7. THE CLEARING HOUSE. The prin ciple of offset — the application of credits to debits and the settlement of any balance remain ing— as applied to banking is defined as the clearing principle. Economically it is an evolu tion of the ancient system of barter by which goods were exchanged for goods, the trade being made even by giving something ato boot)); that is, to equalize any difference in the value of the goods exchanged. In money exchanges this principle is not involved since the amount of money given can always be made to equalize the value of the goods talcen. As soon as nego tiable instrtunents or substitutes for value are employed, this inequality of exchange must again be provided for as is the case with origi nal barter, except that money instead of some other commodity is used to make the trade equal.
The clearing principle now in operation between and among banlcs must have been employed as early as the general introduc tion of bills of exchange into the commercial world. The origin of the first clearing house in the modern sense is, however, clouded in some obscurity. London claims the distinction of having the original bank clearing house, which was organized about the year 1773. It was the custom of the early London banks to send mes sengers irom one to the other, presenting checks and other bills payable at their respective coun ters for payment in money. Two of these mes sengers, so the legend goes, formed the habit of meeting daily at a convenient coffee-house where they would exchange their items, paying the difference with cash which they had brought along for the purpose. Although this plan saved considerable time and the handling of much money, the characteristic dislike of the conserva tive English banker for anything varying from established custom asserted itself and the offending clerks who had thus violated prece dent were properly disciplined. The merits of the idea having finally prevailed, the London Bankers' Clearing House was established and is said to be the first such exchange conducted in a building set aside exclusively for that purpose.
Owing to the unsettled state of finance and the lack of a coherent banking system, it was not until 1853 that the first clearing house was established in the United States, the New York Clearing House having been founded in that year. Albert Gallatin, an eminent financier, had proposed such an organization many years earlier, but without success. Following the ex ample of New York similar associations were formed in other large cities and immediately after the National Bank Act had taxed State banlc note issues out of existence (1863-64), the deposit-and-checic system of banking brought into general use so large an increase of personal checks that clearing houses multi plied very rapidly. The so-called Suffolk system used by the Boston banks from 1818 to 1864 was a clearing plan adopted to facilitate the exchange and redemption of New England State bank notes, but its functions and methods were not those of the true clearing house in the generally accepted meaning of the term.
The Work of the Clearing The clearing house is a plan, rather than a tangible entity, although in one sense the term is used to designate the building in which the actual exchanges take place, and in another the volun tary association of the banks which comprise the membership. As between any two banks, there will be a simple offset of check.s which each holds against the other, payment of the difference or balance being either deferred and included in the following day's transactions or else settled daily in cash. When three or more banks are involved, and the offset is accom plished through a clearing house, the operation of exchange is identical, except that each mem ber bank assumes in accounting that all checks payable by its .neighbors are drawn upon but one fictitious institution — the clearing house and the bank in turn receives all checks on itself from the same source. This result is accom plished by putting all checks on each other member of the clearing house in separate pack ages, listing each total on the credit side of a sheet opposite the name or clearing house num ber of the bank on which they are drawn. The grand total is then recorded on the bank's books as for the Clearing House.° At a fixed time all the banks meet at the clearing house through their representatives, who exchange the packages, one clerk moving around the outside of a series of desks, each of which is occupied by another clerk from the bank whose clearing house number is shown on a brass plate. This clerk records in the debit column the amount of each package of checks received from the distributing messen gers. The result is that while each messenger has come to the clearing house with checks on every other member, he returns with checks on his own bank only, and this without having made a visit to each institution. The difference between the total amount brought to and taken away from the clearing house is the balance, and since the mere exchange of the items does not alter the sum of them, the total debit bal ances due to the clearing house by the members who have brought less than they have received must equal the sum of the credit balances which the clearing house owes the members who have brought more than they have received. This casting of total debit and credit balances is done by the manager of the clearing house and is the proof of the correctness of the exchange. With the exception of the manager, who may be an officer of one of the member banks, all the clerical work at the clearing house is done by the bank clerks who make the exchanges. The exchange of the packages and the sub sequent accounting consumes very little time, 10 to 15 minutes being sufficient to list the totals and strike the balances.