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, 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 the 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. 46. LOANS OF NEW YORK BANKS AND CLEARING-HOUSE BALANCES Each bank in New York attempts to keep at all times a close adjustment of loans and reserves, that is, to prevent a decided fluctuation in the ratio. This is accomplished through an expansion or contraction of call loans, and the banks of the metropolis even go so far as to anticipate the balances resulting from the daily settlements at the clearing-house. Call loans are made in two ways: at each bank as a lending institution, and at the "money post" on the floor of the Stock Exchange, where the representatives of the banks meet with the stock-exchange brokers each business day at 11 o'clock. By that time each bank has heard the returns from the clearing-house settlement and knows whether its reserve for the day has increased or decreased. It can, therefore, calculate whether it can expand its loans or whether it must "call" some of its demand loans in order to replenish its reserve. Each broker also usually knows at that hour whether he has a surplus or needs to borrow. For about an hour, therefore, banking operations are active on the stock exchange. About two o'clock there is usually another bustle of activity in consequence of unexpected inflows and outflows of bank funds. Thus an almost constant adjustment is effected, in so far as the conditions of the market as a whole permit. (2) CLEARING-HOUSES 47. THE ORIGIN OF CLEARING-HOUSES IN THE UNITED STATES BY JAMES G. CANNON On August 23, 1853, 16 presidents, I vice-president, and 21 cashiers, representing 38 banks, assembled in the directors' room of the Merchants' Bank, New York, and appointed a committee with instructions to prepare a plan "to simplify the system of making exchanges and settling the daily balances." On September 13 the plan proposed was adopted, to become effective on 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 Adapted from Clearing-Houses, pp. 133-35; 263-65. (National Monetary Commission, 1910.) 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. But the need of fixed rules of some sort for their guidance became more and more urgent, and on August 1, 1854, a constitution was adopted. This instrument, with the changes that have been made from time to time by the adoption of amendments and resolutions, is in force at the present day. Following the lead of New York all the principal cities of the country have organized clearing-houses until at the present time there are considerably more than a hundred. 48. THE PRINCIPLE INVOLVED IN "CLEARING" BY CHARLES F. DUNBAR To illustrate the working of the Clearing-House system, we will suppose the case of six banks carrying on business in the same town. On a given morning we will suppose the messengers of these banks to meet at the Clearing-House, each bringing the checks received by his bank in deposit on the previous day, as follows: No. 1, checks on No. 2.... $ 6,500 No. 4, checks on No. 1.... $ 8,750 No. 2, checks on No. 1.... $ 7,800 No. 5, checks on No. 1. 2.... $ 8,740 4,620 5,760 " " " " Adapted from The Theory and History of Banking, pp. 52–53. (G. P. Putnam's Sons, 1891.) The sum of all the checks brought in is $191,700. If, now, we credit each bank with the checks which it presents against the others and charge it with the checks presented by them against it, we shall find that No. 1 is charged with $35,740 and credited with $33,550, that No. 2 is charged with $24,190 and credited with $29,870, and so for the others, and, therefore, that If, then, the debtor banks, Nos. 1, 3, and 4, pay into the ClearingHouse the sums due from them, amounting to $13,500, and the ClearingHouse pays out to the creditor banks, Nos. 2, 5, and 6, the sums due them, of like amount, the result will be that every bank will, in effect, have collected payment of all the checks which it had received and will have made payment of all the checks drawn against it. This settlement of checks, amounting in all to $191,700, will have been made by the payment of $13,500, and transactions apparently involving thirty separate demands, each bank being the creditor of five others, will have been settled by a series of additions made at a central office, followed by three payments to and three payments from a common fund. 49. ORGANIZATION AND OPERATION OF CLEARING-HOUSES1 BY JAMES G. CANNON The government of a clearing-house association in the United States is, theoretically, vested in a president, vice-president, secretary, treasurer, manager, and a clearing-house committee, sometimes termed "committee of management" or "executive committee." Not every association, however, is as completely officered as this; in fact, there are many associations that do not have the full list of officials named. A president, a manager, and an executive committee, Adapted from Clearing-Houses, pp. 28-46. (National Monetary Commission, 1910.) however, are found in the organization of nearly every clearing-house association, for these functionaries are practically indispensable. The clearing-house association holds an annual meeting for the purpose of electing officers and committees and for the transaction of other business. The quorum is usually fixed at a majority of all the associated banks. In some instances, however, it is fixed at two-thirds, and in a few cases even as low as one-third, of all the members. Sometimes a specified number is designated as constituting a quorum. Each bank is expected to be represented at the annual meeting by one or more of the officers, but is usually allowed only one vote. The rules regulating the kinds of matter to be cleared are by no means uniform. A number of organizations specify in their articles of association what shall be considered proper clearing matter. With but two exceptions the exchanges passing through the clearing-house are confined to items drawn upon members or upon non-members clearing through members. That is to say, checks and drafts received by a bank member of a clearing-house in any city drawn upon another member of the same clearing-house, from whatever source the checks may have been received, are liquidated through the clearing-house; but checks and drafts received by a member of a clearing-house drawn upon some bank located at a distance, and not a member, nor clearing through a member, are regarded as improper matter for clearing. The number of messengers required to transport the exchanges to and from the clearing-house varies widely in different cities. When the business is light, as in some of the smaller cities, one person acts as both messenger and settling clerk, while in some of the larger cities. the exchanges of some of the banks are so heavy that four or five messengers are necessary to transport them. Checks are taken to the clearing-house bound together with rubber bands or inclosed in large envelopes, the items that go to each of the members being kept separate. If the bulk is not too great, they are often carried in the hand, but it is customary in the large cities to transport them in leather bags or cases. The usual rule is that immediately upon his arrival at the clearing-house the settling clerk delivers to the manager, or the assistant manager, a ticket containing the amount of the items brought from his bank. Two methods of delivering items in the exchange room are in vogue. In the one case they are delivered by all the clerks simultaneously; in the other by each clerk as soon as he arrives at the |