CLEARING HOUSES
The following discussion of clearing houses is confined
mainly to the United States and England. References to the
clearing houses of France and Germany, where the
introduction of the use of checks and the consequent
development of clearing facilities have been tardy, are
contained in the chapters devoted to the banking systems of
those countries.
I. IN THE UNITED STATES
A CLEARING HOUSE DEFINED
[121]What is a clearing house? The Supreme Court of the State of
Pennsylvania has defined it thus:
It is an ingenious device to simplify and facilitate the
work of the banks in reaching an adjustment and payment of
the daily balances due to and from each other at one time
and in one place on each day. In practical operation it is a
place where all the representatives of the banks in a given
city meet, and, under the supervision of a competent
committee or officer selected by the associated banks,
settle their accounts with each other and make or receive
payment of balances and so "clear" the transactions of the
day for which the settlement is made.
But we must go farther than this, for though originally designed as a
labor-saving device, the clearing house has expanded far beyond those
limits, until it has become a medium for united action among the banks
in ways that did not exist even in the imagination of those who were
instrumental in its inception. A clearing house, therefore, may be
defined as a device to simplify and facilitate the daily exchanges of
items and settlements of balances among the banks and a medium for
united action upon all questions affecting their mutual welfare.
METHODS OF EXCHANGE IN NEW YORK PRIOR TO 1853
[122]During a comparatively short period immediately following 1849 the
number of banks in New York increased from 24 to 60. In the daily course
of business each bank received checks and other items on each of the
other banks, which had to be presented for collection. All such items on
hand were assorted and listed on separate slips at the close of the day,
and items coming in through the mail on the following morning were added
at that time. To make the daily exchanges each bank sent out a porter
with a book of entry, or pass book, together with the items to be
exchanged.
The receiving teller of the first bank visited entered the exchanges
brought by the porter on the credit side of his book and the return
exchanges on the debit side, who then hurried away to deliver and
receive in like manner at the other banks. It often happened that five
or six porters would meet at the same bank, thereby retarding one
another's progress and causing much delay. Considerable time was
consumed in making the circuit. Hence, the entry of the return items in
the books of the several banks was delayed until the afternoon, at an
hour when the other work of the bank was becoming urgent.
A daily settlement of the balances was not attempted by the banks, owing
to the time it would have required, but they informally agreed upon a
weekly adjustment, the same to take place after the exchanges on Friday
morning. At that time the cashier of each bank drew a check for each of
the several balances due it, and sent a porter out to collect them. At
the same time the porter carried coin with which to pay balances due by
his bank. After the settlement had been made, there was a meeting to
adjust differences and bring order out of chaos.
An old bank officer (J. S. Gibbons), in describing the inconveniences
and defects of this system, says that some of the more speculative banks
took advantage of the weekly method of settlements by carrying a line of
discounts to an amount greater than their legitimate resources would
allow. Thus, a bank would manage to carry a small debit balance of
$2,000 or $3,000 with thirty or more institutions, making a total debit
balance of, say, $100,000 on which it discounted paper. It was the
practice to borrow enough on Thursday to make the settlements on Friday,
and the return of the loan on Saturday threw it again into the debtor
column. Virtually, therefore, the weekly settlements were nominal only,
and to show that there was no attempt at economy of time and labor in
making them, it is only necessary to say that the cashier drew a check
for every balance due him, whereas a draft on one bank in favor of
another might have settled two accounts at once.
The banks were at liberty to draw on each other for their credit
balances without waiting for the settlements on Friday, and hence, when
specie was needed, this was not infrequently done. But so far did many
of the banks extend their loans and discounts that a single small draft
by one bank on another would induce a general drawing and involve them
all in confusion and virtual war on each other. Three o'clock would
arrive, with the line of drafts incomplete, thus enabling debtor banks
ofttimes to add $50,000 to their specie, whereas creditor banks would
find themselves at the close of the day depleted in perhaps twice that
sum.
THE ORIGIN OF THE NEW YORK CLEARING HOUSE
[123]The desirability of a substitute for such a system had long been
realized, but as yet no plausible scheme had been proposed. As early as
1831 a plan had been suggested by Albert Gallatin, which, to a very
remarkable degree, coincided with the one ultimately adopted.
But the times were not ripe for the scheme thus proposed. Mr. Gallatin
was thinking in advance of the age. In time, however, the question began
to be more generally discussed. For nearly a year it was under
consideration, and finally it was deemed advisable to call a meeting to
take decisive action upon it.
On August 23, 1853, 16 presidents, 1 vice-president, and 21 cashiers,
representing 38 banks, assembled in the directors' room of the
Merchants' Bank, and at this meeting a resolution was passed providing
that "a committee be appointed to procure or hire a suitable room in or
near Wall Street, for the purpose of holding meetings of the officers of
the city banks; that the said committee be requested to submit a plan,
at an adjourned meeting of this body, to simplify the system of making
exchanges and settling the daily balances; and that when a room is
procured or hired for the above purpose, the presidents or cashiers be
requested to meet weekly until a plan is agreed upon." In compliance
with this request, the committee presented a plan for the daily
settlement of balances, at a meeting held on August 31, 1853, which plan
was amended so as to provide "that a room be procured for that purpose,
sufficiently large to afford suitable accommodations."
On September 13, 1853, the scheme was adopted and the committee was
"clothed with full power to hire a room, appoint a manager and clerks,
and make all the necessary arrangements to carry the plan for a clearing
house into effect." The date for beginning operations was fixed for
October 11. Accordingly, on the appointed day, the representatives of
the banks, members of the association, met in a room which had been
procured in the basement at No. 14 Wall Street, and made the first
exchanges. The total clearings on that day were $22,648,109.87, and the
balances were $1,290,572.38. These clearings have since been eclipsed by
over $30,000,000 in the totals of a single bank.
The clearing system in America was thus fairly launched, and from that
time forth its success exceeded the expectations of even its most ardent
projectors. The association consisted at that time of 52 banks, banded
together for their common good, which, as they then conceived, consisted
solely in the exchange of items and settlement of balances at a uniform
time and place. For nearly a year the operations were conducted without
a constitution. The adoption of such an instrument was opposed, on the
ground that it was not needed and might lead to a dangerous
concentration of power in the hands of a few managers, who might use it
for personal aggrandizement, or for the exercise of an arbitrary
supervision.
MEMBERSHIP AND ADMITTANCE FEES AT NEW YORK
[124]The association at present (1909) consists of 50 members[125] (32
National Banks and 18 State Banks) and the United States subtreasury
located at New York. The latter makes its exchanges only at the clearing
house, its balances being settled at its own counter. It has no voice in
the government of the association, and pays a nominal sum for actual
expenses. The privilege which the subtreasury enjoys of making its
exchanges through the clearing house is a matter of great accommodation
both to the subtreasury and to the banks. The New York post-office
clears through one of the members, but renders no compensation to the
association for the privilege.
The membership of the association since its organization has been
constantly changing, owing to the admission and expulsion of members and
voluntary withdrawals, as provided by the constitution.
The association began with 51 members, but by 1858 the list had declined
to 46, the lowest number in the history of the clearing house. A
membership of 67 was attained in 1895.
On February 28, 1854, the Bank of the Union was expelled and the
clearing-house association was authorized to return to it whatever
amount was necessary to offset its advances toward the expenses of the
clearing house. In the following December the Empire City Bank was
expelled and a similar resolution was passed but in no case thereafter
were any such refunds made....
The constitution is very explicit in its terms governing the admission
and conduct of members. Applicants are first considered by the
clearing-house committee and referred hence to the committee on
admissions. The latter committee, if, in its opinion, after a careful
examination, the applicants are qualified for membership, refers them to
the association for final action, a three-fourths vote of those present
being necessary for admission. Banks may be elected to membership at any
meeting of the association, but before being considered by the
clearing-house committee each applicant must be shown to have an
unimpaired capital or an unimpaired capital and surplus of at least
$500,000. Each new member is required to signify its assent to the
constitution, in the same manner as the original members, and pay an
admission fee, according to capital, as follows: A bank the capital of
which does not exceed $5,000,000 must pay $5,000; a bank the capital of
which exceeds $5,000,000 must pay $7,500. Any member increasing its
capital is required to pay in accordance with those rates.
[126]METHODS OF SETTLING BALANCES
There are no less than five different methods of settling balances, in
whole or in part, without the use of money at the clearing house. They
are (1) by manager's check on debtor banks given to creditor banks; (2)
by borrowing and loaning balances without interest; (3) by borrowing and
loaning balances with interest; (4) by the use of one or more of four
forms of certificates, viz., gold and currency depository certificates,
United States assistant treasurer certificates, and clearing-house loan
certificates; and (5) by draft on another city.
When money is not used in the adjustment of balances at the clearing
house, one of the most common methods of settlement is by manager's
check on debtor banks in favor of creditor banks. In such cases the
creditor banks send clerks to the clearing house to receive the
manager's checks, which may be cashed by the debtor banks, exchanged for
cashier's checks or exchange on another city, or sent through the
clearings on another day.
There is one important advantage of the manager's check over settlements
in cash at the clearing house: By its use only one transfer of cash is
necessary in making settlements, and thus the risk is greatly
diminished.
The second mode of settlement, other than on a cash basis, is by
borrowing and loaning balances without interest. At Chicago and
Pittsburg this method is practised as a matter of convenience to the
several members. After the exchanges have been made and the balances
determined, a certain length of time is devoted to this transfer.
The third method is that of borrowing and loaning balances upon
interest, as practised in Boston.
The fourth method is that of employing some form of certificate. Many of
the large clearing houses provide for a depository to receive in special
trust such United States gold coin as any of the banks belonging to the
association may voluntarily deposit with it for safekeeping, upon which
certificates may be issued, to be used in the settlement of
clearing-house balances. Such certificates are usually issued in
denominations of $5,000 and $10,000, and are negotiable only among the
associated banks. Many of the clearing houses impose a fine for their
transfer to any other party than a member of the association.
Coin certificates were devised by F. W. Edmunds of New York, and came
into use about 1857. The Bank of America first acted as a depository,
but after the beginning of the greenback epoch the associated banks
chose the United States subtreasury as such depository for both gold and
currency. When the new clearing house in Cedar Street was occupied, the
gold deposits were transferred to the magnificent vaults with which it
is provided, and these at the present time hold a very heavy deposit of
gold, as well as a very large amount of currency, against which have
been issued clearing-house certificates as before mentioned. The
associations in practically all of the large cities of the United States
now use these gold depository certificates in the settlement of
clearing-house balances.
Clearing-house loan certificates are issued only in emergencies. The
period during which balances are settled by such instruments lasts
usually only three or four months, or until the financial disturbance
which called them forth has subsided.
The fifth method is by draft on some other city. In some places the
option is given of settling in cash or by draft, as at Austin, Tex.;
Charleston, S. C.; Frederick, Md.; Jacksonville, Fla.; Kansas City, Mo.;
New Orleans, La.; Rochester, N. Y.; and Saginaw, Mich. In others
settlements are made exclusively by drafts on another city. Among these
are Syracuse, N. Y.; Worcester, Mass.; Fall River, Mass.; Fremont,
Ohio; Hartford, Conn.; Holyoke and Lowell, Mass.; and Binghamton, N. Y.
Sometimes foreign drafts are used in payments of equal thousands only,
as at Wilmington, Del., and Chester, Pa.
Generally speaking, about 40 per cent. of the clearing houses of the
United States use drafts on other cities in paying their balances. About
30 per cent. settle by manager's check, and about 25 per cent. settle by
cash alone, the remaining 5 per cent. settling by a combination of two
or more of the foregoing methods.
Clearing houses located in New England settle, as a rule, with drafts on
Boston or New York, or both. Clearing houses in the vicinity of
Philadelphia usually settle with drafts on that city or on New York, and
those located in that part of the country lying east of the Mississippi
River settle more or less by draft on New York or Chicago. Settlement is
also sometimes made by draft on some of the larger cities, such as
Baltimore, Washington, Savannah, Kansas City, Detroit, Omaha, and San
Francisco.
[127]RATIO OF BALANCES TO CLEARINGS
The ratio of balances to clearings depends partly upon the number of
banks, but much more upon the amount and character of their business and
upon their relations one to another. This is illustrated by figures
which have just been collected, covering the transactions for the year
1908. At Pittsburg, with 20 members and 128 non-members clearing through
members, the balances were 16.5 per cent. of the clearings; at Buffalo,
with 11 members and 7 non-members, 12 per cent.; at Chicago, with 20
members and 40 non-members clearing through members, 7.5 per cent.; at
Philadelphia, with 31 members and 1 non-member, 11.5 per cent.; at St.
Louis, with 17 members and 35 non-members, 9.3 per cent.; while in New
York, during the fifty-four years of its existence, the percentage of
balances to clearings has been only 4.64 per cent., notwithstanding the
operation of the United States assistant treasurer, who almost always
has a heavy debit balance.
The more nearly the banks stand on an equality with one another, the
more nearly will their transactions approach a complete offset, which,
of course, would leave no balance to settle.
[128]THE NATURE OF CLEARING-HOUSE LOAN CERTIFICATES
Clearing-house certificates are of two kinds--those issued upon the
deposit of gold coin (and in New York City and Boston on gold and silver
certificates and legal-tender notes) and those issued upon the deposit
of collateral securities. The former are employed in ordinary times
solely as a method of economizing time and labor and reducing risk in
handling large sums of money. The latter are employed in times of
financial disturbance or panic, and although both are intended for use
solely in the settlement of balances at the clearing house, the
circumstances that call them forth, the results effected by their use,
and the part they play in banking economy have little or nothing in
common. The certificates issued upon the deposit of gold, etc., are
termed "Clearing-house certificates," and those issued upon the deposit
of collateral security are very properly termed "Clearing-house loan
certificates," with which latter only are we here concerned.
Clearing-house loan certificates may be defined as temporary loans made
by the banks associated together as a clearing-house association, to the
members thereof, for the purpose of settling clearing-house balances.
Such certificates are negotiable, as a rule, only among the members of
the association, and are not in any sense to be regarded as currency.
They are not even seen by the business community, and do not pass from
bank to bank except in payment of clearing-house balances.
To obtain an intelligent understanding of the real character and purpose
of such certificates it will be well to treat somewhat of the
circumstances under which they are issued. In the course of the present
century the United States has undergone periodical derangements of
business affairs, when confidence was displaced by mistrust, when the
payment of debts became difficult, when property values declined, and
business houses failed; when industry and trade were paralyzed, and
general stagnation ensued in all lines of enterprise. In such times
depositors in banks, stricken with fear and sometimes pressed by need,
draw out their deposits, in many cases to such an extent as to render it
difficult or even impossible for the banks to contract their loans
sufficiently to meet the demands thus made upon them. Under our currency
system no adequate method is [was] provided for expanding the money
volume as occasion demands, whereby the banks can continue their usual
loans and discounts, and thus prevent a panic with all its evil
consequences. Hence it is left in a large measure to the financiers of
each community to work out their own remedy, supplemented by such mutual
assistance as a courteous regard for each other may dictate or as
business relations may demand.
Quick to see the defects in our currency system, and the desirability of
in some way supplying it, the bankers of New York, nearly fifty years
ago, devised the scheme of issuing clearing-house loan certificates as a
method of relief from temporary stringencies. Subsequently, nearly all
the clearing houses in the great centres adopted the same device, and by
their heroic resort to the measure they have at different times relieved
the business community of untold disaster, for which invaluable service
they have justly received the grateful recognition of the entire
country.
The great value of clearing-house loan certificates lies in the fact
that they take the place of money in settlements at the clearing house,
and hence save the use of so much actual cash, leaving the amount to be
used by the banks in making loans and discounts, and in meeting other
obligations. The volume of currency, to all intents and purposes, is
expanded by this means to the full amount of the certificates issued.
The loan certificates are taken out by the clearing-house members
through loan committees, specially appointed, and are used, as a rule,
only in the payment of balances among the associated banks. Thus, when
the stringency in the money market seems sufficient to demand it, the
clearing-house association meets and appoints a committee called the
"loan committee," consisting usually of five bank officers, to act in
concurrence with the president of the clearing-house association, who
serves ex officio as a member. It is the duty of such committee to meet
each morning at the clearing house and examine the collateral offered as
security by the banks and issue loan certificates thereon, in such
denominations and proportions to collaterals deposited as may be agreed
upon. In the past the denominations have varied from 25 cents to
$100,000 in the different associations and in proportions varying from
$50 to $100 of certificates to $100 of collateral deposited.
These loan certificates bear interest at rates varying from 5 to 10 per
cent. per annum, payable by the banks to which they are issued to the
banks receiving such certificates in settlement of daily balances. Hence
the interest charged against certain banks must exactly equal and offset
that credited to certain other banks. The aim is to fix the rates
sufficiently high to insure the retirement of the certificates as soon
as the emergency which called them forth has passed by. As a rule they
are retired by the banks, which take them out as soon as they have
obtained sufficient cash to meet their daily obligations. Notice is
given by the debtor banks to the committee, calling for such
certificates as they wish to retire, and the committee gives notice to
the banks holding the same, stating that the interest will cease after a
specified date. In due course the holders send the certificates to the
clearing house for redemption. Upon the retirement of the certificates
the collateral deposited as security is surrendered by the committee in
the same proportion to certificates turned in as was required for
deposit at the time of issue.
It is by no means the general practice for all the members to take out
loan certificates when issues are arranged by the association. Some
banks are in such condition as to be able to weather the storm without
them, while others are weak and in great need of relief. Some banks
regard their use of clearing-house loan certificates as a reflection
upon their standing, and hence refuse to apply for them unless driven to
it by sheer necessity. Others regard it as in no way prejudicial to
their interests, but rather as a patriotic movement in which all the
banks should engage, both for the purpose of assisting their
fellow-members and for the welfare of the community as a whole.
CLEARING-HOUSE LOAN CERTIFICATES AND THE EQUALIZATION OF RESERVES[129]
Comparison of the course of events during the crisis of 1873 with that
in subsequent crises shows a progressively increasing unwillingness or
inability among the New York banks to make use of their cash reserves.
In 1873 the New York banks at the outset of the crisis held an available
reserve of $34,300,000. In the course of four weeks this was reduced to
$5,800,000, and the ratio to deposit liabilities was then less than 4.5
per cent.[130] Suspension was not escaped in 1873 but it was of shorter
duration than in later crises. The banks at that time were unable to
increase their cash resources by any of the means which have been
available in later crises. The Government had no surplus of greenbacks,
aside from about $12,000,000 which was almost entirely secured and
retained by the savings banks. Banknotes could not be issued because the
total circulation was at that time limited by law. Finally, additional
supplies of gold, secured through imports, were useless for ordinary
banking purposes because the business of the country was then carried on
by means of an inconvertible and depreciated paper currency.
Notwithstanding all these special difficulties, the New York banks, by
continuing to use their reserves freely even after payments had been
restricted, were able to restore confidence in a comparatively short
time, and money began to flow back to them within three weeks after the
outbreak of the crisis.
In 1893 the New York banks were in what was for them an unusually strong
condition at the beginning of the disturbance, having early in June a
cash reserve exceeding 30 per cent. of their net deposits. A succession
of banking failures in the West and South led to heavy withdrawals from
New York during the latter part of June and the beginning of July. Then
followed a lull and money began to be returned to New York. During the
third week of July banking failures were renewed in the West and South
and the drain was resumed. The positively unfavorable aspects of the
situation were altogether similar to those of the previous month with
the one further circumstance of a reduced cash reserve in New York. On
the other hand, additional means with which to meet the situation were
becoming available. At the end of July gold imports in large amount had
been arranged. Foreign purchases of our securities were heavy,
reflecting increasing confidence in the repeal of the silver purchase
law. Arrangements had also been made which would certainly lead to a
considerable increase in the issues of bank-notes during August and
September. Notwithstanding all these favorable circumstances the New
York banks suspended, during the first week of August, when they still
held a cash reserve of $79,000,000, more than 20 per cent. of their
deposit liabilities.
In 1907 the New York banks restricted payments when they still held a
cash reserve of more than $220,000,000 and when the reserve ratio was
also above 20 per cent. Both in 1893 and in 1907 suspension was not a
measure of last resort taken after the banks had entirely exhausted
their reserves and when there was no means of securing additional cash
resources. Moreover, after cash payments were restricted the policy of
the banks was unlike that adopted in 1873, in that the banks did not
make further use of their reserves; they hoarded them and added to their
amount, thus unduly prolonging the period of suspension.
Explanation of the failure of the banks in 1893 and 1907 to use their
cash resources as completely as in 1873 is simple; but it is of the very
greatest significance because it will bring to light the most serious
element of weakness in our credit structure. [Written before our banking
reform of 1913.]
In 1893 and in 1907 the clearing-house loan certificate was the only
device resorted to in order to secure the adoption of a common policy by
the banks. In 1873, as on earlier occasions when its use was
authorized, provision was also made for the equalization of the reserves
of the banks. Thus in 1873 the Clearing House Association in addition to
the customary arrangements for the issue of loan certificates adopted
the following resolution:
That in order to accomplish the purposes set forth in this
agreement the legal tenders belonging to the associated
banks shall be considered and treated as a common fund, held
for mutual aid and protection, and the committee appointed
shall have power to equalize the same by assessment or
otherwise at their discretion. For this purpose a statement
shall be made to the committee of the condition of such bank
on the morning of every day, before the opening of business,
which shall be sent with the exchanges to the manager of the
Clearing House, specifying the following items:
(1) Loans and discounts. (2) Amount of loan certificates.
(3) Amount of United States certificates of deposit and
legal tender notes. (4) Amount of deposits deducting
therefrom the amount of special gold deposits.
Two fairly distinct powers were given the clearing-house committee: the
right to issue clearing-house certificates, and control over the
currency portion of the reserves of the banks. This machinery was
devised (according to tradition) after the crisis of 1857 by George S.
Coe, who for more than thirty years was president of the American
Exchange National Bank. The purpose of the certificate was to remove
certain serious difficulties which had become generally recognized
during that crisis. The banks had pursued a policy of loan contraction
which ultimately led to general suspension, because it had proved
impossible to secure any agreement among them.[131] The banks which were
prepared to assist the business community with loans could not do so
because they would be certain to be found with unfavorable
clearing-house balances in favor of the banks which followed a more
selfish course. The loan certificate provided a means of payment other
than cash. What was more important, it took away the temptation from any
single bank to seek to strengthen itself at the expense of its fellows,
and rendered each bank more willing to assist the community with loans
to the extent of its power.
But in addition to the arrangement for the use of loan certificates
provision was also made for what was called the equalization of
reserves. The individual banks were not, of course, equally strong in
reserves at the times when loan certificates were authorized. From that
moment they would be unable to strengthen themselves, aside from the
receipt of money from depositors, except in so far as the other banks
should choose to meet unfavorable balances in cash. Moreover,
withdrawals of cash by depositors would not fall evenly upon the banks.
Some would find their reserves falling away rapidly with no adequate
means of replenishing them. The enforced suspension of individual banks
would pretty certainly involve the other banks in its train. Finally, it
would not be impossible for a bank to induce friendly depositors to
present checks on other banks directly for cash payment, instead of
depositing them for collection and probable payment in loan
certificates, through the clearing house. The arrangement for equalizing
reserves therefore diminished the likelihood of the banks working at
cross purposes--a danger which the use of clearing-house certificates
alone cannot entirely remove.
These arrangements had enabled the banks to pass through periods of
severe strain in 1860 and in 1861 without suspension. In both instances
the use of the loan certificate was followed immediately by an increase
in the loans of the banks, and in no short time by an increase in their
reserves. The situation in 1873 was more serious, and as events proved,
the reserve strength of the banks, while sufficient to carry them
through the worst of the storm, was not enough to enable them to avoid
the resort to suspension.
In 1884, the next occasion when clearing-house loan certificates were
issued, the opposition to the provision for the equalization of reserves
was so widespread that it does not appear that it was even formally
considered. The ground for this opposition can be readily understood. In
1873 the practice of paying interest upon bankers' deposits was
generally regarded with disfavor. Only twelve of the clearing-house
banks offered this inducement to attract deposits; but by this means
they had secured the bulk of the balances of outside banks. It was in
meeting the requirements of these banks that the reserves of all the
banks were exhausted at that time. The noninterest paying banks entered
into the arrangement for the equalization of reserves in expectation of
securing a clearing-house rule against the practice of paying interest
on deposits. But their efforts had resulted in failure. Some of them had
employed their reserves for the common good most reluctantly in 1873,
and the feeling against a similar arrangement in 1884 was naturally far
stronger and more general. Moreover, the working of the pooling
agreement in 1873 had occasioned heart-burnings which had not entirely
disappeared with the lapse of time. It was believed, and doubtless with
reason, that some of the banks had evaded the obligations of the pooling
agreement. It was said that some of the banks had encouraged special
currency deposits so as not to be obliged to turn money into the common
fund. Further, as the arrangement had not included bank-notes, banks
exchanged greenbacks for notes in order either to increase their
holdings of cash or to secure money for payment over the counter. Here
we come upon an objection to the pooling arrangement which doubtless had
much weight with the specially strong banks, although it is more
apparent than real. In order to supply the pressing requirements of some
banks, others who believed that they would have been able to meet all
demands of their depositors were obliged to restrict payments. That such
an expectation would have proved illusory later experience affords ample
proof. When a large number of the banks in any locality suspend, the
others cannot escape adopting the same course. But in 1884 the
erroneousness of the belief had not been made clear by recent
experience.
The New York banks weathered the moderate storms of 1884 and 1890
without suspension, by means of the clearing-house loan certificate
alone, and in the course of time all recollection of the arrangement for
the equalization of reserves seems to have faded from the memory of the
banking community. There was, however, in those years another potent
influence which tended to lessen the likelihood of suspension following
the issue of loan certificates. Many banks were unwilling to take them
out, fearing that such action would be regarded as a confession of
weakness. The prejudice against them was indeed so strong that needed
loan expansion did not follow the authorization of their issue. In 1890
the directors of the Bank of Commerce, then, as now, one of the most
important banks of the city, passed a resolution urging other banks to
relieve the situation by increasing loans and by taking out loan
certificates.
In 1893 only a small part of the balances between the banks was settled
in certificates at first; but by the end of July practically all
balances were settled in that way and suspension followed at once. In
1907 all the banks having unfavorable balances, with but one important
exception, took out certificates on the first day that their issue was
authorized, and suspension was then for the first time simultaneous with
their issue.
The connection between suspension and the use of clearing-house loan
certificates as the sole medium of payment between the banks is simple
and direct. The bank which receives a relatively large amount of drafts
and checks on other banks from its customers cannot pay out cash
indefinitely if it is unable to secure any money from the banks on which
they are drawn. So long as only a few banks are taking out certificates
and the bulk of payments are made in money, no difficulty is
experienced; but as soon as all the banks make use of that medium, the
suspension of the banks which have large numbers of correspondents soon
becomes inevitable. The contention of bankers both in 1893 and in 1907
that they had not suspended since they had only refused to honor drafts
on other banks was untenable. The clearing-house loan certificate was a
device which the banks themselves had adopted and they had failed to
provide any means for preventing partial suspension as the result of its
use. The further contention of some bankers that they had suspended
because they had no money to pay out was doubtless true of a few banks,
but for that very reason other banks must have been all the stronger,
probably well above their required reserve.
That the arrangement for equalizing the reserves, adopted in 1873, would
have availed to prevent suspension on subsequent occasions, is highly
probable, indeed a practical certainty. In 1893 events proved that the
banks had maintained payments up to the very last of the succession of
disasters with the results of which they had been contending. During
August the number of bank failures was not large and none of them was of
great importance. We cannot, of course, know how soon money would have
begun to flow back to New York, but certainly the suspension of payments
could hardly have hastened the movement. From the beginning of September
the reported movements of currency showed a gain for the New York banks,
and for the week ending September 16 the gain was no less than
$8,000,000. One month more of drain, therefore, was the most that the
banks would have been obliged to endure, and for the needs of that month
the banks would not, as in 1873, have been confined to the single
resource of the $79,000,000 of the cash in their vaults.[132]
Similarly, the enormous increase in the money supply of the country in
November and December, 1907, would have offset much of the loss of
reserve which the banks would have incurred, if they had continued to
meet all the demands of their customers for cash. And, finally, it may
be observed that in the unlikely event that alarm had not been allayed
and suspension in the end had become unavoidable, it would not have made
any practical difference to depositors whether the reserves of the banks
had been but 10 per cent. rather than 20 per cent. of their demand
liabilities.
CLEARING-HOUSE BANK EXAMINATIONS[133]
Most bank failures are due to the gradual acquirement of undesirable
assets over a period of years, and if some authority exists with power
to make recommendations of a remedial character, with the further power
to enforce such recommendations, if necessary, there is little doubt
that many bank failures would be averted.
The panic of 1907 presented many striking examples of just what is
intended to be here emphasized, viz., that under the careful
supervision of a competent and reliable examiner many of the assets of
the failed banks, upon which it was impossible for them to realize at a
time when they needed their funds, would probably have been liquidated
upon his recommendation and advice long before the necessity for such
liquidation had arisen.
Mr. J. B. Forgan of Chicago, has recently said on this subject:
A competent examiner--and there are many such now in the
government employ--while he can not pass judgment on all the
loans in a bank, can, after a careful examination, or a
series of examinations, form a wonderfully correct judgment
as to the general character of its assets and as to whether
its management is good or bad, conservative or reckless,
honest or dishonest. Examinations, as they are now
conducted, have a most beneficial influence on bank
management, especially by way of restraint. The
correspondence carried on by the Comptroller, based on the
examiners' reports, does an inestimable lot of good in the
way of forcing bank officers to comply with the law and in
compelling them to face and provide for known losses as they
occur. Supervision by examination does not, however, carry
with it control of management and can not, therefore, be
held responsible for either errors of judgment or lapses of
integrity. Examination is always an event after the act,
having no control over a bank's initiative, which rests
exclusively with the executive officers and directors, and
depends entirely on their business ability, judgment, and
honesty of purpose.
The clearing-house association of Chicago was the pioneer in the
establishment of an independent system of clearing-house bank
examinations in this country, its system having been inaugurated on June
1, 1906, with results that have, to the present time, more than
fulfilled the expectations of the bankers of that community[134]....
In substantially his own words the Chicago examiner operates under the
following conditions: The examinations extend to all the associated
banks of Chicago and to all non-member institutions. The work is
conducted with the aid of five regular assistants, each fitted by
experience to thoroughly do that part of the work assigned to him. The
examinations include, besides a verification of the assets and
liabilities of each bank, so far as is possible, an investigation into
the workings of every department and are made as thorough as is
practicable. After each examination the examiner prepares a detailed
report in duplicate, describing the bank's loans, bonds, investments,
and other assets, mentioning specially all loans, either direct or
indirect, to officers, directors, or employees, or to corporations in
which they may be interested. The report also contains a description of
conditions found in every department. One of these reports is filed in
the vaults of the clearing house, in the custody of the examiner, and
the other is handed to the examined bank's president for the use of its
directors. The individual directors are then notified that the
examination has been made and that a copy of the examiner's report has
been handed to the president for their use. In this way every director
is given an opportunity to see the report, and the examiner, in every
instance, insists upon receiving acknowledgment of the receipt of these
notices.
The detailed report retained by the examiner is not submitted to the
clearing-house committee, under whose direct supervision he operates,
unless the discovery of unusual conditions makes it necessary. A special
report in brief form is prepared in every case and read to the
clearing-house committee at meetings called for that purpose. The report
is made in letter form, and describes in general terms the character of
the examined bank's assets, points out all loans, direct or indirect, to
officers, directors, or employees, or to corporations in which they may
have an interest. It further describes all excessive and important
loans, calls attention to any unwarranted conditions, gross
irregularities, or dangerous tendencies, should any such exist, and
expresses, in a general way, the examiner's opinion of each bank as he
finds it.
Less than a year after the Chicago Clearing House Association appointed
its special examiner the associated banks of Minneapolis took similar
action. The conditions under which the Minneapolis examiner operates are
substantially the same as those governing the examiner at Chicago, the
principal difference being that instead of the examiner sending a copy
of his report to the president of the examined bank and notifying each
of the directors of such bank that he has made such examination and
that the report is in the hands of the president of the institution, as
is the rule of procedure at Chicago, and which, in a measure, leaves it
to the discretion of the directors whether they examine the report
carefully and in detail, the original report is delivered by the
examiner at Minneapolis in person to the board of directors of each bank
which he examines, at a meeting convened for that purpose. The report is
read and the criticisms, if any, are fully discussed, and the
recommendations considered. In this way no director can complain that he
had not sufficient opportunity to become fully conversant with all the
details of his bank.
II. CLEARING HOUSES IN ENGLAND
THE LONDON BANKERS' CLEARING HOUSE AS THE FOREMOST EXAMPLE
[135]The exact origin of the London Bankers' Clearing House will
probably never be determined, for, like other institutions whose purpose
has been to save time and trouble, its system appears to have been
gradually evolved.[136]
With the growth of the check system, each banker would daily find
himself in possession of a number of drafts for the credit of his
customers that needed collection at the offices of other bankers. This
would necessitate each bank sending out one or more clerks on what
became known as "walks" to obtain cash or notes for these drafts from
the houses on which they were drawn.
As in London alone there were some fifty or more private firms carrying
on a banking business this necessitated a considerable amount of work
and was attended with grave risk of robbery.
It is probable, therefore, that arrangements were made by some of the
bankers, as it is still done in some country towns, to meet at one bank
one week and at another the next for the purpose of exchanging checks.
But in consequence of the number of the London bankers this method would
prove awkward, and about the year 1770 we find that the walk clerks from
the city and West End banks had made a practice of meeting at lunch time
at a public house called the Five Bells in Dove Court, Lombard Street,
close to St. Mary Woolnoth Church, and not so very far from the site of
the Bankers' Clearing House of to-day. Here in the public room, or
according to tradition on the posts in the court outside, each day after
lunch a rough system of exchange of checks was carried on between the
clerks from each bank, the balances being settled in notes and cash.
From this rough system has developed the efficient organization of
to-day.
In May, 1854, the clearing house was closed for alterations and
enlargement, and the business was temporarily carried on at the Hall of
Commerce. Here, on June 6, 1854, applications for admission to the
clearing house were received from the following joint-stock banks: The
London and Westminster, the London Joint Stock, the Union Bank of
London, the Commercial Bank of London, and the London and County Bank;
and it was resolved "that the secretary be authorized to comply with
such applications, subject to the payment of an annual sum to be fixed
by the committee to reimburse them for the outlay that has been found
necessary to afford accommodation for their admission." There were at
this time 25 private banks in the clearing house.
Following on the admission of the five premier joint-stock banks in 1854
there were frequent applications from other joint-stock banks--many from
the moment of their foundation. But the wise reply of the committee was
invariably that they did not "deem it expedient to take into
consideration such applications from any banking establishment that has
not been in operation at least for a period of twelve months."
Though the joint-stock banks had been admitted to the clearing house yet
they were only allowed to rent seats there and had no share in the
management, so for the support of their mutual interests they had a
committee of their own which settled the rate to be given by the
joint-stock banks in the London district for deposit money at seven
days' notice.
In 1858 the country bankers submitted a plan for establishing a country
bankers' clearing house in London and proposed that the clearing house
committee should appoint two or three of their number to unite with them
as a working committee.
The establishment of a separate country bankers' clearing house would
have led to many inconveniences, and Mr. John Lubbock, now Lord Avebury,
submitted a plan for carrying out a separate country clearing at the
clearing house. The committee approved the plan and submitted it to the
country bankers' committee, who also gave their approval.
Thus was instituted at the Bankers' Clearing House the country clearing,
which more than all else has brought about the almost universal use of
checks in England, to the exclusion of notes and coin.
Mr. Lubbock's scheme was so well thought out that from its initiation to
the present time the rules have had to be only very slightly modified.
In 1864 the Bank of England entered the clearing house to clear on one
side only, the outside, for though the bank presents to the clearing
bankers at the clearing house all checks payable by them, all checks and
bills drawn on the bank are presented by the clearing bankers at the
bank itself, and the proceeds placed to the credit of each bank's
account. At the same time the governor of the Bank of England was made
ex officio a member of the committee of clearing bankers. After 1864 few
changes were made in the working of the clearing house, the volume of
the country and town clearings increased greatly, but the house proved
capable of meeting any increase.
Friction between the old private bankers and the joint-stock banks grew
less as amalgamations and absorptions increased, and before many years
the committee of London clearing bankers and joint-stock banks committee
amalgamated, it being agreed, as a condition of the joint-stock banks
committee ceasing to exist, that all the banks would abide by the ruling
of the committee as to the rate of deposit at seven days' notice.
Henceforth, every bank in the clearing house was entitled to have one
representative on the committee. Such representatives have hitherto
been chosen solely from the board or the partners and are nominated by
their banks and formally elected by the committee. The committee elects
its own chairman, vice-chairman, and honorary secretary. This committee
meets regularly on the first Thursday in each month, Thursday being the
day on which the Bank of England in normal times makes any alteration in
the bank rate of discount, but it may be summoned by requisition at any
time and meets automatically should the bank rate be altered, since this
governs the rate of deposit allowed by the bankers.
The committee has full power over all clearing house matters, and from
the importance of the banks who compose the clearing house its opinion
carries very great weight on all matters in the banking world. It is,
however, controlled only by the mutual agreement of its members: and the
decision of the majority of its members, though followed loyally, is
never used with any ultimate power of compulsion in matters affecting
banking in general.
In 1907 a third clearing, the Metropolitan, was established. Hitherto,
with the exception of one or two city offices which were included in the
town clearing, the collection of drafts on London branches of the
clearing banks had been effected by the post and by the sending out of
walk clerks by each bank; but in 1907 it was determined to do away with
such means of collection as far as possible and to collect the branch
checks through the clearing house. This proved so successful that the
West End banks were approached the following year, and with one
exception readily consented to come into the new plan by which their
clearing agents had delivered to them at the Metropolitan clearing all
checks drawn upon them. This clearing is the first clearing made each
morning and is handled so expeditiously that even the most distant
London branches get their checks almost earlier than under the old
system. They have, therefore, plenty of time to go through them and to
make returns of any checks that cannot be paid in time for such return
checks to reach the clearing house early in the afternoon. There are now
over 330 banks and branches using this clearing.
For the better defining of the three clearing areas--town,
metropolitan, and country--the letters T M C have been placed in the
corner of all bank checks. From February 19, 1907, the date of the
initiation of the Metropolitan Clearing, up to December 31 of that year,
L482,227,000 was paid in this clearing, while for the year 1908 the
total was L647,842,000, as compared with the town clearing total for
that year of L10,408,254,000 and the country total of L1,064,266,000,
making in all a grand total of L12,120,362,000, which figures, vast as
they are, were a decrease of L610,031,000 on the total L12,730,393,000
for the previous year, 1907.[137] The work entailed by such vast figures
as these could scarcely have been dealt with by hand alone, but by the
installation of adding machines the work is easily and quickly done.
It must not be thought that all checks on London are presented through
the clearing house, for checks on the London branches of the Scotch
banks and of the colonial and foreign banks are still presented over the
counter.
Moreover, though it is mutually understood between the clearing banks
that checks on each other will only be presented through the clearing
house, this agreement has no legal binding.
Two exceptions are continually made; documents or goods have to be taken
up against cash, and the owner before parting wishes to be certain of
his money. In this case the presenting banker either presents his check
for marking--that is to say, the paying banker having ascertained from
his customer's account that there is sufficient money thereon, marks the
check for payment, which has the same effect as if the banker had
accepted it; or, as is becoming more usual, the paying banker gives one
of his own drafts on the Bank of England in exchange for the check.
PROVINCIAL CLEARINGS
Besides the London clearing house, which is an irregular building of no
architectural features whatever, there are eight provincial clearing
houses in England--Birmingham, Bristol, Leeds, Leicester, Liverpool,
Manchester, Newcastle and Sheffield.[138]
Two only of these clear over L100,000,000 in the year. Manchester
cleared L320,296,332 in 1907, with an average weekly total of L6,159,545
and an average daily total of L1,039,923, and Liverpool L196,325,829.
The others cleared in the same year from L12,000,000 to L61,000,000.
Small figures, indeed, compared with London, where the highest total
paid on any one day was, in 1907, L106,703,000. In 1908 the highest
total paid in one day in the London clearing was L85,833,000 and the
lowest L24,903,000.
In London, as in the provincial places, the object of the clearing house
is primarily the convenience of exchange of checks, not the regulation
of banking, and little is regulated save, perhaps, the rate of interest
to be paid on deposits at seven days' notice.
In these days, too, when the tendency is strong for amalgamation, the
local banks are dwarfed by their gigantic competitors, with their
branches in many counties and head offices in London, with the result
that London each year controls more of the banking in England and the
provincial clearings cease more and more to be under local control, but
are controlled by their London head offices.
This may, if the present tendency of amalgamation continues,[139] result
in the committee of London clearing bankers becoming an important
controlling body, but that time is not yet at hand, and though, as we
have said, an expression of opinion on the part of the committee carries
very great weight, yet anything like dictation would very properly be
resented by the important and old-established banks in both London and
the provinces that are outside the clearing house.
FOOTNOTES:
[121] James G. Cannon, _Clearing Houses_, Publications of the National
Monetary Commission, Senate Document, No. 491, 61st Congress, _2nd
Session_, p. 1.
[122] _Ibid._, pp. 148-150.
[123] _Ibid._, pp. 150-154.
[124] _Ibid._, pp. 163-165.
[125] 62 members in 1914.
[126] _Ibid._, pp. 41, 43, 44-46.
[127] _Ibid._, p. 37.
[128] _Ibid._, pp. 75-79.
[129] O. M. W. Sprague, _Banking Reform in the United States_, pp.
104-113. Harvard University. 1911.
[130] The figures in the text refer to the legal tender holdings of the
banks. The banks also held a considerable amount of specie but it was
not a free asset as most of it had been received on special accounts
payable in gold. Including the specie holdings the reserve ratio was
12.8 per cent.
[131] C. F. Dunbar, Economic Essays, chap. XVI.
[132] The increase in the amount of money in circulation for August,
1893, was estimated at $70,000,000.
[133] James G. Cannon, _Clearing Houses_. Publications of the National
Monetary Commission, Senate Document No. 491, 61st Congress, _2d
Session_, pp. 137-141.
[134] [A number of the more important cities such as St. Paul, St.
Louis, and Philadelphia, following the example of Chicago and
Minneapolis, have instituted clearing house bank examinations since
1907.]
[135] Adapted from Robert Martin Holland, _The London Bankers Clearing
House_. Publications of the National Monetary Commission, Senate
Document No. 492, 61st Congress. _2nd Session_.
[136] The date of the establishment of the Clearing House is not known.
The Clearing has, however, been in existence about 150 years.--EDITOR.
[137] [For the five years 1910-14, the total clearings of the London
Clearing House were in the neighborhood of L15,000,000,000 per annum of
which the Town, Metropolitan, and Country Clearings were about 86, 5.5,
and 8.5 per cent., respectively.]
[138] [The approximate number of clearing houses outside of London, in
England, in 1915 is twelve, but these are used only for local clearings.
In addition, most of the towns in England and Wales have a local
exchange which is a clearing on a small scale.]
[139] This tendency has continued as to both the joint-stock and private
banks.--EDITOR.