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   Chapter 39 THE CLEARING-HOUSE SYSTEM[12]

Up To Date Business By Various Characters: 8175

Updated: 2017-12-06 00:03


THE CLEARING-HOUSE SYSTEM A MODERN INSTITUTION

The clearing-house is a comparatively modern institution, the Edinburgh bankers claiming the credit of establishing the first one. The earliest clearing-house of whose transactions we have any record is that of London, founded about 1775. For fully seventy-five years the London clearing-house and that of Edinburgh were the only organisations of the kind known to exist. The monetary systems of most European countries centring around one great national bank located at the capital of each, found in this a means of effecting mercantile settlements. The New York clearing-house was established in 1853, from which date the American clearing-house system has grown to enormous proportions. No country in the world has so large a need of clearing-houses, for in no country is the bank cheque so generally used in the payment of ordinary accounts.

TRANSFER OF CREDITS IN CLEARING-HOUSES

The purpose of the clearing-house is largely to facilitate the transfer of credits. This is explained by the following illustration: Suppose that Brown and Smith keep their money on deposit in Bank A and that Brown gives Smith his cheque for $100 and Smith deposits it in the bank to his (Smith's) credit. The officers of the bank will subtract $100 from Brown's account and add the same amount to Smith's account. No actual money need be touched. It is simply a matter of arithmetic and bookkeeping. Credit has been transferred from Brown to Smith. If all the people of a city kept their money in one central bank there would be no need of a clearing-house. The bookkeepers of the bank would be kept busy transferring credits from one customer to another on the books of the bank. But if Brown keeps his money in Bank A and Smith keeps his money in Bank B it is necessary that Bank A and Bank B come together somewhere to conveniently make the credit transfer, and this is practically what they do in the clearing-house. Then, again, if Bank A should be located in San Francisco and Bank B in Boston, the difficulty of transfer of credit is greatly increased.

Through the agency of clearing-houses located in money centres and of co-operation between banks at distant points, the transfer of credits between business men located anywhere in the United States, or for that matter in the world, has become a comparatively simple matter. If it were not for the agency of this system it would be utterly impossible for a great city to do the business of a single day. All the actual money in all the banks and stores and safes and pockets of New York City to-day would fall far short if used to pay to-day's transactions. It is estimated that the cash transactions of a single day are fifty times greater than the actual cash changing hands in one day. So that the great bulk of the business of the country, both cash and credit, is done on a system of credit transfers made possible wholly through the agency of our banking system.

FOOTNOTE:

[12] See also Lesson VIII. of Part I. of this book ("General Business Information").

ORGANISATION OF CLEARING-HOUSES

Each large city has its clearing-house system. To establish a clearing-house a number of banks associate themselves together, under certain regulations, for the purpose of exchanging daily at one time and place the cheques and other commercial paper which they hold against each other. The usual officers are a president, a secretary, a treasurer, and manager, and a clearing-house committee. The cheques, etc., which the banks take to the clearing-house are called the clearing-house exchanges, and the total amount of paper exchanged is called the day's clearings. Those banks which bring a less amount than they take away are obliged to make the difference good in cash or its equivalent within a fixed time upon the same day. Suppose, for illustration, that a clearing-house association consists of five banks-A, B, C, D, and E-and that Bank A took to the clearing-house cheques against B, C, D, and E amounting to $20,000, and that B, C, D, and E took to the clearing-ho

use cheques against A amounting to $21,000. Then A is on this particular day a debtor bank, and owes the clearing-house, or the other banks through the clearing-house, $1000. The payment of the balances by the debtor banks and the receipt of the balances by the creditor banks complete each day's transactions. As the total amount brought to the clearing-house is always the same as the amount taken away, so the balances due from the debtor banks must be exactly equal to the amounts due the creditor banks. The clearings in New York City in one day amount to from $100,000,000 to $200,000,000, and the actual cash handled, if any, need only be for the actual debit balances. Usually once a week (in some cities oftener) the banks of a city make to their clearing-house a report, based on daily balances, of their condition. The clearing-house establishes a fellowship among banks that has already proved in times of money panics of the greatest service to themselves and the community.

PAYMENT OF BALANCES IN CLEARING-HOUSES

Clearing-house certificates are made use of in many cities for the payment of balances by debtor banks. These are issued against gold deposited with one of the associated banks. They are numbered, registered, and countersigned by the proper officer, and are used only in settlements between the banks. Various methods of making settlements are in use. In some of the cities the balances are paid by drafts on New York or other money centres. The debtor bank sells some creditor bank New York exchange, and receives in return a cheque or order on the clearing-house, which when presented makes the debits and credits balance. It is estimated that the actual cash employed in New York clearings is less than one half of one per cent. of the balances.

HOW DISTANT BANKS ARE CONNECTED BY THE CLEARING-HOUSE SYSTEM

Illustrating cheque collections.

To illustrate the connection between banks at distant points let us suppose that B of Haverhill, Mass., who keeps his money on deposit in the First National Bank of that city, sends a cheque to S of Waconia, Wis., in payment of a bill. S deposits the cheque in the Farmers' Bank of Waconia and receives immediate credit for it in his bank-book, just the same as though the cheque were drawn upon the same or a near-by bank. The Farmers' Bank deposits the cheque, with other cheques, in, say, the First National Bank of Minneapolis, or it may send the cheque to its correspondent in New York-say the Ninth National-asking to be credited with the amount. For sake of illustration, suppose that the cheque is deposited with the First National of Minneapolis. Now, this bank has a correspondent in Chicago-the Commercial National-and a correspondent in New York-the National Bank of the Republic. If sent to the Commercial National, this bank has a correspondent in Boston-the Eliot Bank, where the cheque would be sent. Now, the First National of Haverhill has a correspondent in Boston-the National Revere Bank. The Eliot Bank would likely take this cheque to the Boston clearing-house as a charge against the Revere Bank. The Revere Bank would deduct the amount from the First National of Haverhill's deposit and send the paid cheque to the Haverhill Bank, where at the close of the month it would be handed to B, showing on the back the indorsement of S, and stamping representing all the banks through whose hands it passed. If the Farmers' Bank of Waconia had sent direct to its New York correspondent, the Ninth National, this bank would have sent to its Boston correspondent, the North National, and the cheque would have been charged up through the clearing-house against the Revere Bank. If the First National of Minneapolis had sent direct to its New York correspondent, the National Bank of the Republic, this bank would have sent to its Boston correspondent, the Shawmut National, etc. As a rule, banks collect by whatever route seems most convenient or advantageous. It is estimated that millions of dollars are lost to the banks each year on account of the time consumed by cheques en route.

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