On account of the operations which have just been described every bank finds itself each day in the possession of checks, drafts, and bills of exchange payable by or collectible through the various other banks of the city in which it is located. Originally these collections were made by sending out clerks for the purpose of receiving the money due from other banks and of delivering to them the checks and drafts drawn against them or their correspondents. This method of procedure, however, proved to be very uneconomical and in some respects dangerous. A little army of bank clerks carrying considerable sums of money about the streets of a great city during certain hours of the afternoon furnished an unusual opportunity to thieves, and imposed a great problem upon the police authorities. Another defect of this method of procedure consisted in the great loss of time which it involved. The distances which had to be traversed were sometimes very great in large cities in which the banking institutions were very far apart; sometimes the clerks had to stand in line for a long time at the desks of banks waiting for each other; and frequently they crossed each other's paths upon errands which could quite as well have been performed by one person as by two. At a time when they could least afford it the banks were also obliged to suspend other business in order to attend to these collections.
The remedy ultimately found for these difficulties was the clearing-house, the essential feature of which is a room conveniently situated, in which all the bank clerks meet every day at a specified hour for the purpose of exchanging securities. This room is usually furnished with desks, one for each bank, arranged in a semicircular or circular form. At a specified time each day the clerks deposit the checks belonging to each bank at the proper desks, and receive those drawn against the institutions which they represent. The clerk at each desk then prepares a balance-sheet by entering in debit and credit columns respectively the aggregate of the checks, drafts, and bills of exchange which his bank holds against each of the others and the amount which it owes to each. By footing up these aggregates he is able to determine the total amount due by or to his bank, as the case may be. These balance-sheets are then sent up to the central desk, presided over by the master of the clearing-house, and accounts between the various banks are there settled, it being necessary simply for those from whom payments are due to pay the amount in one form or another to the master of the clearing-house, and for those to whom sums are due to receive the amounts from him.
The balances are paid now in one way and now in another. In some clearing-houses banks are required to pay in cash; in others they are permitted to carry accounts with the clearing-house; and in still others the balances are paid in drafts on some large institution which has extensive connections with all the banks in question, and which sometimes is the manager of the clearing system.
Rarely do all the banks in a city belong to the clearinghouse association. Those which are not members, however, are usually permitted to do their clearing through those which are. The same method is often pursued in the case of out-of-town banks, the clearings for which are usually performed through their respective correspondents, each member of the clearing-house association transferring to the others not only the checks and drafts which are drawn directly upon them, but also those which are drawn upon their various out-of-town correspondents or upon those banks within the city which do their clearing through these particular institutions. By this method practically all the exchanges of a city and its connections in various parts of the country pass through the clearing-house.
The advantages of the clearing-house system are obvious. An enormous amount of time and expense is saved to all the banks, the danger incident to carrying large sums of money about the streets is obviated, and the commercial statistics collected are extremely useful not only to banks, but to public officials, economists, etc. These statistics indicate the magnitude of the business transacted through banks, and are thus a key to the explanation of certain economic phenomena of great political and social as well as commercial importance.