The purpose of the clearing-house is largely to facilitate the
transfer of credits. This is explained by the following illustration:
Suppose that Brown and Smith keep their money on deposit in Bank A and
that Brown gives Smith his cheque for $100 and Smith deposits it in
the bank to his (Smith's) credit. The officers of the bank will
subtract $100 from Brown's account and add the same amount to Smith's
account. No actual money need be touched. It is simply a matter of
arithmetic and bookkeeping. Credit has been transferred from Brown to
Smith. If all the people of a city kept their money in one central
bank there would be no need of a clearing-house. The bookkeepers of
the bank would be kept busy transferring credits from one customer to
another on the books of the bank. But if Brown keeps his money in Bank
A and Smith keeps his money in Bank B it is necessary that Bank A and
Bank B come together somewhere to conveniently make the credit
transfer, and this is practically what they do in the clearing-house.
Then, again, if Bank A should be located in San Francisco and Bank B
in Boston, the difficulty of transfer of credit is greatly increased.
Through the agency of clearing-houses located in money centres and of
co-operation between banks at distant points, the transfer of credits
between business men located anywhere in the United States, or for
that matter in the world, has become a comparatively simple matter. If
it were not for the agency of this system it would be utterly
impossible for a great city to do the business of a single day. All
the actual money in all the banks and stores and safes and pockets of
New York City to-day would fall far short if used to pay to-day's
transactions. It is estimated that the cash transactions of a single
day are fifty times greater than the actual cash changing hands in one
day. So that the great bulk of the business of the country, both cash
and credit, is done on a system of credit transfers made possible
wholly through the agency of our banking system.