Two questions are involved in intercommunity clearings

Claims must be brought together

Different kinds of machinery are employed

The second question referred to above (namely, how are the final balances settled?) is the more important. Intercommunity bank claims are, of course, claims to cash. But the whole object of clearing is to eliminate the expensive necessity of remitting cash for each claim. Yet under the indirect system of bringing debits and credits together something must be remitted which will directly or indirectly serve the bank equally as well as cash in the sphere where cash functions, namely, in the reserves. For the right to demand cash in one place there may be substituted the right to demand cash elsewhere. If a bank itself carries a balance with another bank outside of its own community it may arrange to make and to receive payments through such an account. The balance itself, being a demand claim, virtually constitutes a part of the bank's reserve, whether such balance be legally available for reserve purposes or not. The effect of excluding from lawful reserves the balances carried by banks with other banks is simply to raise the percentage of prescribed reserves. In last analysis, therefore, the whole question of clearances between banks in different communities of a given country depends upon the system of reserves.

At this point reference ought to be made to the fact that the claims arising from the depositing or the payment of bank notes are not ordinarily handled in the same way as are those arising from checks and kindred instruments. Much depends upon the general character of the bank notes. If a bank note is legal tender or lawful money for reserve purposes for banks other than the bank or banks of issue - even though in essence the bank note represents ultimately only a claim to standard money - it is nevertheless normally as serviceable as standard money itself for all banks which may include it in reserves. Hence there is no occasion for offsetting claims so founded. Thus in Europe where there are central banks of issue whose notes are considered satisfactory for reserve purposes little cash outside of such notes is kept in the vaults of the other banks. But if a bank note be not available for reserve purposes it may be returned to the bank of issue for collection or for credit, or it may simply be held temporarily as till money and again paid out. Apart from possible legal restrictions (as in the case of our Federal Reserve Banks) the choice between these two alternatives will depend upon a number of circumstances. First there would arise the question, Is the bank holding another bank's note itself a bank of issue? If so, it will have no desire to prolong at its own expense the life of the note of another bank. It will choose rather to pay out its own notes and to return for collection the notes of other banks. Another circumstance that would be taken into account would be the immediate demand for hand to hand money. If that demand were great and relatively unexpected a given bank might, irrespective of other considerations, pay out the notes of other banks. The question of expense would also be a factor of some importance. The greater the expense involved in returning notes for redemption the less intense would be the inclination to have them redeemed. Illustrations of the points here referred to can be numerously found in connection with our own national banking system. State banks are practically prohibited from issuing notes through the provision of a 10% federal tax. But in most of the states national bank notes are available for reserve purposes and there is no incentive for the state banks concerned to return national bank notes for redemption. On the other hand national banks may not include each other's notes in their reserves, but time and again they will retain such notes temporarily in their tills in order to meet over-the-counter demands for currency.

Final balances must also be paid

This is largely a question of the system of reserves

Claims based on bank notes are not necessarily handled like other claims

The nature of the bank note i8 of importance

No question of alternatives presents itself, however, in connection with checks and kindred instruments. Their nature, as already indicated, is such as to stimulate prompt redemption. The only question with them is by what means can they be most expeditiously and most economically collected.

Checks, etc., are speedily redeemed

It was pointed out above that the form of remittance and the adjustment of final balances in domestic-intercommunity clearings is primarily a question of the system of reserves. From this point of view two general systems of reserves may be distinguished, namely, centralized and decentralized.

Under a system of centralized reserves the major por tion of the cash reserves of a country are in the control of some central institution which is directly or indirectly in touch with the local banks. If reserves are centralized it follows of necessity that the balances carried with the central institution by the local banks shall be regarded as equivalent to cash for reserve purposes. If these balances were not so regarded each bank would have to maintain reserves in its own vaults and to that extent centralization would be destroyed.

Assuming, however, a system of centralized reserves, whatever the actual clearing or collection machinery that may be devised, remittances can be made by debtor banks in the form of drafts on the central bank. The adjustment of intercommuntiy claims is, under such a system, in last analysis simply a matter of bookkeeping. For drafts drawn the debtor banks are debited on the books of the reserve holding authority, while creditor banks are correspondingly credited. As between banks in different communities the net result is simply a shifting of credit to the amount of the net indebtedness, from the balances, collectively considered, of the banks in the debtor communities to the banks in the creditor communities.