Of the four common forms of bank liabilities to creditors, the first two—Bank Notes and Deposits—are generally payable on demand and do not bear interest, whereas the other two forms Bills Payable and Acceptances—are payable at a time fixed by the date of acceptance and the terms of the papers and may or may not bear interest. As a check cannot be readily used by the payee in making payments or for reserves and does not bear interest, the holder has funds which are useless, and at the same time he incurs a certain risk that the check will not be honored. In addi tion the statutory or common law may require him to present the item for payment within a certain time. Bank notes, on the other hand, attain to general acceptability because the holder may make payments with them and one bank may use the notes of other banks as reserves. If the law were to prohibit such uses, bank notes would be collected at once upon receipt, just as checks are; otherwise the holder would lose the use of the funds repre sented and the debtor would have them meanwhile without having to pay interest. Acceptances and bills payable having a definite maturity must be presented for payment at the time of maturity. If interest ceases at maturity it is financially profit able to present the item at that time and the law may also require such presentation so as to protect the indorsers of the instrument.
Methods of Presentment The method of presentment of an item for payment is deter mined by its cost and by legal requirements. The costs include the clerical work, messenger service, loss of interest on idle funds, risks of carrying the items or moneys in the street or in the mails, and so forth. Items on institutions in the holder's city are col lected either by messenger or through the clearing house. A clearing house is now established in every city of considerable size and the items collected by messenger include merely those on institutions not members of the clearing house, documentary items, special advice items, and large sight items. At the bank the city collection clerk dispatches messengers over prescribed routes with these collection items.
The Clearing House The clearing house is an association which provides a common meeting place and facilities for collection messengers to exchange their reciprocal claims on each other and settle the net balances only. Suppose, for example, that in a city with five clearing banks, the claims on a certain day are as follows: Then the equation of debit and credit balances is: + 532,452 + = + = The banks A and E are net debtors to banks B, C, and D, and the payment of $2,905,635 balances settles their combined clearings of $11,5o5,o66.
The economies of this clearing plan are evident. The items can be more expeditiously handled if put into one messenger's box and carried a short distance to the clearing house than if put into many boxes and carried to the respective drawee banks.
Only the net balances of the day's exchanges need be paid in money and carried in the street, thus reducing risk and expense, and this expense may be further reduced by depositing funds with the clearing house for clearing house certificates which may be used to settle balances. Each bank needs to carry a much smaller amount of till money, for the sums due to and due from the bank are offset synchronously and the bank does not have to provide in advance cash enough to pay the whole of the sums due to other banks. Finally a great economy of time results, inasmuch as system and uniform rules are devised for the prompt exchange of items and settlement of balances. The effect of the whole process is to offset indebtedness and conserve the use of money.
Out-of-Town Collections To collect out-of-town items, one system is to effect arrange ments whereby the correspondent acts as agent, collecting items on banks in its city through the clearing house and on banks in its vicinity through subcollecting agents. Since checks are payable at the drawee bank's window, the drawee bank remits for the proceeds after deducting exchange charges presumably to cover the expense of maintaining a balance with the sending bank against which drafts may be drawn to make remittances. The law holds a bank to the exercise of due care in choosing collection agents and to reasonable promptness in sending and remitting for items. Sending an item directly to the drawee bank, however, unless the principal bank expressly permits it, is held to be negli gence, and therefore the collecting bank sends the item to sub agents in the same city as the drawee bank. The terms of agreement between the depositor and the collecting bank as to collection charges, the time when items are credited to the account, and the reciprocity of collection services, are various. This system results in indirect routing of items to save col lection charges, and therefore in too large an amount of funds being afloat in the mails.
To cut down the expense of this system of out-of-town collec tions, co-operative "country" clearing houses have been estab lished in some of the chief cities as adjuncts to the city clearing house. A member sends to the country clearing house such of its out-of-town items as it desires and is permitted to send. All items on one drawee bank, or on the banks of one city, are put into one envelope and mailed to that bank or the agent of the clearing house in that city. The bank or agent makes out one lump remittance to the clearing house, which settles with its members. This system of co-operative collections may go further and require all drawee banks to remit at par for all items sent to them, and then assess the expense of the country clearing house upon the depositing banks at so much per item or per dollar collected.