CLEARING, AND CLEARING HOUSES

CLEARING, AND CLEARING HOUSES.
Clearing is the settlement of mutual claims by the payment of differences. The total of the claims to be settled is the
clearings, and the differences are called
balances. Clearing house is a place where clearing is done.

—The greatest use of clearing is to facilitate the daily payment of the checks held by the banks of a city against one another. Clearing is used in Great Britain to adjust the complicated accounts of the through traffic of connecting railroads, and to simplify the fortnightly deliveries of stock on the London stock exchange. England has three bank clearing houses; France, one; Austria, one; Australia, one, and the United States, 28. There are two railway clearing houses, one in London for the English and Scotch railroads, and one in Dublin for the Irish railroads. The only stock exchange clearing house is in London.

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Clearing between banks is a simple process, done in substantially the same way in all the clearing houses. At a certain hour in the morning every bank sends a
clerk and messenger to the clearing house, where each bank has its desk. Its clerk sits at this desk and receives from the messengers of all the other banks in turn, all the checks, or “exchanges,” held against it for payment. As the messengers deliver their exchanges they take receipts. When all the messengers have made the tour of the room each bank will have received through its clerk all the checks held against it by the other banks in the clearing house, and will have delivered through its messenger to every other bank all the checks, or “exchanges,” it holds for payment. If it receives more than it has delivered, it is a “debtor” bank, and has a balance to pay; if it delivers more than it has received, it is a “creditor” bank, and must be paid a balance. In the New York clearing house this process of delivering “exchanges” and taking receipts usually consumes about ten minutes. Without the clearing house, the messengers would need six to eight hours to do the same work. Proof sheets are made, under the supervision of the manager of the clearing house, to see that everything balances, and no clerk is allowed to leave until any error made has been discovered and corrected. At a later hour—before 1.30 in New York and 12.30 in Chicago—the debtor banks must pay to the clearing house for the creditor banks the balances due. It sometimes happens that, at the clearing, checks are delivered to a bank which it does not consider itself bound to pay. For these the clearing house makes no allowance. Balances must be paid as if the checks were all good. Claims arising from disputed checks are adjusted directly between the banks interested.

—In the London and Philadelphia clearing houses no money is used for the payment of balances. Every clearing house bank in London, and the clearing house itself, keep accounts with the bank of England, and differences are settled by transfers from one account to another. In the Philadelphia clearing house the debit balances are paid either by certificates issued by the assistant treasurer of the United States for legal tender notes deposited, or by certificates issued by the clearing house association for
gold deposited in their safe. Thus no loss can possibly occur in paying balances to the clearing house; the banks give their due bill for the odd amount under $5,000. These due bills the manager deposits in a bank and gives his checks to the creditor banks for the odd amounts due them. The manager who has had charge of the Philadelphia clearing house for over 23 years, Mr. George E. Arnold, has received and paid out over $3,000,000,000, and is not bothered with one cent of money. In the New York, Chicago, and other clearing houses generally, balances are settled in legal tender paper or coin, and to some extent in clearing house certificates.

—London originated the clearing house. It was formed spontaneously by the clerks of the London private bankers, who, to save themselves the trouble of going about to each bank, got into the habit of meeting in a room to settle their mutual claims. A similar practice arose among French merchants, in old times, of making their bills payable at the great annual fair at Lyons, where they met to balance their debts, and pay the differences. In this way, says Boisguillebert in his
Dissertation sur la Nature des Richesses, transactions to the amount of 80,000,000 francs were settled without the use of a sou in money. Edinburgh bankers claim the credit of having established the first clearing house. It was formed to put a stop to the malicious practice that had grown up among the rival banks of suddenly presenting large amounts of notes on each other in the hopes of forcing a suspension. An agreement was made to meet twice a week to adjust their respective claims, and no demands were to be made at any other times. In 1775, after the London bank clerks had cleared among themselves for some years, a common centre of exchange was agreed upon by the bankers—then all private—in Lombard street, in the City. Bankers in the West End cleared through the City banks, and this practice still continues. For 20 years after the joint stock banks had been formed, the jealousy of the private banks excluded them from the benefits of the clearing house, and they were not admitted until 1854, after the intolerable inconvenience to which they were subjected for the lack of clearing house facilities had driven them to plan a clearing house for themselves. The bank of England has never been admitted to the London clearing house. In 1810 the London clearing house numbered 46 members; in 1840, 29; and lately, but 26. In 1858, on the suggestion of Sir John Lubbock, the operation of the clearing house was extended, to include country bankers.

—Besides the London clearing house there are, in Europe, clearing houses at Manchester, (which Prof. Jevons thinks has a better method than is used at London), Newcastle, Vienna and Paris. At Paris, owing to the limited use of banking facilities and to the large proportion of settlements made through the bank of France, the clearings are no larger than in Cincinnati, St. Louis, or Baltimore. Melbourne, Australia, has a clearing house which ranks with the St. Louis clearing house in amount of clearings. Liverpool, though one of the greatest centres of commercial exchange in the world, has no clearing house proper, and the use of checks has been almost unknown there until within the last five years.

—The largest clearing house in the world is in the United States, and that country has the greatest number of clearing houses.

—New York now surpasses London, the oldest clearing centre. in the amount of its average daily clearings. In 1880 the total clearings of the London clearing house were, in dollars, $28,197,659,227; those of New York were $38,614,448,223.06. But the largest clearings in one day up to the end of 1880 were those of Nov. 17, at London, which amounted to $302,900,000. The transactions of the New York clearing house in 1880 were the
largest ever made in any room on earth, and exceeded the sum of the payments ($18,334,854,202) and the receipts ($18,570,348,647) of the United States government since its foundation. All this immense business was done without the loss of a cent, and with no errors. The largest clearings made in New York, before 1872, were $35,541,088,264, in 1869, when one-third of them were due to gold speculation. London’s largest clearings were $29,544,268,442 in the year 1873. The New York clearing house was founded Oct. 11, 1853, with 52 banks. This number was reduced after the panic of 1857, to 47; rose to 60 in 1873; in 1880 was 57; and in June, 1881, was 59, at which time the capital of the clearing house banks was $60,875,000. New York does 78 per cent, of all the clearings made in the United States.—”The American,” Mr. Ellis said, in his paper on ‘The Clearing House System,’ read before the English Bankers’ Institute, Feb. 16, 1881, “seems to be the character most suited to the adoption of centralizing and clearing principles.” There is a clearing house in every important city in the United States, and the smaller cities are rapidly adopting this financial labor-saving device. In 1853 the first American clearing house was started in the United States. In 1877 there were 23 clearing houses in the country, including 409 banks; and in 1880 there were 28 clearing houses, of which 26 contained an aggregate of 394 banks, with a capital and surplus of $336,895,432. Twenty-three of these reported their clearings, which footed up, in 1880, $50,724,616,647. The American clearing houses that report are those at New York, Boston, Philadelphia, Chicago, Cincinnati, St. Louis, Baltimore, New Orleans, San Francisco, Louisville, Pittsburg, Milwaukee, Providence, Indianapolis, Kansas City, Cleveland, Hartford, New Haven, Columbus, Worcester, Springfield, Lowell, and Syracuse. Those that do not report are at St. Joseph, St. Paul, Norfolk, Memphis, and Portland. The total clearings of all the American clearing houses since the establishment of that at New York, in 1853, down to the end of 1880, are, as far as reported, $701,127,832,344. Clearings not reported are estimated by Mr. Dudley P. Bailey at $9,000,000,000; making the grand total, $710,127,832,344.

—Clearing saves time, trouble and money. Mr. William A. Camp, manager of the New York clearing house, states that when it was formed, the banks were able to close 2,500 bank ledger accounts, in each of which numerous daily entries had to be made. The London and Westminster bank stated in evidence before the house of commons, that before they joined the clearing house they were obliged to keep in hand £150,000 in notes for negotiating their exchanges. The Bullion Report of 1810 records that 46 bankers in London made average daily clearings of £4,700,000, with a payment of only £220,000 in bank notes. Mr. Babbage shows in the Journal of the Statistical Society for March, 1856, that the clearings were made with the use of less than 4 per cent. in cash. In the New York clearing house, in 1880, the average daily exchanges were $121,000,000, and the average daily differences, or “balances,” paid in money, were $4,900,000, equal to 4 1/10 per cent, of the settlements. The gold coin actually paid through the clearing house in 1880 weighed 598 tons. Had all the payments made during the year been in gold coin, without the aid of clearing the gold used would have weighed 74,000 tons. (
The Public.) The ratio of balances paid in money to the clearing houses in different cities for a term of years were as follows: Boston, 11.8 per cent.; Philadelphia, 9; St. Louis, 20; Cincinnati, 14.5; New Orleans, 11.2; Milwaukee and Pittsburg, 18. Dudley P. Bailey calculates in the Bankers’ Magazine for June, 1881, that since the establishment of the clearing house system in this country it has effected exchanges amounting to the enormous sum of $710,000,000,000, with the use of only about $48,000,000,000, or 6.8 per cent. in money or certificates. All business movement is quickened by the clearing house. Before it was established in New York, the banks on account of the enormous labor involved, made their settlements but once a week. The clearing house makes settlements possible every day. Since the use of money has been discontinued in the London clearing house, two or three dozen clerks clear every day, without the use of a coin or note, checks and bills to the average amount of $100,000,000. If gold were to be used instead of the clearing house machinery the weight to be moved every day would be 200 tons, over distances varying from yards to miles.

—Something more than the economy of time, trouble and money is gained by the clearing house. It is developing a new economic and social force that will have mighty consequences. The clearing house establishes a fellowship between banks that has already proved in more than one crisis to be of great importance to the community and themselves. When the war of the rebellion broke out in the United States in 1861, the united action of the New York clearing house banks enabled the government to raise the funds with which to maintain its credit, and, as its manager, Mr. Camp, claims, the regularity and exactness of the clearing house machinery, and the union of the banks in the clearing house, were great factors in tiding over the financial embarrassments of those dark days. The New York clearing house banks, encouraged by their experience during the war, checked the demoralization of the panic of 1873 by combining their entire resources by the issue of loan certificates to the extent of over $25,000,000. Banks in the clearing houses have a disciplinary power over each other. One of the banks in a large American city was compelled by its associates to withdraw, in 1881, from the clearing house, on account of fraudulent returns of taxable deposits, made to the United States internal revenue commissioner. The constitution of the clearing house of New York city provides that for sufficient cause any bank whatever may be expelled from the clearing
house by a majority of its associates, and at the same time vests a still more summary power of instant suspension in a standing committee. Similar provisions are found in the constitutions of the clearing house of Chicago and other cities. In Philadelphia each member of the clearing house is required to make a full statement of its condition every day for the information of its associates, and in New York similar reports must be made weekly. Clearing houses usually have an arbitration committee to determine all disputes between banks submitted by both parties.

—Not less important is the effect of the publicity given, especially in America, to the clearing house returns, which are published daily in most of the cities.

—Every week a summary of the statements of the American clearing houses that make reports is prepared and telegraphed, with explanatory remarks, over a large part of the United States, by the associated press. These statements are looked for by business men and capitalists with as much interest as the weather reports. They are financial weather reports. This work of collation and explanation is done by Mr. Wm. M. Grosvenor, editor of
The Public, of New York, whose statistical genius was the first to see the application that could be made of these representative figures which reflect the changing conditions of business as closely as the barometer measures the pressure of the atmosphere. Bank clearings at London, New York, Chicago and elsewhere rose with the swelling tide of prosperity before the crash of 1873, sank with the industrial ebb that followed, and are now steadily rising all over the world.

Table. Click to enlarge in new window.

Mr. Grosvenor’s weekly and yearly analyses of the American clearings show that they register the growth of cities, the rise and fall of speculation—in stocks at New York, of grain at Chicago, and of cotton at New Orleans. Clearings are affected by such episodes as the gold speculation in New York in 1869, with the collapse of Black Friday and the yellow fever in Memphis in 1879. Extraordinary winters like that of 1880-81, the cessation of navigation on the American lakes, the approach of the holidays, the condition of the money market and of general trade, such a shrinkage of prices in merchandise and stocks as took place in the spring of 1880—all these modify the figures of the clearing house. Declining yield in the great bonanza mines of Nevada affects the clearings of San Francisco; and a break in wheat, like that of December, 1880, the clearings of Milwaukee. Pittsburg clearings show the recovery of its great iron industry. The wheat corner in Chicago increases the clearings of July 1, 1881. When stock speculators, to produce a break in Wall street, flood the country with rumors of disaster to all business interests, the weekly reports of rising clearings disprove the false assertion and act a great part in the maintenance of confidence.

—The fullest compendium of clearing house statistics yet made may be found in Mr. Dudley P. Bailey’s article on “The Clearing House System,” Bankers’ Magazine, New York, June, 1881. Consult, also, the files of
The Public;Mr. Arthur Ellis’ paper on “The Clearing House System applied to Trade and Distribution,” read before the London Institute of Bankers, Feb. 16, 1881; Sir John Lubbock, in the Journal of the Statistical Society, September, 1865; Mr. Babbage, in same journal, March, 1856; Geo. H. Ellery’s “The Banks of New York, and the Panic of 1857”; article “Clearing House” in
Johnson’s Encyclopœdia, by W. A. Camp, manager New York clearing house, and the following in periodicals: “Clearing House of New York,” (J. S. Gibbons),
Bank. Mag. (N. Y.), 14:41; “Clearing House,”
Bank. Mag. (N. Y.). 8:344,445; 9:409; 32:341;
Internat. Rev., 3:395; “Clearing Houses in 1857-8,”
Bank. Mag. (N. Y.), 13:6; “Clearing House Associations,”
Bank.Mag.(N.Y.), 18:217; “Clearing House Methods,”
Bank. Mag. (N. Y.), 30:10; “Clearing House System,”
Bank. Mag. (N. Y.), 13:882; 29:929; “Clearing Houses of the U. S.,”
Bank. Mag. (N. Y.), 31: 332—
The Railway Clearing House. This is the most complex of all clearing houses. It determines the amount due each one of the many connecting railroads of Great Britain and Ireland for its part of the through freight and passenger business. It is independent of each company, but under the control of all. There are four main departments: merchandise; passengers and parcels; mileage of rolling stock; lost luggage. Employés at each station forward every week to the railway clearing house at London the through passenger tickets taken up, and every month make reports of the weight, destination and payment of through freight. At every railroad junction the clearing house has its agents, who make weekly reports of the number, condition and destination of every car that passes from one line to another. All these returns and the passenger tickets forwarded are cleared by the clearing house, which ascertains the balance due by or to each company. Balances on passenger business are payable within 5 days, and balances on freight business within 23 days after the receipt of the clearing house advices. These are sent out monthly to the companies. The railway clearing house arbitrates between the companies on claims for damages to rolling stock, or in cases of disputed liability on freight or passenger business. The processes of the railway clearing house are simple, but the vast amount of detail to be attended to requires the employment of a large central staff to check accounts, determine balances, and settle them. There are two railway clearing houses in Great Britain and Ireland, formed under the provisions of the railway clearing act of 1850. Ninety-three English and Scotch railways clear in London, in a building in Seymour street, near Euston station. The Irish railways have a clearing house in Dublin.

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Stock Exchange Clearing House. The stock exchange, London, has the only stock exchange clearing house. Only a part of the members of the London stock exchange belong to it, and it clears for them alone. In the settlement of securities not transferable to bearer, it has caused little short of a revolution. Each broker who belongs to the clearing house submits a statement, and all but the balance of stock deliverable or receivable is canceled. The clearing house keeps a record of intermediate liabilities in case of dispute. The stock exchange clearing house system is not as perfect as that in other clearing houses, but it saves an immensity of trouble, and in departments of the London stock exchange where clearing is practiced, complaints of the onerousness of settling the half-monthly accounts are not as frequent as in those where it is not used.

H. D. LLOYD.