Clearing-house associations are unions of banks, for the purpose of securing a speedy settlement of the claims of banks against one another. The oldest of these is the London Clearing-House, which appears to have been established about 1775. The most important clearing-house in the United States is that of the city of New York, which was established in 1853. Before the establishment of clearing-houses, the process of settling the mutual claims of banks upon one another was cumbersome and tardy. Each bank was forced to send out runners, carrying to every other bank the checks and claims that it had upon them. As each bank settled periodically its bills with every other bank, there was a continual interchange of money between them. 

All this has been obviated by the establishment of clearing-houses, in which representatives of the several banks meet daily, for the purpose of adjusting the claims of the banks upon one another. An insight into the workings of clearing-houses can best be obtained by a brief description of the methods pursued in the New York Clearing-House, which may be taken as typical of all the rest. The banks represented send daily to the clearing-house at least two clerks a delivery-clerk and a settling-clerk. At the clearing-house, each bank has a desk at which the settling-clerk or clerks are seated. They bring to the clearing-house in bundles the checks, drafts, and other obligations due them from other banks, each bank being represented by a separate package. 

They bring also a list of the amounts due them from each of the banks in question. Before clearing begins, Transcriptions of these lists are handed to the inspector. The sum total represents the aggregate amount to be settled for the day. Promptly at 10 o'clock, the delivery-clerks begin passing from one desk to another, delivering to each the package of claims of all sorts that their banks have against other banks. These claims are accepted in bulk, without examination of the items. As soon as all of the packages have been delivered, they are carried back to the banks, where an examination of the items takes place; and if there are any that are not valid, the adjustment takes place between the bank which has received them and that which presented them, without intervention of the clearing-house or rectification of the accounts drawn up there. 

When all of the packages have been received by the settling-clerks at the clearing-house, the latter draw up a statement of the demands made upon them. As these never balance the claims made by their banks, it is obvious that at the close of each day's business some of the banks will be entitled to receive money and others obliged to make payments, to settle the accounts. When each clerk has made up his account, he forwards a statement of the aggregates, with the amount of the balance to be paid or to be received. When all have forwarded their accounts to the manager, and the accounts are proved by the equality of the debit and credit aggregates and balances, the manager certifies the amounts which each bank owes to the associated banks, or is entitled to receive from them.

In the London Clearing-House, for the settlement of balances a different rule prevails. Debit balances are settled by checks on the Bank of England in favor of the associated banks, and credit balances by similar checks drawn by the associated banks in favor of the creditor banks. In New York the amounts due by debtor banks are paid in cash to the clearing-house manager, who in turn pays the creditor banks. For this purpose gold certificates issued by the United States Government are used, and also clearing-house gold certificates, which represent gold coin deposited with the clearing-house, and which are valid only in the settlement of clearing-house balances.

By the aid of the clearing-house, each bank can settle all of its relations to the banks of the city by a single payment, instead of adjusting its relations with each bank separately. Furthermore, settlements are effected by the transfer of a much smaller quantity of cash than would be otherwise required. Thus, in the first year of the New York Clearing-House, average daily clearings of $19,104,594,94 were effected by average daily payments of $988,078.06---but 5.17 per cent. In some years the percentage of balances paid in money has fallen as low as 3 per cent., and during the entire history of the New York Clearing-House has never reached so much as 7 per cent. 

The aggregate New York clearings were $5,750,455,987 in 1854, and $77,020,672,494 in 1901---the year of maximum exchanges. The aggregate exchanges reflect not only the growth of the city in importance as a commercial centre, but also the business conditions throughout the country--rising in times of notable prosperity and sinking in eras of depression. Thus, we may contrast the clearings of $35,461,052,826 in 1873, $48,565,818,212 in 1881, and $37,660,686,572 in 1890, with clearings of $22,000,000,000 in 1874, $25,250,791,440 in 1885, and $24,230,145,368 in
1894.

The New York Clearing-House is by far the most important in the United States. The excellence of the system embodied in it and the facilities which it affords to banks have been so generally appreciated that the institution has been widely copied, even in some of the smaller cities. On September 30, 1901, there were in the United States no fewer than ninety clearing-house organizations, which had, in the year ending on that date, transacted clearings to the extent of $114,190,226,021. It must be said, however, that five-eighths of the aggregate belonged to New York City. Abroad, the London Clearing-House transacted business in 1901 to the amount of $9,561,169,000. Clearing-houses exist on the Continent of Europe, though the use of checks in daily life is far less frequent there than in England and in the United States, and the clearings are not so important. On the other hand, the institution is widely known in Canada, Australia, and other English colonies.

In the United States, the Clearing-house associations not only furnish the facilities for settlements among banks which have been described, but also enable the banks to act as units in matters of banking policy. They establish rules of banking practice in the interest of the banks, as a whole, which individual banks would not be strong enough to maintain. Thus, many associations fix the rates to be charged for the collection of out-of-town checks. Certain associations prohibit the issue of certified checks by the members. 

Many details of practice are thus regulated by clearing-house rules. These associations, too, foster among the banks a feeling of solidarity of interest and furnish an organ through which this can find expression. In times of financial distress, it may be a matter of supreme importance to all the banks that none go to the wall; for such an occurrence may cause a run upon all the banks and a general catastrophe. The stronger banks, under such circumstances, come to the aid of their weaker brethren.


Nowhere is the function of the clearing-house in sustaining the interests of the banks, and the general credit of the community, more apparent than in the issue of clearing-house loan certificates. The ordinary clearing-house gold certificate differs from a Government gold certificate only in the fact that the clearing-house, and not the Government, is the custodian of the gold. It is preferred over the Government certificate because it can be issued in denominations better suited to the needs of the banks. With these certificates the loan certificates have nothing in common. They are issued only in times of panic, to meet temporary emergencies, and are called in and canceled as soon as their work is done. 

In times of panic there is an unusual demand for means of payment. Under the national banking system of reserves, which permits the country banks to deposit a portion of their legal reserves in the commercial centers, this strain is felt quite severely in the money centers. It is only to a limited extent that such emergencies can be met by restricting discounts. In preparation for a demand which can be foreseen, this usually takes place; but at the moment of the crisis, credits must be expanded and loans discounted freely, of the storm is to be weathered. Where free banking exists, this is usually done through increased note issues; but the banking system of the United States does not admit of such an increase. The clearing-house loan certificate relieves the situation by substituting certificates based, not on cash, but on securities for the cash ordinarily used in clearing-house operations--thereby placing this cash at the disposal of the banks for the use of their customers.

The clearing-house requires a deposit of securities with a committee, and issues certificates bearing a relatively high interest---in New York City, six per cent., up to a certain per cent. of the securities deposited, generally 75 per cent. It generally provides that any loss arising from the issue of the certificates shall be assessed pro rata, either upon the capital and surplus or upon the average clearings of the banks. Thus the entire credit of the associated banks is pledged for the redemption of the certificates. The interest charge makes it to the advantage of the banks to redeem as soon as possible the certificates issued to them, and they rarely last more than a few months.

This expedient was first tried by the New York Clearing-House in 1860, and has been repeated in 1862, 1863, 1873, 1884, 1890, and 1893. In the latter year the issue began June 21 and ceased September 6. The issue, the largest in the history of the clearing-house, was $41,490,000. The last certificate was redeemed November 1, a little more than four months after the first issue. While, since 1860, these issues in New York have amounted to over $168,000,000, there has been no loss upon them. The example set by New York was pretty generally followed by other clearing-houses in 1873, and such issues have since been authorized by other associations to meet a general financial stringency or a local emergency.