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-Housé 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.

51. CLEARINGS OF NON-MEMBER BANKS IN CHICAGC

BY JAMES G. CANNON

Besides the regular members there are about forty non-member banks clearing through the Chicago Clearing-House. In other words, there is an average of two to each member. Most of those clearing in this way are private banks and trust companies.

Up to January, 1907, the Chicago Clearing-House exacted no compensation for permitting outside institutions to clear through its members. About that time an amendment was added to the constitution making it imperative for a member bank to first obtain the consent of the clearing-house committee before it could clear for an outside institution, and further obligated such a member to pay as follows: For each bank having a capital of—

The amendment further provided that such banks and bankers should, under proper authority, consent to the same examinations and render the same statements of their condition as are required of the members of the association, and be subject to all such rules and regulations in matters of common interest arising from or affecting relations with banks in other localities, and the fostering of sound and conservative methods of banking, as have been or may from time to time be adopted by the association, and sign an agreement so to do in such form as the clearing-house committee may require.

B. The System as a Whole

(1) GENERAL RELATIONS

52. COLLECTING OUT-OF-TOWN CHECKS

BY JAMES G. CANNON

It is evident that a bank receives from its customers in the daily course of business checks drawn on banks in distant towns and cities, but before a bank can realize any return from such checks it must 'Adapted from Clearing-Houses, pp. 288-89. (National Monetary Commission, 1910.)

collect them. That is, it must send them to the banks upon which they are drawn, or to some near-by bank which will act as its agent, for payment. For the purpose of collecting or clearing these foreign. checks the clearing-house is not available. 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 charges made by banks for exchange are usually extremely vexing to customers, and to the layman appear indeed quite unreasonable. It is obvious, however, that the banks are asked to perform an important service for their customers. When A, who lives at a distance from a financial center, buys a bill of goods from B, living in the city, and sends a check drawn on his local bank for payment of the amount, he subjects someone to the expense of collecting the check, and, further, someone is out the use of the money until the collection has been made.

For instance, a check on a bank in Massillon, Ohio, presented for payment in New York City might be sent to a bank in Cleveland, which in turn would send the check to the Massillon bank for collection. In an actual case like this two checks had to be drawn, four letters had to be written, 8 cents in postage stamps were used, and seventy-five or more handlings of the check were involved by a score or so of clerks, in five different banks, located in three different cities.

It would seem that the banks could not be expected to advance funds pending collection; but the competition among the financial institutions in the larger cities is so keen that the bank does not stand upon its rights and insist that the check shall be held for collection and credited to B's account only when collected, but passes it to his credit at once through fear that he will withdraw his account and deposit with some other bank that will extend that accommodation to him. This practice is quite general.

During the past few years great strides have been made by the clearing-houses throughout the country in the matter of establishing uniform rates for the collection of country checks, and at the present time there are few associations in the United States that have not some sort of a schedule for this purpose, however crude it may be.

53. LOST MOTION IN COLLECTING CHECKS1
BY JAMES C. HALLOCK

1. A check for less than $50 on Stonington, Conn., started at Westerly, R.I., six miles from Stonington, which it reached only after many days and a thousand miles of travel by the following route: Westerly to Providence, Providence to Boston, Boston to New York, New York to Boston again, but to another bank; Boston to New York again, but to another bank; New York to New Haven, New Haven to Saybrook, Saybrook to New London, and New London to Stonington. It passed through Boston twice, New York twice, and New Haven four times. It was put through nine banks, two of them in Boston and two in New York.

The following diagram pictures the circuitous journey:

Clearing Out-of-Town Checks, pp. 12 and 21. (Copyright by the author, 1903.)