In some cities, the debtor banks borrow the credit balances from the creditor banks before actual settle ment, and thus minimize the amount of cash to be handled. The borrowing banks usually pay interest for the amounts loaned.
Clearing house gold certificates are sometimes used. The clearing house provides adequate vaults in which gold coin is deposited, and issues receipts in favor of banks that make deposits. The banks then indorse these receipts and use them in settlement of balances at the clearing house. The clearing house pays out these certificates the same as actual gold or currency. They are recognized by the National Banking Act as equivalent to gold, and may be counted in the reserves of the national banks. They are issued in large de nominations, usually $5,000 and $10,000, and are valuable only in settlement of balances between clear ing house banks. The system makes a safe and con venient method of having gold coin in a non-negoti able form available for the payment of large balances.
6. Clearing house loan certifi cates are issued in times of financial crisis to help the weaker banks, which might otherwise be unable to meet their obligations. If the public should suspect that the reserves of a particular bank were getting dangerously low, a run would be started, which might spread to the other banks and cause general embar rassment. At such a time, the clearing house banks make a special agreement whereby any member may deposit certain types of security as collateral with the clearing house loan committee and receive loan cer tificates. The ratio of certificates issued to the amount of collateral deposited has varied all the way from 50 to 100 per cent.
Usually the certificates are intended for use only in settling clearing house balances; but in some com munities, especially where payroll demands are heavy, they are issued in small denominations and put into general circulation. Whether used in one way or the other, they serve the bank just the same' as so much cash, for they are paid out to the clearing house or over the counter in place of cash. Denomi nations have varied from twenty-five cents to $100, 000, according to the use intended. Interest at the rate of from five to ten per cent is charged against the borrowing bank in order to insure cancellation of the certificates as soon as possible. The interest re ceived is paid to the banks which hold the certificates as a result of credit balances at the clearing house.
• The issue of loan certificates is a signal to the public that the banks are standing together, and the usual result is restored confidence. The clearing house
often refuses to publish the names of banks 'applying for certificates. In fact, the stronger banks some times take out certificates which they do not need at all, simply to create a general impression in favor of the practice. The plan has been devised as a sub stitute for the issue of currency against rediscounted paper. It would probably never have been resorted to if we had had an elastic credit system with some central rediscount agency. The Federal Reserve system may render it unnecessary in the future.
7. Examination of members.—Most clearing houses require periodical reports from members. Some go so far as to conduct examinations, from time to time. Much can be said in favor of clearing house examinations. They often reveal bad investments in time to prevent serious loss and act as a check upon mismanagement. It has been urged against them that they place too much information about member banks in the hands of the manager and the officials of the clearing house. This may well be true. The St. Louis Association provides in part against this danger by contracting with the examiner that he shall not accept any position in a bank within 300 miles of St. Louis within a period of three years after leaving the employ of the clearing house, unless with the consent of the committee on management. Banks, in many cities, have so far been unwilling to submit to clearing house examination.
8. Other activities.—We can mention here only a few of the activities of clearing houses in different parts of the country. The associations of New York and Boston aided the government with large loans in the dark days of the Civil War. Some clearing houses have fixed uniform rates of interest to be paid by member banks to depositors, and in a few cases the minimum rate on loans has been agreed upon. A common practice is to fix uniform rates of exchange. In some clearing houses, members report the names of customers who violate the ordinary rules of busi ness integrity. In some cities, advertisements for all members are placed thru the associations. In others, the members are forbidden to solicit business from the customers of another member. Various other rules are agreed upon. Some of them are of doubtful merit. They are mentioned here merely to indicate the extent to which cooperation thru the clearing house has been carried.