In large cities cheques representing millions of dollars are deposited
in the banks every day. The separate collection of these would be
almost impossible were it not for the clearing-house system. Each
large city has its clearing-house. It is an establishment formed by
the banks themselves, and for their own convenience. The leading banks
of a city connect themselves with the clearing-house of that city, and
through other banks with the clearing-houses of other cities,
particularly New York. Country banks connect themselves with one or
more clearing-houses through city banks, which do their business for
them. The New York banks, largely through private bankers, branches of
foreign banking houses, connect themselves with London, so that each
bank in the world is connected indirectly with every other bank in the
world, and in London is the final clearing-house of the world.
[Illustration: The advantages of the clearing-house system.]
Suppose that the above diagram represents the banks and clearing-house
of a city, and also the two business houses of Brown and Smith. Brown
keeps his money on deposit in Bank E, and Smith in Bank B. Brown sends
(by mail) a cheque to Smith in payment of a bill. Now, Smith can come
all the way to Bank E, and, if he is properly identified, can collect
the cheque. He does not do this, however, but deposits Brown's cheque
in Bank B, the bank where he does his banking business. Now, B cannot
send to E to get the money. It could do this, perhaps, if it had only
one cheque, but it has taken in hundreds of cheques, some, perhaps, on
every bank in town, and on many banks out of town. It would take a
hundred messengers to collect them. So, instead of B's going to E,
they meet half-way, or at a central point called a clearing-house, and
there collect their cheques. B may have $5000 in cheques on E, and E
may have $4000 in cheques on B, so that the exchange can be made--that
is, the cheques can be paid by E paying the difference of $1000, which
is done, not direct, but through the officers of the clearing-house.
Now Bank E's messenger carries Brown's cheque back with him and enters
it up against Brown's account. This in simple language is the primary
idea of the clearing-house.
The clearings in New York in one day amount to from one to two hundred
millions of dollars. By clearings we mean the value of the cheques
which are _cleared_--that is, which change hands through the
clearing-house. Usually once a week (in some cities oftener) the banks
of a city make to their clearing-house a report, based on daily
balances, of their condition.
[Illustration: The route of a cheque.]
To illustrate the connection between banks at distant points let us
suppose that B of Media, Pennsylvania, who keeps his money on deposit
in the First National Bank of Media, sends a cheque in payment of a
bill to K of South Evanston, Illinois. K deposits the cheque in the
Citizens Bank of his town and receives immediate credit for it upon
his bank-book, just the same as though the cheque were drawn upon the
same or a near-by bank. The Citizens Bank simply sends the cheque,
with other distant cheques, to its correspondent, the National Bank of
the Republic, Chicago, on deposit, in many instances in about the
same sense that K deposited the cheque in the Citizens Bank. The
National Bank of the Republic sends the cheque, with other cheques, to
its New York correspondent, the National Park Bank. It may possibly
send to Philadelphia direct, or even to Media; but this is very
unlikely. The National Park Bank sends the cheque to its Philadelphia
correspondent, say the Penn National Bank. Now the clearing-house
clerk of the Penn National carries the cheque to the Philadelphia
clearing-house and enters it, with other cheques, on the First
National of Media. Custom, however, differs very greatly in this
particular. Many near-by country banks clear through city banks;
others clear less directly. If the First National Bank of Philadelphia
is known at the clearing-house as the representative of the First
National Bank of Media it likely has money belonging to this Media
bank on deposit. In that case the cheque is charged up against the
account of the First National of Philadelphia. This bank then sends
the cheque to the First National of Media, by which it is charged up
against B. This system of collection of cheques is about as perfect as
is the post-office system of carrying registered mail.
[Illustration: Backs of two paid cheques.]
Now, the banks and clearing-houses through which the cheque passes on
its way _home_ stamp their indorsements and other information upon the
back. Our illustration shows the backs of two cheques which have
"travelled." Millions of dollars are collected by banks daily in this
way, and all without expense to their customers. It is estimated that
these collections cost the New York City banks more than two million
dollars a year in loss of interest while the cheques are _en route_.
Ten thousand collection letters are sent out daily by the banks of New
York City alone.