The method of settling balances varies in different cities. The banks which have debit balances against them are required to send to the clearing house before a certain hour, usually twelve or one o'clock, the amount due from it. These balances are generally paid in clearing house certificates, United States gold certificates, legal tender notes or gold coin.1 Sometimes settlement is made by cashier's check. In most cities each member of the clearing house has on actual deposit in the vaults of the clearing house, or some bank agreed upon as depository, gold coin for which clearing house certificates are issued. These certificates save the actual handling of the gold but can be used only in settling balances between the banks. After the time specified for the payment of debit balances the creditor banks can receive from the clearing house the balances due them. The clearing house manager receipts for all debit balances paid in and in turn requires a receipt for each credit balance paid out. When the day's settlement is completed not a dollar remains in the clearing house as the money paid in by debtor banks is all paid out again to the creditor banks.
The principle of the clearing house and the method of making the exchanges is substantially the same everywhere, though slight differences in detail obtain in different cities. In small towns with only a few banks the process is very simple, the clearing house being merely a convenient meeting place for representatives of the several banks to exchange checks one against the other. In New York the Sub-Treasury has the privilege of clearing through the clearing house as an accommodation both to the banks and to itself. A peculiar system of settlement is used in the Boston Clearing House, and, in a modified form, in Pittsburgh and some other cities. At the close of the morning exchange in Boston representatives of the various banks borrow and lend balances and settle them by orders on the clearing house. Cannon says that sixty per cent of the total balances of the Boston Clearing House are now settled in this way. Thus bank A may find itself a heavy debtor to the clearing house while bank B has a large balance to its credit. A may then borrow from B which gives him an order on the clearing house and A turns in this order in the settlement of his balance later in the day. This, of course, amounts to a loan of money and rates of interest about equal to call money rates are charged.
1 Cannon: Clearing Houses, pp. 36-42.
The New York Clearing House, which was organized in 1853, is of course the largest and most important in the country. Its volume of exchanges for the year 1912 averaged over $325,000,000 a day, and yet the cash required to handle this enormous total averaged only about $18,-000,000 a day, or a little over five per cent of the totals involved. The actual clearing in New York ordinarily takes less than a half hour's work. In other cities with a smaller volume of exchanges even less time is required.