Domestic-intercommunity clearings

The basis of intercommunity claims is found in individual business relations

1 The subject of clearing houses is fully and authoritatively discussed in H. J. Cannon's Clearing Houses, Publications of the National Monetary Commission (U. S.).

It is hardly necessary in this place to set forth at length what is comprised in modern trade between different localities. Suffice it to say that it involves practically the same elements that are usually referred to in the analysis of international trade. The most obvious element is the purchase and sale of commodities. Next would come the purchase and sale of securities. As a third broad class would some the services rendered for salaries and wages, while in a fourth category could be included loans of all kinds. Of course, at any given moment the situation as between any given community and other communities is likely to be very complex. Some residents of the community are purchasing goods outside while others are selling, some are acquiring securities while others are disposing of them, some are rendering services while others are under obligation for services rendered, and, finally, some are lending to those outside while others are borrowing. But if such a complex situation could at any given moment be completely canvassed it would be found that all the individual operations could be classified under one of two heads, namely, "credits" or "debits." The credits underlie the claims held by the banks of a given community against banks in other communities. The debits, on the other hand, underlie in like manner the claims held by outside banks against the banks of the community under consideration.

While the basis of intercommunity bank claims is to be found in the economic transactions arising between individuals in different communities they do not all originate in exactly the same way. It is possible for example for a depositor in a bank in a given community to deposit bank notes obtained in the course of the day's business but originally issued by banks elsewhere. To the amount of such notes the bank receiving them would then have a claim against the banks of issue. But the bulk of the claims arise in connection with checks, promissory notes, drafts, and bills of exchange.

Intercommunity business gives rise to "credits " and to "debits "

The claims have different sources

Considering a single transaction between residents of different communities there are several ways in which as far as the principals are concerned, the obligation arising between them may be settled. Assuming the payment to be due, the debtor may draw a check on his own bank and remit to his creditor in the distant community. Or the debtor may go to his bank and obtain from it a draft drawn in favor of the creditor on a bank in the creditor's community or on a bank in such other community as may for the purpose be acceptable to the creditor. In these two cases the debtor is assumed to take initiative. It is possible, however, that the initiative be taken by the creditor. He may himself draw a draft on the debtor for payment, which draft may be sent direct or which may, through indorsement, be transferred by the creditor to his bank, which thereupon undertakes to collect it for him. These drafts are generally known as domestic bills of exchange, although less generally so in the United States than in Europe. Or it is possible that the creditor deposit for collection, before or at maturity, a promissory note or similar instrument given by the debtor. Of course, the bill of exchange or the promissory note accepted or given by an individual, is not of itself a claim against a bank. It yields a claim against a bank only when the debtor pays it with cash or with a check. The amount involved then becomes a claim by the creditor's bank against the debtor's bank, or at any rate against the bank which effected the collection. Moreover while such drafts, bills of exchange, etc., may be immediately payable, as with "demand" or "sight bills," or while they may be payable only after a lapse of time, as with "time bills" it is, of course, only the demand or sight and the matured time instruments which affect the immediate situation.

The actual clearance of reciprocal intercommunity bank claims involves two questions: 1. What method is employed for bringing together the reciprocal claims? 2. How are the final balances settled?

Bank notes, checks, etc.

Debtor or creditor may take the initiative

Instruments already due alone affect the immediate situation

As already indicated the claims must be brought together either directly or indirectly. Under the direct method some form of organization resembling the clearing house in local clearings would be necessary. Here the balances alone would be remitted for. So far as is known no such formal organization has anywhere been attempted, the great difficulty in the way being the necessity for verifying in first instance the validity of the claim. A bank does not, for example, wish to be charged for a check not validly drawn by its depositor. Under the indirect method all items are sent to their ultimate destination for collection, and remittance in satisfactory form is sent. Here clearing works out indirectly because there is no conscious balancing of debits with credits. Yet through the employment of forms of remittance which involve simply a transfer of the original claims to a common intermediary, the great end of clearing, namely, the offsetting of debits with credits, is more or less completely achieved.

The machinery employed for transmitting claims in intercommunity clearings varies from country to country and in the United States even from city to city. Each bank holding claims against banks in other communities may itself undertake to send out for collection the instruments which embody such claims. On the other hand the local clearing house may undertake to make all foreign collections for its member banks. Again under a centralized banking system the central banks may be relied upon. Thus under our Federal Reserve System the reserve banks are to some extent constituting themselves collection agencies for their member banks. The machinery employed, while representing an important question of economy of procedure, is not, however, of great significance in connection with the achievement of the ultimate object of clearing.