50. SPECIAL FUNCTIONS OF CLEARING-HOUSES1

BY JAMES G. CANNON

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 most important of the special functions of a clearinghouse are (a) the extending of loans to the Government, (b) mutual assistance of members, (c) fixing uniform rates of interest on deposits, (d) fixing uniform rates of exchange and of charges on collections, (e) the issue of clearing-house loan certificates, and (ƒ) examining individual banks.

a) Less than a decade after the inauguration of the clearinghouse 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 was enabled to put armies into the field and maintain the struggle for national unity.

b) 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 on 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 illmanaged member.

c) 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

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Adapted from Clearing-Houses, pp. 11-22, 139-49. (National Monetary Commission, 1910.)

upon in Buffalo, and were observed practically without friction or violation for some nine years thereafter. They were broken at last only because of their non-observance 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, Missouri, 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 sayings departments of commercial banks may pay interest on savings accounts, 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 three per cent per annum. No interest is allowed for any fractional part of a six months' period.

The banks of Savannah, Georgia, 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 they 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, Tennessee, 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 associated banks for that purpose.

d) Still another of the special functions of a clearing-house is the fixing of uniform rates of exchange and of charges on the collection of items. In 1881, the year in which the clearing-house in Buffalo was organized, a prominent banker in that city succeeded in uniting the banks on rates. The promoter of the enterprise, though well known for rate cutting, was a successful banker and had always been able to meet competition successfully. Hence, when he proposed a uniform-rate system the other banks were only too glad to consider his propositions. Meetings were accordingly held, schedules of charges were drawn up, and rules were formulated for the guidance of the banks. In a short time a schedule was adopted and put into successful operation. The rates were not high, but were arranged so as to do justice, as far as possible, to the banks on the one hand and the depositors on the other, and so satisfactory was the new régime that it remained in harmonious operation for nearly nine years. It is said that the increase in profits or collections, to the twelve banks interested, over the former method of doing business free of charge, paid the dividends of all the banks each year, and whatever profit was made on loans and discounts was used to build up the surplus. But the formation of new banks finally played havoc with the uniformrate system. While it lasted it was made obligatory upon every bank, but in 1891 the newly organized banks began to cut on rates. The clearing-house members endeavored to induce the new banks to join the association, but did not at first succeed. It was regarded as unjust to the member banks to hold them to the existing agreement when their competitors were free, and accordingly, in June, 1891, the schedule of rates was made no longer obligatory.

In 1895 the Rochester (New York) Clearing-House Association put into operation a schedule of collection charges, and the results have been most satisfactory. All of the banks were in favor of it, though there was at first some complaint on the part of customers.

Up to a comparatively short time ago no other association in the country had approached that of St. Joseph in the detail with which it worked out a system of regulations governing the conduct of its members in regard to making collections. In the past few years, however, considerable attention has been given to the subject by the

several associations, with the result that between 50 and 60 per cent of all the clearing-houses in the United States are now working under comprehensive rules and regulations covering the collection of items which come under this head.

e) One of the most important of the special functions of the clearing-houses, to which attention may be briefly called, is the issue of clearing-house loan certificates in times of panic. By this means, in some cases, the specie reserves of the clearing-house members have been combined in a way to become a common fund, so that any bank that experienced an unusual demand for specie was supported by the combined reserves of all the banks. The bank thus assisted secures the other members against loss by depositing with a committee appointed for the purpose of receiving them its securities in the shape of stocks, bonds, and bills receivable.'

f) A recently developed function of clearing-houses is the examination of banks in the association in an effort to supplement the work of federal and state bank examiners in their efforts to reduce bank failures to a minimum. Chicago was the pioneer in the field, its system of clearing-house examinations being inaugurated on June 1, 1906, as a direct result of the failure of the Walsh banks the preceding autumn.

The examinations extend to all the associated banks of Chicago and to all non-member institutions. The examinations include, besides a verification of the assets and liabilities of each bank, so far as is possible, an investigation into the workings of every department, and are made as thorough as is practicable. After each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments, and other assets, mentioning specially all loans, either direct or indirect, to officers, directors, or employees, or to corporations in which they may be interested. The report also contains a description of conditions found in every department. One of these reports is filed in the vaults of the clearing-house, in the custody of the examiner, and the other is handed to the examined bank's president for the use of its directors. This system has spread rapidly and is now in vogue in more than a score of the larger cities of the country. Everywhere it appears to have been eminently successful.

See Selection No. 94.-EDITOR.

Various clearing-houses in different parts of the country have incorporated into their rules and regulations certain special features, some of which are worthy of mention. For instance, at Altoona, Pennsylvania, it is the duty of the associated members to report to the secretary of the association any flagrant violation of commercial or financial integrity on the part of anyone having business relations with them. Furthermore, the solicitation of accounts of other members is prohibited, and any members having accounts of the same depositors shall have the right of ascertaining, each from the other, the extent and character of the loans made to such depositor. It is also provided that when a depositor of any member bank applies to another member for a loan the member so applied to shall have the right to ascertain from the applicant's bank whether the loan had been previously offered there and, if refused, the reason for refusal.

At Philadelphia, Pennsylvania, Chester, Pennsylvania, and Wilmington, Delaware, it is provided that the associated banks shall report at once to each other the names of individuals, firms, or corporations whose accounts have been closed on account of overdrawing, depositing worthless checks, or otherwise defrauding them.

The associated banks of Minneapolis, by special agreement, but not by constitutional provision, have appointed an advertising committee, of which the manager of the clearing-house is the chairman, to which is submitted all general schemes of advertising. The schemes are submitted in writing to the committee by the solicitor and action taken thereon. Many of these propositions are rejected, and what is known as clearing-house advertising appears only in the best mediums. The claim is made that this concerted action serves to secure much better rates and does not preclude any bank from placing advertisements in any other direction it desires. Chattanooga, Tennessee, and Fort Wayne, Indiana, also have made provision regulating the placing of advertisements by their member banks. The regulations of the Portland (Maine) Association state that no member shall, by advertisement, circular letter, or publication, reflect unfavorably upon the responsibility of another member.

The constitution of the Rochester Clearing-House Association provides that members are prohibited from offering a higher rate of interest to induce a customer to change his account from one bank to another or as an offset against collection charges.