needed and might lead to a dangerous concentration of power in the hands of a few managers, who might use it for personal aggrandizement or for the exercise of an arbitrary supervision. But the need of fixed rules of some sort for their guidance became more and more urgent, and on August 1, 1854, a constitution was adopted.

This instrument, with the changes that have been made from time to time by the adoption of amendments and resolutions, is in force at the present day.

Following the lead of New York all the principal cities of the country have organized clearing-houses until at the present time there are considerably more than a hundred.

48. THE PRINCIPLE INVOLVED IN "CLEARING”

BY CHARLES F. DUNBAR

To illustrate the working of the Clearing-House system, we will suppose the case of six banks carrying on business in the same town. On a given morning we will suppose the messengers of these banks to meet at the Clearing-House, each bringing the checks received by his bank in deposit on the previous day, as follows:

No. 1, checks on No. 2.... $ 6,500 No. 4, checks on No. 1.... $ 8,750

No. 2, checks on No. 1.... $ 7,800 No. 5, checks on No. 1.... $ 8,740

"

No. 3, checks on No. 1.... $6,750 No. 6, checks on No. 1..

$3,700

66

66

แ 66

2.... 4,270

2....

4,100

'Adapted from The Theory and History of Banking, PP. 52-53. (G. P. Put

nam's Sons, 1891.)

The sum of all the checks brought in is $191,700. If, now, we credit each bank with the checks which it presents against the others and charge it with the checks presented by them against it, we shall find that No. 1 is charged with $35,740 and credited with $33,550, that No. 2 is charged with $24,190 and credited with $29,870, and so for the others, and, therefore, that

If, then, the debtor banks, Nos. 1, 3, and 4, pay into the ClearingHouse the sums due from them, amounting to $13,500, and the ClearingHouse pays out to the creditor banks, Nos. 2, 5, and 6, the sums due them, of like amount, the result will be that every bank will, in effect, have collected payment of all the checks which it had received and will have made payment of all the checks drawn against it. This settlement of checks, amounting in all to $191,700, will have been made by the payment of $13,500, and transactions apparently involving thirty separate demands, each bank being the creditor of five others, will have been settled by a series of additions made at a central office, followed by three payments to and three payments from a common fund.

49. ORGANIZATION AND OPERATION OF CLEARING-HOUSES1

BY JAMES G. CANNON

The government of a clearing-house association in the United States is, theoretically, vested in a president, vice-president, secretary, treasurer, manager, and a clearing-house committee, sometimes termed "committee of management" or "executive committee." Not every association, however, is as completely officered as this; in fact, there are many associations that do not have the full list of officials named. A president, a manager, and an executive committee, Adapted from Clearing-Houses, pp. 28-46. (National Monetary Commission, 1910.)

however, are found in the organization of nearly every clearing-house association, for these functionaries are practically indispensable.

The clearing-house association holds an annual meeting for the purpose of electing officers and committees and for the transaction of other business. The quorum is usually fixed at a majority of all the associated banks. In some instances, however, it is fixed at two-thirds, and in a few cases even as low as one-third, of all the members. Sometimes a specified number is designated as constituting a quorum. Each bank is expected to be represented at the annual meeting by one or more of the officers, but is usually allowed only one vote.

The rules regulating the kinds of matter to be cleared are by no means uniform. A number of organizations specify in their articles of association what shall be considered proper clearing matter. With but two exceptions the exchanges passing through the clearing-house are confined to items drawn upon members or upon non-members clearing through members. That is to say, checks and drafts received by a bank member of a clearing-house in any city drawn upon another member of the same clearing-house, from whatever source the checks may have been received, are liquidated through the clearing-house; but checks and drafts received by a member of a clearing-house drawn upon some bank located at a distance, and not a member, nor clearing through a member, are regarded as improper matter for clearing.

The number of messengers required to transport the exchanges to and from the clearing-house varies widely in different cities. When the business is light, as in some of the smaller cities, one person acts as both messenger and settling clerk, while in some of the larger cities the exchanges of some of the banks are so heavy that four or five messengers are necessary to transport them.

Checks are taken to the clearing-house bound together with rubber bands or inclosed in large envelopes, the items that go to each of the members being kept separate. If the bulk is not too great, they are often carried in the hand, but it is customary in the large cities to transport them in leather bags or cases. The usual rule is that immediately upon his arrival at the clearing-house the settling clerk delivers to the manager, or the assistant manager, a ticket containing the amount of the items brought from his bank.

Two methods of delivering items in the exchange room are in vogue. In the one case they are delivered by all the clerks simultaneously; in the other by each clerk as soon as he arrives at the

clearing-room; but the exchanges must all be made before a specified time.

When the clerks begin the exchanges at the same time, they all start upon the signal from the manager with their items on their arms or in bags or cases strapped over the back, and proceed in the same direction, passing along the desks until they have deposited all their paper. In the large cities, where the clerks are numerous, order and method are necessary in delivery to prevent confusion and to save time. But in small cities, where the clerks usually deliver their items as soon as they arrive, more liberty is allowed in personal conduct; also by this method an opportunity is afforded to the less proficient clerks to arrive early and list their items as fast as they are delivered to them from the other banks.

When the clearings have been made, the next step is for each settling clerk to determine the amount of the balance of his own bank, which is found by taking the difference between the amount brought to the clearing-house and the amount taken away. A certain amount of time is allowed for the proof. In some cases the settling clerks do not remain until the proof is made, but leave for their respective banks as soon as they make out their tickets for the amounts brought, amounts received, and balances. If the manager of the clearinghouse, or his assistant in charge of the proofsheet, finds, after he has made all the entries and additions, that his work does not prove, he first determines whether the error was made by one of the settling clerks or by himself. If by one of the clerks, it is usually discovered in a short time at the bank, whereupon the latter reports the error to the manager at the clearing-house either by messenger or by telephone. If the bank fails to report the error in due time, the manager takes the debit and credit slips and finds it.

The speed with which the business of a clearing-house is transacted seems almost incredible. The actual time required to make the exchanges varies from one and one-half minutes to ten minutes. When the exchanges are made simultaneously, the time varies, as a rule, in proportion to the number of members. In view of the shortness of time required to make its exchanges, the New York Clearing-House affords, perhaps, the best example in existence of the success of modern business methods as compared with the old way of doing things. The clearances exceed on the average $300,000,000, and yet this enormous amount of paper is exchanged between the banks in ten minutes, and often in less time.

Clearing-houses may be divided into two classes with reference to the funds used in the settlement of balances: first, those clearinghouses which make their settlements on a cash basis, and, second, those clearing-houses which make their settlements on some other basis.

About 17 per cent of the clearing-houses in the United States settle their balances entirely on a cash basis. Among the clearinghouses that do'not settle with cash no less than five different methods of settling are in vogue. They are (1) by manager's check on debtor banks given to creditor banks; (2) by borrowing and loaning balances without interest; (3) by borrowing and loaning balances with interest; (4) by the use of one or more of four forms of certificates, viz., gold and currency depository certificates, United States assistant treasurer certificates, and clearing-house loan certificates; and (5) by draft on another city. These methods, however, are often found in combination.

Where manager's checks are used the creditor banks send clerks to the clearing-house to receive the manager's checks. These may be taken to the debtor banks and cashed, exchanged for cashier's checks or drafts on other cities, or sent through the clearings on another day.

Clearing-house certificates are of two kinds: those issued upon the deposit of gold coin (and in New York City and Boston on gold and silver certificates and legal-tender notes) and those issued upon the deposit of collateral securities. The former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. The latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing-house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. The certificates issued upon the deposit of gold, etc., are termed "Clearing-house certificates," and those issued upon the deposit of collateral security are very properly termed “Clearing-house loan certificates."

Generally speaking, about 40 per cent of the clearing-houses of the United States use drafts on other cities in paying their balances. About 30 per cent settle by manager's check and about 25 per cent settle by cash alone, the remaining 5 per cent settling by a combination of two or more of the foregoing methods.

'See Selection No. 94.-EDITOR