Clearing houses

Front matter

Class Hf y ^ ^^Q^o Book O O

2d Session ] SENATE | No. 491

Clearing Houses

Chapter I . — Classes of Clearing Houses i

A clearing house defined — Clearing houses classified with respect to functions — Clearing houses classified with respect to the funds used in settlements.

II. — ClEaring-House Terms 3

How usages differ — The meaning of "to clear" — Clearings — Exchange and exchanges — Bills and bills of exchange — Draft and check — Accounts balanced and balances in accounts — Collections — Items — Clearing matter — Settlements — Out-of-town checks and country checks.

III. — Special Functions op a Clearing House 11

Primary object — Extension of field — List of special functions — Action of clearing-house banks at outbreak of civil war — Mutual assistance of members — Fixing rates of interest on deposits — The practice in Sioux City — Establishing rates of exchange — Some Buffalo history — Rochester — Baltimore — Houston — Toledo — Topeka — St.

Louis — West Superior — St. Joseph — Clearing-house loan certificates.

IV. — Possible Developments of the Clearinghouse System 24

New functions to be exercised — Country checks — Transfer of currency from point to point — Possible use of gold certificates — Special examiners — Settlement of balances — Advantages of the cash basis — Clearing-house depositories — ^The use of depository certificates.

V. — The Administration of Clearing Houses 30

List of officials — Duties of officers — Committees — Annual meetings.

Page.

Chapter VI. — Thk Sktti^Ement of Clearing-House;

BaIvANCES 36

Results accomplished by settlements — Ratio of balances to clearings — Settlements with money — Clearing-house settlements in Canada — Money in labeled packages — Objections to silver — Methods of settling balances without money — Advantages of the manager's check over settlements in cash.

VII. — Ci^EARiNG-HousE Exchanges 47

Location of clearing houses — Arrangement of furniture — Hour of making exchanges — Clearing matter — Character of indorsements — Messengers and settling clerks — Conducting the exchanges — Determining balances — Two clearings a day.

VIII. — Clearing Country Checks 58

The growing use of checks — The difficulty of country checks — Remedies proposed — State and National clearing houses — The Kansas City, Mo., plan — The Atlanta, Ga., plan. IX. — Typical Journey of a Country Check Remitted FOR A City Account 64

The small amount of work required of payer and .payee — The large amount of work required of the bank in which the check is deposited and its correspondent — What the receiving bank does — What its regular correspondent in the city nearest the country bank is required to do — What the country bank has to do — An illustrative example. X. — ClEaring-House Loan Certificates 75

What clearing-house loan certificates are — Origin — Interest rates — Uses — First issue in i860 — The issues of 1861, 1863, and 1864 — Action of various clearing houses in 1873 — New Orleans in 1879 — New York in 1884 — Action of the New York, Boston, and Philadelphia clearing-house associations in 1890 — General resort to loan certificates in 1893 — Emergency circulation in the South, Boston, and Philadelphia in 1895 — New Orleans in 1896 — Calculations of interest.

Contents.

Page.

Chapter XI. — Clearing-House Loan Certificates op the

Panic of 1907 117

Causes of panic — Action of the New York clearing house — Chicago clearing house — Boston clearing house — Philadelphia clearing house — Clearing-house checks issued at Canton, Ohio — At Cincinnati and Cleveland — Certificates at Fargo, N. Dak., and Los Angeles — Plan of group 2, Ohio Bankers' Association — Total of certificates issued. XII. — Clearing-House Bank Examiners 137

General remarks — Examiner appointed at Chicago in 1906 — Minneapolis and St.

Paul — St. Louis — Los Angeles — Kansas City and St. Joseph — Philadelphia — Details of proposed group plan of the California Bankers' Association.

XIII. — The New York Clearing House 148

Origin and early history — Formal organization in 1853 — First location — New York clearinghouse building company — Cedar street property — Constitutional provisions — Committees — Statistics of membership — Clearing for nonmembers — Statements of condition — Capitalization of New York banks — Records of clearing house.

XIV. — Daily Routine op the New York Clearing

House 190

The clearing room — Clerks and messengers — The manager's part — How the exchanges are made — The cash balance paid in — ^The disbursements — Clearing-house gold depository — Restrictive indorsements — Pro rating of expenses — Record of fines — Table of annual clearings — Table of average daily balances.

XV. — The Clearing House Association op the

Banks op Philadelphia 223

Early history — Runners' exchange — The morning exchange — Gold depository — Clearing-house due bills — Settlements without the use of money — Comparison of bank statements — Collateral security — Assessments of expenses — Admission of new members — Plan of administration — List of presidents — Failures and resulting litigation.

Page.

Chapter XVI. — The Boston Clearing House 240

Formation and early history — Period of the civil war — Settlement of balances — Borrowing and loaning balances— Clearing for outside banks.

XVII. — Foreign Department of the Boston Clearing

House 259

Organization and history — Regulations — ^Two clearing hours — Blanks and forms — Fines — Bookkeeping.

XVIII. — The Chicago Clearing House 276

Date and history of formation — Methods of exchange — Preliminary exchanges among members — Kinds of money employed in settling balances — ^Trading balances — Non member banks that clear — Statements of condition — Expenses and fines — Admissions and expulsions — Volume of clearings — Administration.

XIX. — The St. Louis Clearing House 298

Early history — Scope of membership — Plan of administration — Management of clearings — Records kept by the manager.

VI

Contents.

ILLUSTRATIONS.

Page.

Form of receipt used by Buffalo clearing house given by creditor

banks on receipt of balances 40

Form of receipt given by Buffalo clearing house to debtor banks on

payment of balances 42

Facsimile of the check the journey of which is shown on the map on

page 71 69

Map showing the check's itinerary 71

Facsimile of the back of the check, showing the numerous indorsements it bore on finally reaching the bank on which it was

drawn 73

Form of clearing-house loan certificate used by New York clearing house in 1873; later issues differ from this only in the omission of

the restrictive date 84

Form of clearing-house loan certificate used in Philadelphia 87

Form of clearing-house loan certificate used in Boston 97

Form of clearing-house loan certificate used in Baltimore 99

Form of clearing-house loan certificate used in New Orleans 102

Form of clearing-house loan certificate used in Cincinnati 104

Form of clearing-house loan certificate used in Detroit 106

Form of clearing-house loan certificate used in Atlanta, Ga 108

Form of clearing-house loan certificate used in Birmingham, Ala 1 1 1

Form of clearing-house check used in Chicago 120

Form of clearing-house check used at Canton 126

Form of clearing-house certificate used at Fargo, N. Dak 128

Form of check issued by Group 2, Ohio Bankers' Association 130

Resolution authorizing exchanges through a member bank 172

Application to clear for another bank 173

Consent to clear for another bank 174

Form of statement of weekly averages of nonmember banks 175

Form of statement of weekly averages for trust companies 176

Form of statement required by the New York Clearing House

Association of Trust Companies 180

Form used at clearing house in tabulating national bank statements 181

Form used at clearing house in tabulating state bank statements 182

Skeleton of weekly statement of the associated banks of the city of

New York 183

Page.

Form of statement required of associated banks 184

Form of summary of weekly statement of associated banks Face 1 84

Skeleton of weekly statement of nonmember banks Face 1 84

Facsimile of "small ticket" deposited by messenger with settling

clerk 193

Form of "first" or credit ticket 194

Form of settling clerk's receipts 196

Form of settling clerk's statement 197

Form of "second" ticket 199

Clearing-house proof sheet 201

Form of settling clerk's report to his bank of daily balances 203

Manager's receipt 205

Form of gold certificate (face) 206

Form of gold certificate (back) 207

Clearings for fifty-five years at New York 217

Balances paid in cash for fifty-five years at New York 221

Form of clearing-house due bill 226

Form of weekly statement required of Philadelphia banks 228

Form of daily statement employed by the banks of Philadelphia 230

Form of statement of the average condition of Philadelphia

banks Face 230

Form of ticket used by Boston banks in connection with payment of

debit balances 246

Form of manager's receipt for debit balances, Boston 248

Form in use in Boston for transfer of balances 250

Statement of weekly averages of the associated banks of Boston Face 252

Form of average weekly return in use by the associated banks of

Boston 253

Form of receipt for pro rata charge on account of uncollected checks,

Boston 264

Foreign slip and check ticket, Boston clearing house 266

Form of receipt, foreign department, Boston clearing house 268

Exchange ticket, foreign department, Boston clearing house 270

Form of letter of transmission to correspondents, Boston 272

Form of settling sheet, foreign department, Boston clearing house 275

Forms of reports used in trading balances, Chicago 283

Form of order used in transferring balances that have been loaned,

Chicago 287

Form of order on clearing-house manager for balance due Chicago. _ 293

Facsimile of debit list used in St. Louis clearing house 303

Form used for listing balances in St. Louis clearing house 305

Form of manager's report of clearings, balances, etc., St. Louis 307

CLEARING HOUSES.

Chapter I.

CLASSES OF CLEARING HOUSES.

A CLEARING HOUSE DEFINED — CLEARING HOUSES CI.ASSI- FIED WITH RESPECT TO FUNCTIONS — CLEARING HOUSES CLASSIFIED WITH RESPECT TO THE FUNDS USED IN SET- TLEMENTS.

What is a clearing house? The supreme court of the State of Pennsylvania has defined it thus :

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 of balances and so "clear" the transactions of the day for which the settlement is made.

But we must go farther than this, for though originally designed as a labor-saving device, the clearing house has expanded far beyond those limits, until it has become a medium for united action among the banks in ways that did not exist even in the imagination of those who were instrumental in its inception. A clearing house, therefore, may be defined as a device to simplify and facilitate the daily exchanges of items and settlements of balances among the banks and a medium for united action upon all questions affecting their mutual welfare.

National Monetary C o mm is s to n

The clearing houses in the United States may be divided into two classes, the sole function of the first of which consists in clearing notes, drafts, checks, bills of exchange, and whatever else may be agreed upon, and the second of which, in addition to exercising the functions of the class just mentioned, prescribes rules and regulations for the control of its members in various matters, such as the fixing of uniform rates of exchange, interest charges, collections, etc.

Clearing houses may also be divided into two classes with reference to the funds used in the settlement of balances: First, those clearing houses which make their settlements entirely on a cash basis, or, as stated in the decision of the supreme court above referred to, *'by such form of acknowledgment or certificate as the associated banks may agree to use in their dealings with each other as the equivalent or representative of cash;" and second, those clearing houses which make their settlements by checks or drafts on large financial centers.

Chapter II. CLEARING-HOUSE TERMS

HOW USAGES DIFFER — THE MEANING OF "TO CIvEAR " — CLEARINGS — EXCHANGE AND EXCHANGES — BIIvI^S AND BII.I.S OF EXCHANGE — DRAFT AND CHECK — ACCOUNTS BAI.ANCED AND BAI^ANCES IN ACCOUNTS — COI^IvECTlONS — ITEMS — CI.EARING MATTER — SETTI^EMENTS — OUT-OF- TOWN CHECKS AND COUNTRY CHECKS.

Every profession and every line of business, as well as every trade, develops its own peculiar terms and phrases. Those who become familiar with the routine of the business or the profession use these terms among themselves with a degree of precision and certainty of meaning which sometimes is difficult for one outside of the group to comprehend. The usage in this regard by banks and clearing houses is no exception to the general rule.

Terms which are current in one part of the country or in one financial center do not always obtain in others, and to a certain extent different terms are sometimes employed in different parts of the country for indicating approximately the same things. For these reasons, and others which the reader will readily apprehend, a brief consideration of a few of the prominent terms employed in clearing-house affairs is appropriate by way of introduction to the more important chapters which follow.

Nothing like a complete list is attempted, and instead of presenting the definitions in conventional dictionary fashion, the meaning of certain terms and the special uses to which they are applied are laid before the reader in a far less formal manner.

The term "clearing house" is defined at some length in another part of this volume, from the standpoints of use and function. The word is also used in the sense of location or place. A clearing house may be described as an office, established by the banks of a city, where their representatives meet daily to exchange drafts and checks and adjust balances.

The term ''to clear" is popularly defined "to pass through the clearing house." Another definition is, "to settle accounts by exchange of bills and checks, as is done in the clearing house." To clear a check means to pass it from the bank that holds it as a deposit or for collection to the bank on which it is drawn, and to receive payment therefor; but, with the complexities of modern business, a single check is seldom cleared. Instead a multitude of checks and other items are included in each clearing. The term "to clear" therefore takes on a broader meaning, and the only adequate conception of it is afforded by a view of the actual operations of a clearing house, which are set forth in another part of this volume.

The word "clearing" designates the settlement of balances between banks, arising from the interchange of checks, drafts, etc., carried on at the clearing house. The term "clearings" signifies the total of differences balanced at a clearing house. Occasionally the words "clearance" and "clearances," which, properly employed, designate space or distance, are used in the place of "clearing" and "clearings." Their employment in the place of the latter is not justified by general usage nor by the real meaning of these forms of the word.

The term "exchange," so common in financial and business transactions, has various shades of meaning, ranging from a charge for the transfer of money from one point to another, to the place where business interests of a special class are brought together and where contracts concerning them are made. The word literally means the act of giving one thing as an equivalent for another, or for interchanging two equivalents. From this it comes that the word indicates that which is given or received by an arrangement for mutual interchange, and hence the term " exchanges," frequently employed by those who have transactions with the clearing house, to indicate the items that are to be exchanged, as, for example, in the phrase: "The amount of exchanges."

The term "bill" has several different meanings, ranging from a statement of an account, or of money due, to a bank note or government note. Occasionally, in loose usage, it means a promissory note. In Great Britain the term is frequently used to mean a bill of exchange. As used in connection with clearing-house affairs in this country, it usually designates bank notes or government notes.

A "bill of exchange" is a written order or request from one person to another, for the payment of money to a third, the amount to be charged to the drawer of the bill. This term, therefore, while having a special meaning in some cases, often includes drafts which are drawn by merchants upon their customers in ordinary course and put through bank for collection. The term in this sense, however, is less commonly employed than ''draft."

A "draft" may be described as an order drawn by one party on another for the payment of money to a third. It is for the most part limited to an order payable at, or collectable through, a bank or other financial agency. A draft made payable at some time other than at sight, and which has been accepted by the party upon whom it is drawn, is known as an "acceptance," and is treated by banks and clearing houses the same as a note.

A "check" is an order in writing upon a bank or banker for the payment of a designated amount of money to some designated person or order. Checks vary in form. Those which are current between banks and bankers — as, for example,, the checks that would be used by a country bank in drawing against the balance lodged with its New York correspondent — frequently take the form that commonly obtains with drafts. Hence the term "bank draft" or "banker's draft," often employed by those who purchase New York or other exchange of their local banks to designate the character of their remittance.

A "center" is described as, in the dictionaries, the place about which things cluster, or to which they converge. It is also described as the point of emanation or radiation. With this definition before us, it is easy to perceive what is meant by a "money center" or a "financial center."

The term "balance" has two distinct meanings, and the word is used among bankers and business men in a way to indicate two things entirely different from each other. In its simplest form a balance may be declared to be an equality between the credit and debit totals of an account. But it is also used to refer to the difference between such totals, or, in other words, the excess on one side or the other. Thus in the first sense we declare that an accoimt is balanced when it has been closed by securing an equality of the two sides. In the second sense, when we speak of the balance in an account, we mean either the debit or credit amount, as the case may be, that is required to produce an equality of the two sides, or, in other words, to close the account. The balances in a clearing-house statement are the respective differences between the debit and credit sides of the several accoimts included in the statement. A bank's balance in a clearing-house settlement would mean either the amount that it has to pay or the amount that it is to receive, according to the excess of debits or credits shown by the statement.

The dictionaries define the verb "to collect" as follows: "To gather money from many people." A collection is defined as "that which has been gathered or taken up;" but amiong the banks and in clearing-house circles the term "collection" is somewhat expanded beyond these Hmitations, and is used for designating that which is to be collected. For example, the drafts or bills of exchange which a bank holds at a given date are frequently designated as its ''collections," particularly at the time that they are being arranged in proper order for transmission to its correspondents or for delivery to the clearing house. Sometimes the term employed in such cases is "collection items," which, of course, means the items for collection.

An "item," as the term is generally understood, means a separate article or entry in an account or schedule, or a sum so entered. The term among banks and in clearing houses is used in the latter sense almost literally. An item is that of which an entry has been made, whether it is a draft, bill of exchange, check, or note.

The word is frequently employed in combination with a qualifying term, as, for example, "collection items," "out-of-town items," "city items," etc.

A term which is as nearly original with and peculiar to clearing houses as any that might be cited is "clearing matter." "Matter," in this phrase, is a collective term, and designates any and all of the items that go into a clearing house. Clearing matter then means that collection of items, however assorted, which may be cleared. "Acceptable clearing matter" would designate that which is acceptable, according to the rules of the clearing house. There would, of course, be the opposite or negative term; for example, "unacceptable matter," meaning that which, while having somewhat of the character of clearing matter, is not of a kind that is handled by the clearing house in question, under the rules governing its operation.

A settlement, in ordinary commercial affairs, is an adjustment of accounts. **To settle" means to liquidate, or to pay, or to adjust differences. A ''settlement" may mean either the act of settling or that which is accomplished by settling. A bank's clearing-house settlement therefore means an adjustment or payment of the difference between the debit and credit side of the account and further designates either a receipt or a disbursement, as the case may be. Each member bank has a settlement with its clearing house daily.

In the designation of checks, with respect to the location of the banks upon which they are drawn, considerable confusion exists at times in the term employed for the purpose. ''Personal check" and "local check" are terms occasionally used to indicate out-of-town checks or checks on country banks. An out-of-town check is one drawn upon any bank outside of the city in which a given clearing house is located, or outside of the city in which member banks of the given clearing house are situated. In other words, it is one that must be sent away for collection. The term " country check" has the same general meaning, but is applied more particularly to checks drawn upon banks located at a considerable distance from a given clearing-house center. Referring again to the terms "personal check" and "local check," above referred to, it must be evident to everyone who gives the matter the least thought that a check drawn by a depositor on a bank in New York would be a local check, and that it also. would be a personal check, and yet such a check, issued in the regular course of business, is not objection-

20040- n able from any point of view. On the other hand, a check drawn by a merchant in an interior town upon a bank in that town, irrespective of the responsibiUty of the drawer or the standing of the bank upon which it is drawn, would also be a personal check; but the latter would not represent par funds in New York. Out-of-town checks and country checks, accordingly, are subject to special regulations with respect to costs of collection.

Chapter III. SPECIAL FUNCTIONS OF A CLEARING HOUSE

PRIMARY OBJECT — EXTENSION OF FIEI.D — UST OF SPECIAL, FUNCTIONS — ACTION OF CI^EARING-HOUSE BANKS AT OUTBREAK OF CIVIIv WAR — MUTUAI, ASSISTANCE OF MEM- BERS — FIXING RATES OF INTEREST ON DEPOSITS — THE PRACTICE IN SIOUX CITY — ESTABUSHING RATES OF EXCHANGE — SOME BUFFAI^O HISTORY — ROCHESTER — BAI.TIMORE — HOUSTON — TOI^EDO — TOPEKA — ST. I.OUIS — WEST SUPERIOR — ST. JOSEPH — CLEARING-HOUSE LOAN CERTIFICATES.

The primary object of a clearing house is the exchange of checks and drafts between the banks associated to- ►gether for that purpose, and the settlement of balances resulting from such exchanges; but this is not the only function exercised. As already shown, this single function constitutes a clearing house of the first class, while the addition of other functions puts the organization into another class. The tendency has been marked, especially in recent years, to include within the legitimate field of clearing houses all questions affecting the mutual welfare of the banks and the community as a whole. The bankers west of the Mississippi River have given to the country the most striking examples of the possibilities of clearing houses exercising various special functions, while the great associations of the East, and especially that of New York, have exemplified the utility and value of clearinghouse loan certificates.

The most important of the special functions of a clearing house are (a) the extending of loans to the Government, (6) mutual assistance of members, (c) fixing uniform rates of interest on deposits, id) fixing uniform rates of exchange and of charges on collections, and (e) the issue of clearing-house loan certificates.

lycss than a decade after the inauguration of the clearing-house system in America the civil war broke out and threw the Government into a condition of acute financial embarrassment. The ordinary sources of income were insufficient to meet the demands of the approaching crisis. Thereupon the banks, members of the clearing houses in New York and Boston, responded with practical unanimity to the call of, the Government for loans, by which the latter w^as enabled to put armies in the field and ^maintain the struggle for national unity.

In times of panic it is not infrequently the case that a bank in good standing becomes temporarily embarrassed. Unfortunate report may cause a run upon it, and, being unable to call in a sufficient amount of its outstanding loans to meet the demands of its frightened depositors, it must either secure a loan or fail. In such an emergency the other members of the clearing house are usually willing to render assistance until the strain is relaxed. To secure such aid, however, a bank must be sound in its management and of good repute in every respect. Otherwise the members of the clearing house are likely to decline assistance, being quite willing to get rid of a weak and ill-managed member.

Another of the special functions of a clearing house is the fixing of uniform rates of interest on deposits, and in a few instances on loans. In some associations the legality of such action is still regarded as a moot question, and hence they are reluctant to enforce such a rule. Other associations, however, have not hesitated to regulate the members on these points. As early as 1881 rates of interest were agreed upon in Buffalo, and were observed practically without fraction or violation for some nine years thereafter. They were broken at last only because of their nonobservance by new banks, which at the outset refused to become members of the clearing-house organization.

The Sioux City Clearing House Association has fixed a maximum rate of interest of 2 per cent per annum, to be paid by the members upon bank accounts or balances, and on time certificates of deposit 3 per cent. Without any special clearing-house regulation on the subject, it is generally understood by the banks that 6 per cent is the minimum rate that shall be charged on first-class loans, and that the rate shall range from that to 8 per cent, according to the character of the risk.

At St. Joseph, Mo., the clearing-house rules provide that interest (not naming the rate) may be paid on balances to banks, bankers, trust companies, the St. Joseph Cattle Loan Company, deposits of the Government, State, county, city, etc., or to individuals, firms, corporations, not located or doing business in St. Joseph or Buchanan County, but that no interest may be paid to individuals, firms, or corporations located or doing business in St.

Joseph or Buchanan County, except by unanimous consent. Trust companies may pay interest on checking accounts at the rate of 2 per cent per annum, while savings banks, trust companies, and savings departments of commercial banks, on savings accounts, may pay interest at a rate not to exceed 3 per cent. Interest is not allowed on demand or time certificates for a less period than six months, and then at the rate of 3 per cent per annum. No interest is allowed for any fractional part of a six months' period.

The banks of Savannah, Ga., under clearing-house regulation, may pay interest not to exceed 3 per cent on individual accounts, and then only when the balances in such accounts exceed $25,000. On bank balances, without limitation as to amount, tljey may pay not to exceed 3 per cent.

The question of clearing-house regulation of the rates to be charged on local loans has been considered by many associations in different parts of the country, but, generally speaking, has not met with much favor. It is quite evident that on this one point the individual banks are jealous of their prerogative to loan their money at whatever rate they choose. The nearest approach to clearinghouse rate regulation of loans seems to be in the arrangement in vogue at Chattanooga, Tenn., by which the minimum rate to be charged by the banks in making their loans is determined from time to time by a committee appointed by the associate banks for that purpose.