credit. Instead, he deposits the check, the bank crediting his account and charging the account of A. The same process is being followed by all the depositors in making settlements with each other. No actual cash changes hands; there is merely an offsetting of debits with credits on the books of the bank. This is utilizing the "clearing" principle, which is to offset debits with credits and pay only the resultant balance. Banks make use of this principle in settling accounts with each other. The agency through which they avoid the constant transfer of money among themselves is the clearing house. The term is used to apply either to the building used for this purpose or more generally to the organization or association of the banks united together for this and other purposes. The objects and purposes of a modern clearing house association might be stated as follows: (1) To facilitate the handling of business between its members. (2) To foster and encourage conservative, safe and sound banking methods and banking practices. (3) To use its influence in matters of common interest to its members, and for the general good of the community wherein it is located. (4) To perform such other services as are agreed upon by its members and which are not in contravention of Federal or State laws.

Clearing House Functions

In its practical sense the clearing house represents a plan rather than a tangible thing. Let us suppose there are five banks which are members of a clearing house. At the end of the day's business each member finds itself with checks drawn upon the other four. The checks of each are indorsed with the bank stamp, enclosed in a separate envelope for each bank and a total of the checks is listed on the outside. The totals are then listed opposite the bank names on a double column sheet and a footing is struck. In theory each bank assumes that these checks are not payable by the individual banks but by the "clearing house.,, Therefore, at a fixed time, usually about ten o'clock A. M., each bank sends a messenger to the clearing house with its checks against the other banks. In a small town the office of one of the members is used as a clearing house and an officer of that bank acts as "manager." The packages are then exchanged. Each clerk writes opposite the proper names, the amount of the checks on his bank presented by the others. These amounts are added up and the smaller amount is subtracted from the larger. If the messenger receives more checks on his own bank than his bank had on the others, then he is a "debtor." If the reverse is true, then he is a "creditor." The manager then takes the record of the debtor and creditor balances which, of course, must be equal, thus proving the correctness of the exchange. The clerks return to their respective banks with checks drawn only on their banks, whereas they came to the clearing house with checks drawn only on other banks.

Typical Clearing House Statement

Statement Of Member No....

............................Clearing House

Institute National Bank

Banks

No.

On

From

Brought to C. H.

Balances

Errors in List

Errors in Statements

Missing Indorsements

Wrong Clearings

No.

Dr.

Cr.

First National Bank

1 |

1

Union State Bank

2

2

Merchants National Bank

3

3

Farmers Trust Company

4

4

City National Bank

5

5

People's State Bank

6

6

Town & County Bank

7

7

Chandler State Bank

8

8

Country Clearing House

9

9

Post Office

10

10

Total

fines to be listed above

Balance

Cr.

Dr.