Advantages of Country Clearing Houses The economy of country clearing houses comes from the re duction effected in postage expense, the clerical work at each bank, the number of banks handling each item, the expense and trouble of maintaining many correspondent accounts by the individual banks, and, by more direct routing, the reduction of the time of transit or interest charge. The economy of reducing the overhead is greater in proportion as the number of items handled becomes greater; it is, therefore, desirable to have the system as inclusive as possible. This fact is brought out by the experience of Boston, where the volume of checks and the cost per thousand dollars were as follows: Another natural result of the establishment of country clear ings is the abolition of exchange charges. The Boston Country Clearing House inaugurated par collections in 1900. All banks of New England were invited to agree to remit at par for checks properly drawn on them and presented for payment by mail; the banks were allowed to ship currency at the expense of the Boston banks, or to remit at par in Boston or New York funds. No bank was actually required to use the Boston par system, and it could continue to use its former correspondents and methods; but the clearing house banks at Boston refused to receive at par checks on any country bank which charged exchange, and items on it were collected through the express companies or otherwise in cash. Under this coercion the Boston Country Clearing House succeeded in getting practically all the New England banks and trust companies to remit at par. It sent the checks directly to the drawee bank. The advantages to the country bank were that it got the advantage of the Boston par list embracing upwards of 90 per cent of the New England banks, that it had to prepare but one remittance letter to the clearing house instead of one to each bank as formerly, that it was able to determine at sight the cost of collecting, a great convenience in analyzing an account, that checks went by a more direct course and required a shorter time of transit, and that interest on balances became more general and easy to obtain.
Growth of Country Clearing Houses The New York Clearing House Association created a country department in 1915. It acted only as collecting agent of the sending bank and sent its items directly to the drawee bank. The checks for collection were deposited between 9:3o A.M. and 4 P.M. (2 P.M. on Saturdays), and only large checks after 2 P.M. The members were expected to deposit their checks at intervals during the day, accompanied by letters of transmission upon prescribed forms. The checks had to be sorted according to states, and a separate letter of transmission made for each state. Checks on institutions not in the collection system were not per mitted to be deposited, and only cash items might be deposited. No items bearing "special instructions" were handled. When deposits were made the depositor received a duc bill which could be cleared through the exchanges on the second morning after its date.
Country clearing houses increased in number and volume of business after the proved success of the Boston system. By 1915 they existed in Boston, Kansas City, Atlanta, Oklahoma City, Nashville, Chattanooga, Omaha, Richmond, New York, Louis ville, and St. Louis. In that year the committee of twenty-five
of the American Bankers' Association reported the following statistics of the operations of these houses: With the extension of the federal reserve par collection system the country clearing houses are being discontinued and their func tions performed by the federal reserve banks. At present (1921) but four clearing houses arc still operating country departments. Probably the discontinued ones would be resurrected if the fed eral reserve banks should ever cease to absorb the service charges. The country collection department of the New York Clearing House ceased to function November 15, 1918.
Nature and Allocation of Collection Charges When a bank cashes a check on an out-of-town bank, or ac cepts one in payment to itself or for collection, it can realize no return from same until it is presented directly to the drawee bank, or indirectly through some near-by institution, for payment. Theoretically the check is payable over the counter of the drawee bank in currency. If the receiving bank cashed it at par, or if the bank accepted it at par in payment, or gave credit to the deposit ing customer at par and made the credit immediately available for withdrawal and allowed interest from date of deposit, it is evident that certain charges must be borne by either the collect ing bank or by the drawee bank, namely: the expense for clerical work at the collecting bank, the postage from the collecting bank to the drawee bank (or local collecting agent), the clerical work of the drawee bank (or local collecting agent) in preparation of remittance, the postage and expressage from the drawee bank (or collecting agent) to the collecting bank, the insurance on the package of currency, and the clerical work and the postage on advice of receipt of payment at the collecting bank. Meanwhile also the collecting bank is without the use of the funds from date of receipt of check to date of receipt of remittance and loses the interest upon them. The fact that the check wanders far from the drawee bank delays its presentment and permits the drawee bank to enjoy that much longer a non-interest-bearing liability, that is, to enjoy the use of the funds without interest.
Several alternatives are evident for allocating these collection costs, and in assessing the cost they should be analyzed into their elements, as each element has its peculiar justification.
A jobber in a reserve city who accepts in payment for a bill of goods a check on an out-of-town bank understands that the col lection of that check will occasion expense to someone; if his bank accepts it for collection, the bank may either debit those costs to his account or it may absorb those costs and perform the collec tion as a service and recoup them from the total profits of the jobber's account. The practice of banks should therefore vary with the size of the account; very small accounts bring such small profits in other ways as will not compensate for a lack of payment for the collection service, and a charge for this as well as the other services is legitimate.