The process of clearing involves a balancing of reciprocal liabilities with ultimate delivery in cash or its equivalent only of differences. If reciprocal claims of any kind are to be brought together for the purpose of offset, some kind of machinery for the realization of this object must be provided. Those possessing or holding reciprocal claims may come together in person and thus by agreement offset their respective claims, but where the claimants cannot come together personally some agency must be provided to act as an intermediary between them. Moreover, where the several claimants come together personally any differences obtaining between their claims can be easily settled with cash or with the delivery of whatever the nature of the claims may require. But if an intermediary must be relied upon in the clearing process such intermediary must either hold proper funds for all whose reciprocal claims appear in the clearings, or it must be in position to collect from them any debit balances that may arise. In other words, the process of clearing requires not only a means of bringing together the reciprocal claims, but also a means of making delivery of whatever the claims may require to cover the amount of possible differences.

Clearing is applicable to all kinds of transactions involving reciprocal liabilities. Thus on the New York Stock Exchange there is a clearing house which handles all the transactions of the brokers for the day. In the Stock Exchange Clearing House the broker makes or accepts delivery only of the difference between sales and purchases of any particular stock, and in cash only of the difference between total sales and total purchases. The installation of the clearing system on the stock exchange greatly extended the possibilities of the brokers' business. In like manner the English railways maintain a clearing house to handle the numerous reciprocal claims growing out of the transshipment of persons and of freight over their several lines. This has greatly simplified their accounting.

Clearing involves the offset of reciprocal liabilities

The reciprocal claims must be brought together

The process is widely applicable

In the banking field reciprocal claims arise among the banks through the depositing by clients or through the payment by debtors of checks, drafts, etc., and of bank notes drawn on or issued by banks other than those in or to which the deposits or the payments are made. The reciprocal claims among banks are, of course, money claims, and the settlement of differences arising between such claims would thus require the payment of money or of that which might constitute a satisfactory alternative.

Clearing in the banking field may be classified as local, domestic-intercommunity and international. These may be considered in turn, although the subject of international clearing is in some particulars so distinctive that it will be independently discussed in the following chapter.

Local clearings concern the offsetting of reciprocal claims by banks in the same community. This is the more familiar type of clearing handled by clearing houses in all our large cities. Most of the claims handled in local clearings grow out of local business relations. In cities in the United States, for example, a considerable proportion of the total business grows out of transactions between the residents of the city. The payments back and forth that are made as a result of such transactions, in so far as they are made through banking instrumentalities, appear to a considerable extent in the bank clearings. Some of the claims may, however, arise outside and may appear in the local clearings as a result of transfer.

Local clearings, as already indicated, are today handled in the main through organized institutions known as "clearing houses." This system is practically one of directly bringing reciprocal claimants together. In the settlement of differences payments may be directly made by the ultimate debtor or indirectly through an officer or department of the clearing house. Moreover, such payments may be in actual cash, as in New York, or simply in drafts on other centers or institutions. A good many interior towns in the United States employ drafts on New York. English banks in London use Bank of England cheques. In Boston, where clearing is handled through the federal reserve bank, checks drawn on the reserve bank are depended upon. In some cases also systems of loans of one kind or another have been devised.

Claims involved in bank clearings are money claims

Bank clearings are local, domestic-intercommunity and international

Local clearings

The "clearing house"

The nature of the claims handled in a local clearing house will depend upon the rules of the particular institution. Where there are many clearing houses, as in the United States, numerous differences appear in such rules. The bulk of the claims, however, arise through the depositing of checks which, as already indicated, constitute in growing proportion the currency of business.1

Domestic-intercommunity clearings concern the offsetting of reciprocal claims held against each other by banks in different communities of the same country. The factor of distance and the lack of formal organization naturally add elements of complication not found in purely local clearings, although in both cases the general object aimed at is the same.

The basis of these intercommunity bank claims is the great variety of economic transactions arising between individuals in different communities. The volume of such claims has steadily increased with growing division of labor and with expanding trade. The general trend in the development of the economic life of a country like the United States has been toward territorial specialization, and this has greatly increased community interdependence with a consequent development of intercommunity trade. This trade, moreover, has relied increasingly on banking means of payment, and the outcome has been, therefore, a rapid expansion of intercommunity bank claims.