A clearing house may be denned as a device to simplify and facilitate the daily exchange of checks and drafts and the settlement of balances among the banks associated together for the purpose. In recent years clearing houses have tended to expand this primary function so as to provide "a medium for united action upon all questions affecting their mutual welfare." As a device for economizing time and labor the clearing house is one of the most important aids in the banking system.
A check, as we have seen, is an order upon the depositor's bank to pay a certain sum of money from his account either to himself or to some other person. In an active business house many such checks or orders are issued every day in payment of bills or other obligations, and in turn many checks are received from debtors living in the same city or in other places. Checks so received must be presented for payment to the various banks on which they are drawn. Now the merchant has neither the time nor the facilities for collecting these checks; moreover, the expense involved would be considerable. He therefore turns these orders over to his bank which undertakes to collect them from the several banks on which they are drawn. In this way every bank is constantly receiving checks, some drawn upon itself, some drawn upon other banks in the city, and some upon out-of-town banks. Checks upon itself are paid in cash over the counter, or are credited to the account of the depositor and charged to the drawer's account. The method of handling checks upon out-of-town banks will be explained later.
To simplify the process of collecting checks which each bank receives drawn upon other banks in the same city, the clearing house was devised. In the absence of some clearing house arrangement, each bank would have to present for payment to every other bank in the city the checks which its customers deposit and receive the money in payment. This would involve a great waste of time, much inconvenience, and some risk of losing the money. In all cities having several banks, and even in the smaller towns with but few banks, the daily exchange of checks and the settlement of balances between banks is now made through the clearing house. Where no clearing house arrangement exists and in those cases where for some reason a bank is not a member of the clearing house association, all city collections must be made by messenger or runner.