THE CLEARING HOUSE
A work dealing with the subject of the Money Market would not be
complete without reference to the Clearing House—the institution by
which our enormous financial operations are adjusted. Without such
arrangements as are carried out so practically and automatically by the
Clearing House, it would be impossible to carry on our present trade,
and our banking system could not have developed into such a high state
of efficiency as we at present find.
Although our Clearing House has now been established for more than a
century and a quarter, London cannot lay claim to be the originator of
the clearing system. Edinburgh established such a system some years
before its adoption in London, and a somewhat similar arrangement
appears to have been in vogue in certain continental towns, it is said,
since the sixteenth century.
Up to the year 1775 all the cheques which a London banker held on
other London bankers were presented daily to the bankers on whom
they were drawn, and paid in cash or notes. Such a system was very
inconvenient to both the collecting and the paying bankers, as not
only did it entail the trouble of sending out clerks to present the
various cheques, but every banker was bound to keep an unnecessarily
large stock of cash and notes in his till, in order to be prepared to
meet in cash any demand which might be made upon him. There was also
considerable risk in the clerks’ carrying about such large amounts of
notes and gold.
In the year 1775 certain of the private bankers of London arranged a
scheme between themselves whereby to minimise this inconvenience and
risk. They hired a room in which the representatives of each bank met
daily, and exchanged the cheques and bills which they held on each
other. The _balances only_ which each bank had either to receive or pay
were settled in cash. By this means a great saving was effected in the
use of actual cash, and the risk of transfer of large sums from bank to
bank was to a large extent reduced.
At a later date the use of actual cash was still further economised.
Each of the banks represented in the Clearing House was compelled by
regulations to keep an account at the Bank of England. After this
regulation came into force, instead of cash being paid or received at
the end of the day, as was formerly the case, each banker’s account at
the Bank of England was either credited or debited with the balance due
to or by him on the aggregate of his daily transactions.
When the Clearing House was first established it met with much
opposition, although its advantages were so apparent. Several of the
largest bankers refused to countenance it. In course of time, however,
the great advantages it possessed wore down all opposition, other
bankers joined the “clearing,” a regular set of rules was drawn up for
the conduct of its business, and a committee of bankers was appointed
to supervise its working.
On the establishment of joint-stock banks in 1833 they were prohibited
from enjoying the facilities of the clearing system, owing to the
jealousy of the private banks. It was not until 1854 that this jealousy
was overcome, and the joint-stock banks permitted to join the Clearing
House; but the Bank of England did not take advantage of the system
until ten years later.
In the year 1858 the Country Clearing system was established. Under
this arrangement all cheques on country banks held by other banks are
passed through the Clearing House into the hands of the London agents
of the banks on which they are drawn. The London agent sends by post
each night to the various country banks which he represents, a parcel
of cheques consisting of the whole of the cheques on each respective
country bank which have been passed to him through the clearing. Each
of the country banks has thus but one remittance to deal with each
morning, instead of numerous remittances from banks situated all over
the country. On the other hand, the trouble to which each bank was
formerly put of forwarding all country cheques received direct to the
various banks on which they might be drawn was done away with.
The West End and suburban banks of London cannot, by reason of
distance, be directly represented in the Clearing House. A system,
however, is in operation by which practically the total of their daily
transactions becomes merged in the total figure of each day’s clearing.
Cheques presented to these banks by other banks are paid by what is
known as a “payment.” A “payment” is in effect a draft on their head
office or clearing agent, and these drafts are passed through the
Clearing House.
By these various developments it has come about that the vast
majority of bills and cheques passing through the hands of bankers,
throughout the country, become focussed in the London Clearing House,
and the returns of that institution, showing the total of the daily
transactions with which it has dealt, consequently afford a good
barometer of the state of trade throughout the country, the figures
rising or falling as prosperity or depression affects our commercial
condition. The returns are now published weekly, and the figures there
shown are stupendous in their amount—the average daily clearing on
ordinary days for the year 1902 amounting to £15,559,600, and on Stock
Exchange settling days to £38,961,800, while the grand total for the
year amounted to the record figure of £10,028,742,000.
Without going into detail as to the exact mode of procedure carried out
in the working of the clearing system, we will roughly delineate the
manner in which the transactions are brought to a head at the close of
each day’s work.
The clerks of each bank represented in the Clearing House make
out a summary at the end of each day, showing the amount of the
“articles” (cheques, bills, and drafts) which they have handed to the
representatives of other banks, and the amount of the articles handed
to them by other banks, and the difference of these two figures shows
the net amount which has to be received or paid as the result of the
aggregate of all their transactions.
All the clearing banks must keep an account at the Bank of England, and
a nominal account is kept at the Bank, called the “Clearing Bankers’
Account.” At the close of each day the amount owing by each bank, which
on balance has to _pay_, is debited to that bank’s account at the Bank
of England, and credited to the “Clearing Bankers’ Account”; while as
regards those banks which have to _receive_ on balance, the “Clearing
Bankers’ Account” is debited, and the account of those banks credited.
Thus while the Clearing Bankers’ Account at the Bank is automatically
balanced each day—as, in the aggregate, the credits of one set of
banks must be balanced by the debits of the other set—the whole of the
enormous total of transactions thus brought to one head is settled by a
few dozen entries in the books of the Bank of England.
Quite recently, and not before it was absolutely necessary, the
building of the Clearing House was largely extended, and the internal
arrangements reorganised, giving greater facility for the work carried
out there; and an innovation has been made in supplying Burroughs’
Automatic Adding Machines for the use of the clerks of the house. About
one hundred and forty of these machines are now in use, and though when
they are all at work the Clearing House is certainly not the quietest
spot in the City, yet the convenience and great economy of time and
labour resulting from their use cannot be fully appreciated by any
except those in daily touch with the work.[3]
[Footnote 3: Since the first edition of this book was published a new
clearing has been established, called the “Metropolitan Clearing.”
By means of this new system, cheques on various branch and private
banks situated within a certain radius of Lombard Street are collected
through the medium of the Clearing House and the head offices of the
various banks, and the total of such collections is brought into the
daily general settlement of the “House,” thus swelling the already
enormous figures. This system has certainly increased the efficiency
and unification of the Clearing House, and it has almost entirely
eliminated the well-known “walk clerk.”]