This " clearing-house balance" namely the amount due the "clearing-house " from a " debtor bank," or the amount due from the "clearing-house " to a " creditor bank " is settled in different ways, according to the custom of the several "clearing-houses." First, it may be in part accomplished by the loaning of the balances between the banks themselves, for an understanding of which, see " Clearing-house Rates."
b. "Clearing-house gold certificates" issued by the clearing-house (or similar certificates issued by a United States Sub-treasury), being receipts of denominations of $5,000 and $10,000 against gold, on deposit, and acceptable only between members of the association. Gold equal in amounts to certificates outstanding is held at all times. Also called " clearinghouse-certificates."
1 Formerly these certificates were issued against deposits other than gold, but such is not now the case, as will be seen by the following excerpt from a letter from Mr. James G. Cannon, author of " Clearing-houses: "
Fourth, by drawing a draft on a bank in another city. For instance, settlements at the " clearing-house " in Rochester, N. Y., might be effected by checks drawn on banks in New York City.
Fifth, gold coin, gold certificates and legal tender notes; but silver and silver certificates are only used under a mutual agreement among the members to make payments in amounts less than denominations of the gold coin or gold certificates.
Clearing-House Balances. By reading the last subject, it will be seen that "balance" refers to a transaction between the "clearing-house" and one bank. "Balances" has reference to the amount necessary to settle the differences between all the banks "clearing " through a given association.
Clearing-House Certificates. See paragraph "b" under "Clearing-House Balance."
Clearing-House Gold Certificates. Certificates issued against a deposit of gold, as explained under "Clearing-House Balance," paragraph "b."
Clearing-House Loan Certificate. Issued by the "clearinghouse "(it would be well to read that subject) to some member of the association, showing the deposit with the "clearinghouse" of approved securities, such certificates being negotiable only between members of the clearing-house association. They are issued only during times of financial distress, and up to only a certain percentage of the face value of the deposited securities, say 75%. It is not likely, however, under the Federal Reserve Banking System, that the issuing of such certificates will ever again be necessary.
An instance was that of 1893 ¹ when the scarcity of actual money in Boston for the transaction of business was so great that a form of money had to be temporarily created.
The banks had plenty of good securities on hand, but it was impossible to convert them into cash, as money was so scarce a long while ago, and now their issue is only permitted against deposits of gold." that there was no method of obtaining payment for the securities in case of their sale, which, in any event, would necessarily have been at a sacrifice. As the securities had a value, and as " clearing-house loan certificates " would be accepted among the members of the association in lieu of cash, a temporary substitute was obtained, by such of the member banks as desired, depositing their approved securities, accompanied by their own interest-bearing (7 3-10%) obligations, and receiving in return certificates showing the deposits. Not only did this furnish a substitute for money, but tided over many weak banks which otherwise would have met disaster.
1 The N. Y. Clearing-house first issued certificates in 1860, also during 1861, 1862, 1863 and 1867; again in 1873, 1884, 1890 and 1893.
2 Cannon declares that these "certificates" are not in any sense to be regarded as currency. They are not even seen by the business community and do not pass from bank to bank, except in payment of "clearing-house balances."
And that "the great value of clearing-house loan certificates consists in the fact that they take the place of money in settlements of the clearinghouse, and hence save the use of so much actual cash."
As the financial distress gradually is replaced by a feeling of confidence, and money, which, for the time being, has been hoarded by the general public, comes back into circulation, " clearing-house loan certificates" are gradually retired, and the deposited securities returned to their proper owners.
The necessity for issues of certificates of this class in panicky times may not occur in the future for the reason that under the Federal Reserve Banking Act "rediscounts " (see that subject) can now be made at the Federal Reserve Banks.
There has been no necessity for these certificates in Europe because of the "greater concentration of banking capital there"; although from time to time the larger banks have come to the assistance of the smaller ones.
Clearing-House Rates. First read " Clearing-house." Before the inauguration of the Federal Reserve System, if it so happened, after "clearing," that some of the "creditor banks " desired to loan all or part of the money due them in the clearing-house settlement, an opportunity to borrow was offered other banks in need of funds. The rate of interest on loans made, at such times, was called the "clearing-house rate," and the money available for loaning in the hands of the "creditor bank' was termed its "clearing-house balance." This was also frequently referred to as "balance between banks."
As time went on, this custom of loaning money became confined almost entirely to Boston, but when the Federal Reserve Act went into force, it was abandoned even there.
But he shows that the Atlanta Clearing-house Association in 1893 and likewise clearing associations in other Southern cities, issued these certificates in small denominations, as low as $1.00. The wording on the Atlanta certificate being in part:
"Will be received on deposit or in payment of debts due any bank in said clearing-house."
And, to quote Mr. Cannon, "an implication that they were used in general circulation, which indeed, is true." This use as money, however, was entirely confined to the South.
Clearing-House Settlement. When a bank's representative has attended to his clearing-house duties for the day, and payment has been made to, or received from, the " clearinghouse," the "clearing-house settlement " for that bank has been effected.
It is the adjustment of one bank with all the other banks of the association of the amounts due each other through the medium of the "clearing-house," payment being received, or made, in accordance with amounts due.
Clearing-House Sheet. (Read "Clearing-House.") The sheet on which the total amount of checks, etc., which a bank holds against all the other banks of the clearing-house, or against those which clear through members of the association, is entered, at the close of each business day. This sheet is presented with the checks (which are exchanged with the other banks) the following business day - that being the usual custom - at the clearing-house.
Clearing-House Statement. See " Bank Statement."