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   Chapter 11 THE CLEARING-HOUSE SYSTEM

Up To Date Business By Various Characters: 5029

Updated: 2017-12-06 00:03


In large cities cheques representing millions of dollars are deposited in the banks every day. The separate collection of these would be almost impossible were it not for the clearing-house system. Each large city has its clearing-house. It is an establishment formed by the banks themselves, and for their own convenience. The leading banks of a city connect themselves with the clearing-house of that city, and through other banks with the clearing-houses of other cities, particularly New York. Country banks connect themselves with one or more clearing-houses through city banks, which do their business for them. The New York banks, largely through private bankers, branches of foreign banking houses, connect themselves with London, so that each bank in the world is connected indirectly with every other bank in the world, and in London is the final clearing-house of the world.

The advantages of the clearing-house system.

Suppose that the above diagram represents the banks and clearing-house of a city, and also the two business houses of Brown and Smith. Brown keeps his money on deposit in Bank E, and Smith in Bank B. Brown sends (by mail) a cheque to Smith in payment of a bill. Now, Smith can come all the way to Bank E, and, if he is properly identified, can collect the cheque. He does not do this, however, but deposits Brown's cheque in Bank B, the bank where he does his banking business. Now, B cannot send to E to get the money. It could do this, perhaps, if it had only one cheque, but it has taken in hundreds of cheques, some, perhaps, on every bank in town, and on many banks out of town. It would take a hundred messengers to collect them. So, instead of B's going to E, they meet half-way, or at a central point called a clearing-house, and there collect their cheques. B may have $5000 in cheques on E, and E may have $4000 in cheques on B, so that the exchange can be made-that is, the cheques can be paid by E paying the difference of $1000, which is done, not direct, but through the officers of the clearing-house. Now Bank E's messenger carries Brown's cheque back with him and enters it up against Brown's account. This in simple language is the primary idea of the clearing-house.

The clearings in New York in one day amount to from one to two hundred millions of dollars. By clearings we mean the value of the cheques which are cleared-that is, which change hands through the clearing-house. Usually once a week (in some cities oftener) the banks of a city make to the

ir clearing-house a report, based on daily balances, of their condition.

The route of a cheque.

To illustrate the connection between banks at distant points let us suppose that B of Media, Pennsylvania, who keeps his money on deposit in the First National Bank of Media, sends a cheque in payment of a bill to K of South Evanston, Illinois. K deposits the cheque in the Citizens Bank of his town and receives immediate credit for it upon his bank-book, just the same as though the cheque were drawn upon the same or a near-by bank. The Citizens Bank simply sends the cheque, with other distant cheques, to its correspondent, the National Bank of the Republic, Chicago, on deposit, in many instances in about the same sense that K deposited the cheque in the Citizens Bank. The National Bank of the Republic sends the cheque, with other cheques, to its New York correspondent, the National Park Bank. It may possibly send to Philadelphia direct, or even to Media; but this is very unlikely. The National Park Bank sends the cheque to its Philadelphia correspondent, say the Penn National Bank. Now the clearing-house clerk of the Penn National carries the cheque to the Philadelphia clearing-house and enters it, with other cheques, on the First National of Media. Custom, however, differs very greatly in this particular. Many near-by country banks clear through city banks; others clear less directly. If the First National Bank of Philadelphia is known at the clearing-house as the representative of the First National Bank of Media it likely has money belonging to this Media bank on deposit. In that case the cheque is charged up against the account of the First National of Philadelphia. This bank then sends the cheque to the First National of Media, by which it is charged up against B. This system of collection of cheques is about as perfect as is the post-office system of carrying registered mail.

Backs of two paid cheques.

Now, the banks and clearing-houses through which the cheque passes on its way home stamp their indorsements and other information upon the back. Our illustration shows the backs of two cheques which have "travelled." Millions of dollars are collected by banks daily in this way, and all without expense to their customers. It is estimated that these collections cost the New York City banks more than two million dollars a year in loss of interest while the cheques are en route. Ten thousand collection letters are sent out daily by the banks of New York City alone.

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