A few hours are allowed the banks after the exchange has taken place for the settlement of balances. The general hour for the ex change is 10 A.M. and at noon all debtor banks must pay their balances in acceptable funds to the manager of the clearing house. At 1 o'clock all creditor banks send to the clearing house and receive payment for their credit balances. Unpaid items are accounted for directly be tween the two banks involved and are not re turned thiough the clearing house. The clearing house acts merely as the agent for the debtor banks and is not liable in any way for the payment or genuineness of the checks which have been exchanged. Thus in a few minutes' time vast numbers of checks representing mil lions of dollars are presented and later settled for with very little actual money being neces sary. The ratio of balances to clearings de pends upon the relative size of the banks making the exchanges and as a general average for all clearing houses it may, be set down at about 10 per cent. In New York city, which has the most notable clearing house in the country, the average extending over a period of years is less than 5 per cent.
Various methods are used in settling bal ances, the object being to avoid as far as pos sible the use of money. Thus drafts may be used by the debtors which the manager of the clearing house deposits with one member, draw ing his own drafts against this deposit in favor of the creditor banks. In many clearing houses actual currency is used, but in others, gold and other money is deposited in the vaults of the clearing house and certificates similar in nature to warehouse receipts are issued in denomina tions of $5,000 or more. By using these certifi cates, which cannot be negotiated except by member banks, counting and recounting large sums of money is avoided, nor is there danger of loss in carrying the money through the streets.
In acting as clearing houses for their mem bers as the Federal Reserve banks are required to do under the terms of the Federal Reserve Act, the same accounting principles are em ployed, with due allowance for the fact that the member banks are separated within their own districts by at least one day's mail time from their clearing house, in this instance the Reserve Bank. The checks are sent by mail instead of by messenger as in the case of a local clearing house and the balances are ad justed by debits and credits to accounts with the Reserve Bank.
The 12 Federal Reserve banks also use the clearing principle in making settlement with each other through the operations of a Gold Settlement Fund held at Washington under the supervision of the Federal Reserve Board. Each reserve bank keeps a portion of its gold reserve in the form of United States gold cer tificates on deposit in the Settlement Fund. Once a week each reserve bank telegraphs the amount owing by it to every other reserve bank. These totals are then offset and the balances are adjusted by debits and credits in the fund. Settlements representing the exchange transac tions between the different sections of the country are thus effected by a change in owner ship of the gold which is not in any physical way disturbed. Before the establishment of
this National Clearing House it was necessary to transfer large amounts of gold and currency from one section of the country to the other as the trade balance varied in accordance with the seasons.
In order that the transac tions of the clearing house may be properly con ducted, certain regulations are adopted. Rules govern the nature of items which may be passed through the exchanges, how they shall be en dorsed, the hour of clearing and settlement; fines are imposed for lateness or errors; and the kinds of money which may be used in paying debit balances are agreed upon. This necessity for regulation has led to further clearing house development in which the banks act as an asso ciation for uniformity and the common good.
Many clearing houses receive out of town checks from their members and make collection. In this way better terms and quicker returns can be secured than if each bank acted inde pendently. Country checks handled by a clear ing house are collected and not cleared. The clearing house in this case operates as the agent of all its members and deals with the out-of town banks much as the member banks do in collecting checks through individual arrange ment with their country correspondents.
Several of the larger clearing house associa tions employ their own examiners who work independently of State or Federal officials. These local examiners not only make the usual audit and examination of the cash and books of the member banks, but they also make a careful investigation of the banks loans and discounts from the viewpoint of the credit risk. In this way each member bank is assured that other banks in the city are being carefully managed and in position to secure expert advice if it is needed. The records of the clearing house ex aminer are confidential and cannot be secured by any of the banks. All detail reports are given to the officers and directors of the bank examined and their attention is called to any assets which are of questionable value. The judgment of the clearing house examiner is usually to be depended upon in this connection, since indirectly he represents the combined credit skill of the officers of all the banks which he investigates. It is a matter of record that no depositor has lost a dollar through the fail ure of a bank subject to clearing house exam inations. This system of examination was first adopted by the Chicago Clearing House in 1906.
It is expected that many of the activities of clearing houses in the United States will grad ually give way in favor of the Reserve banks as these institutions develop in their super visory capacity. The clearing function, however, for which all clearing houses are primarily established, is of sufficient importance in bank ing to insure the continued existence of bank clearing houses under any present or future banking system.
Bibliography.— Cannon, James G., (Clean ing (New York 1905) ; Hallock, James C., 'Clearing Out-of-Town Checks) (Saint Louis 1903) ; American Bankers Association, New York, General Reference Library.