THE CLEARING SYSTEM Bank Clearing.—If a number of people who are all customers of the same bank pay one another with cheques, their debts are set off against their credits in the books of the bank. But if there are several banks, the process of set-off is more complicated. Each bank will receive some cheques drawn in favour of its own deposi tors by those of other banks. It will credit its own depositors with the amounts of these cheques conditionally on the banks on which the cheques are drawn paying them. It will sort out the cheques and present to each bank those drawn on it. But all the other banks will be following the same procedure ; every bank will be both debtor and creditor. To settle between any two, it is not necessary for each to pay the gross amount due to the other. They can set off debts and credits, and leave a net balance to be paid by one to the other. The process of set-off can be further devel oped and simplified by the creation of a central organization called a clearing-house. Instead of each bank presenting its claims to each of the others separately, each bank presents all its claims to the clearing-house. The clearing-house is then in a position to set off all the debts and credits of any one bank. If the bank is on balance a debtor it pays the net amount to the clearinghouse; if it is on balance a creditor it receives the net amount from the clearing-house. The receipts and payments of the clearing-house balance exactly.
In a place which is a clearing centre all the banks will not necessarily be members of the clearing-house. But those which are not members cannot easily dispense with its facilities; they will probably make arrange ments with the banks which are members to act as their agents. A clearing bank which undertakes to act as agent for one or more non-members can deal with their cheques along with its own, keeping a separate account for each. They must then make ar rangements to pay or receive the net balance disclosed every day after the process of set-off is completed. This arrangement can also be made for banks at a distance from the clearing centre. Clearing requires the personal presence in one room of represent atives of all the clearing banks and a bank with no establish ment (whether head office or branch) at the clearing centre cannot take part in it except through the agency of one of the banks carrying on business there. The outlying bank will probably arrange for the clearing bank to be its correspondent; it becomes a depositor in the correspondent bank, and maintains a balance on current account from which it can meet its clearing liabilities, and to which it can credit its receipts. In a country like the United States, where branch-banking is greatly restricted, this relation of the outlying bank to its correspondent at the clearing centre plays a great part in banking organization. There are intermediate clearing centres at which the banks, while acting as clearing agents or correspondents of the outlying banks of the district, themselves rely on correspondents at the greater centres.
In every country there tends to be a single ultimate clearing centre to which the residue of cheques not cleared locally will gravitate. One of the primary functions of a modern central bank is to hold deposits from the clearing banks, with which they settle their clearing balances. The London clear ing banks settle with cheques on the Bank of England. Clearing facilities form one of the principal features of the Federal Re serve Banks of the United States.
At the present day clearing is chiefly concerned with cheques. But the same machinery is applicable to bank-notes, and is often applied in communities where there are several note-issuing banks. Each bank presents to the note-clearing house the notes of other banks which it has received in the course of business, and its claims are set against its liabilities in respect of its own notes held by the other banks.
By means of the clearing system pay ments that people are willing to make with bank credit, can be carried right through to ultimate settlement without the use of money. On the other hand there are classes of payments for which bank credit is a less convenient medium than money, that is to say (I) payments to or by people (usually of small re sources) who have no banking accounts, and (2) the smaller pay ments (e.g., to shops, places of entertainment, railways, trams, etc.) of those who have banking accounts. Employers of labour regularly draw out money from the banks to pay wages, and all people with banking accounts draw sums out for use as pocket money. The banks must be prepared to meet these demands. They are the debtors of their depositors, and like all debtors are bound to pay, if so required, in money. To a great extent the money they pay out returns to them.
It is these transactions in money that make the place at which the bank undertakes to pay its depositors a matter of practical concern. If all payments were made in bank credit, the cheques and notes with which they were made would in any case all go to the clearing centre, wherever they might be presented. But one who has to make payments in money will want to keep his deposits with a bank or a branch bank in close proximity to the place where he resides or carries on business. One who has deposited money in a bank expects to find the money, when he needs it, at the place where he left it. In reality the money itself has become the unencumbered prop erty of the bank, and the rights of the depositor to it have been replaced by his rights as a creditor against the bank. Neverthe less it is an understood condition of the contract between them that the bank's debt shall be paid in money on demand (or after notice when that is stipulated) at the place at which the account is kept.
