1 Let us take Boston2 for example. A given bank receives through its course of business each day a great many checks, which are payable at various other banks in the city. To collect all these checks by a process of presentation at each bank would be a slow and tedious affair. In order to simplify this process of collection, a "clearinghouse" is established - a place where at a given hour of each business day some one person from each of the banks come together and there adjust the differences through the medium of the " clearing-house." Each bank's representative receives the checks against it, held by all the other banks, the total of which shows what that bank owes the "clearinghouse." If the amount of the checks which this bank holds against others is greater in sum than the total amount held against itself, there is a balance due it from the " clearinghouse," and, therefore, it is called a "creditor bank," and will be paid the sum due by the " clearing-house." If the aggregate amount of what it owes is greater than the amount of checks which such bank holds against the others, then it owes the "clearing-house," and it is a " debtor bank," in which event it must pay to the " clearing-house," the amount for which it is debtor. It will be seen, therefore, at the close of the "clearing-house "transactions for the day, that the total amount of debits will just offset the credits; the " clearinghouse "merely acting as a medium for settlement.
1 The Supreme Court of Pennsylvania has defined a clearing-house after this manner: "It is an ingenious device to simplify and facilitate the work of the banks in reaching an adjustment and payment of the daily balances due to and from each other at one time and in one place on each day. In practical operation it is a place where all the representatives of the banks in a given city meet, and, under the supervision of a competent committee or officer selected by the associated banks, settle their accounts with each other and make or receive payment for balances and so ' clear ' the transactions of the day for which the settlement is made."
The above is taken from James G. Cannon's most complete work on clearing-houses, from which the writer has obtained much valuable assistance, and to which the reader is referred for all information in relation to the " clearing-house " plan, and to forms of printed blanks used by the different associations. The writer is also greatly indebted to Charles A. Ruggles, the very able manager of the Boston Clearing-house, for many suggestions touching this subject.
Conant says, in "The Principles of Money and Banking ": "The clearing system is a development of a principle of Roman commercial law know as compensatio - the setting off of a debt which one owes to another by a claim against him.
" This system attained a high degree of perfection in the Middle Ages at the fairs of Lyons. Under an ordinance of Louis XI. (March 8, 1463) four fairs were authorized at stated intervals in each year, each of which was followed by a day of settlement fixed at the fair next preceding. Every banker came to these settlements prepared with a balance-sheet of his debts and credits. Three steps were required in completing settlements: first, the acceptance of bills by those upon whom they were drawn. This was necessary, as Vigne points out, in order to determine what items could actually be cleared. Then came the comparison of accounts and finally the settlement in money, of which very little was ultimately required."
2 Although Boston has been chosen as an example to set forth the clearing-house principle, it does not necessarily follow that the details are alike in the different clearing-houses of the country or the world. The principle, however, remains the same, there being no essential difference in the accomplishment of the exchanges.
An association of this kind is formed so that banks may avoid not only the tedious collecting of checks, drafts, etc., from bank to bank, but also the handling, of such enormous amounts of money such a cumbersome method would necessitate, and the risk involved in so doing.
The value of the "clearing-house " plan may be appreciated by the fact that the "clearings" (i. e. the amount of the checks, drafts, etc., passing through the association) of New York City alone are estimated to have averaged for the past ten years over fifty-eight billions of dollars annually. Imagine handling in actual money such vast sums. It is many times more than the total money in circulation in the whole country. Up to September 1, 1905, there has passed through the New York Clearing-house since its inception in 1853 the enormous total of $1,703,425,193,728.60.
A good illustration of the economy in the handling of money is the case of a New York bank which recently " cleared " checks to the amount of more than $18,000,000, yet when the credits and debits were balanced the whole difference was evened up by a payment of only 12 cents.
The expenses of the " clearing-house" are shared among the banks, and a bank must be a member of the " clearinghouse association" to enjoy its full privileges.
Trust companies may or may not be members of the association, according to the particular "clearing-house,' and, in the latter event, they generally arrange to collect their own checks; i. e. "clear," through some bank which is; viz.: each will deposit its checks at some one given bank, which will put them through the "clearing-house."
Checks received by a bank in favour of one of its depositors drawn by another do not, of course, pass through the " clearing-house."
The " clearing-house" idea was adopted in England toward the end of the eighteenth century, and one was established in New York October, 1853.
There are (January, 1907) 110 of these associations in the United States, and new ones starting at frequent intervals.
(See also " Non-member Bank.")