Uncle Sam: We are on the very last lap tonight, as I understand the situation. We have had the Standard of Value, Money, Currency, Exchange, Value, Price, Property, Wealth, Credit, Reserves, the Bank; and now comes the settlement of the claims against the bank in the shape of checks, drafts and bills of exchange.
When we finish this conversation we can, I hope, begin to put things together, that is, make use of our material.
Mr. Banker: Uncle Sam is right, we shall be ready to do some constructing when we have disposed of the Clearing House, which is destined to play a gigantic part in the future of American banking. This is true because the Clearing House is bound to become the machinery by which all American banks are to co?perate and protect themselves through their combined strength; and it will be a splendid exhibition of what true co?peration can accomplish.
The character and origin then of the Clearing House, its present and prospective function, must be carefully studied by us, if this assumption is correct.
Mr. Merchant: The character of the Clearing House, or the principle upon which it works, is simple enough; although its operations are vast, and its achievements in times of financial stress have been most striking, even though not always satisfactory.
The principle of clearing is, as I have just said, simple indeed. If I have a claim against Mr. Manufacturer, and he has an equal claim against me, we clear them by exchanging our claims with each other. If one of you gentlemen should sue another for one hundred dollars, and the other should make a defense by pleading an offset of one hundred dollars, and the court should allow[Pg 290] both claims, you would clear them through the court, the one offsetting the other; that is all there is of the principal involved.
Mr. Banker: Mr. Merchant, you have put this matter more simply than any book has ever done. Indeed, I had not reduced the transaction to such simple terms. To put it in the form of a definition, as you stated, it would read this way: "To offset one claim against another, and pay the balance, if any, is clearing them."
I had thought that it would be my particular task to explain this transaction of clearing, and after a good deal of meditation I had worked out a thought which I am sure is next best, after your definition; and it will take us one step nearer to the Clearing House, without getting into any of its complexities. My illustration is this: if there were but one bank in a town, and all the people did their business through this single bank, by depositing their money and checks, and then paid all their bills, with checks on the bank, apart from any outside business, every debt in the town would be paid by check, and there would be no need of any money at all as the claims and debts would be exactly equal, and would always cancel each other to a cent.
Mr. Lawyer: What you have said about one bank in a town is equally true of two, three or four, or any number of banks, if you assume that every person in town does his entire business through the banks, providing, of course, that the banks get together, and offset all the checks and drafts they receive during the day. There might be something to pay from day to day for the time being, but all would be adjusted in the end, without any variation or difference.
Mr. Banker: Precisely so, but when you get those bankers together, for the purpose of trading checks, you have created a Clearing House.
Stephen Colwell says: "Clearing is beyond all question, the simplest, the most economical, and when ap[Pg 291]plicable, the most efficient of all modes of paying debts; it is precisely analogous to balancing accounts."
James G. Cannon, author of the leading work upon the history of American Clearing Houses, describes a Clearing House "as an office, established by the banks of a city, where their representatives meet daily to exchange drafts and checks, and adjust balances." Again, "as a device to simplify and facilitate the daily exchanges of items, checks, drafts and bills of exchange, and the settlement of balances among the banks, and a medium for muted action upon all questions affecting their mutual welfare."
You would think that the Clearing House was such a simple matter, and such a great advantage that a Clearing House would have been thought of, and put into operation as soon as banks got under way, but not so. Their development and establishment, as we know them today, has been slow indeed, and the early history of their origin most interesting.
Jevons says: "About the year 1775, a few of the London bankers hired a room where their clerks could meet to exchange notes and bills, and settle their mutual debts. The society was of the nature of a strictly private club; the public knowing nothing about it, and the transactions being conducted in perfect secrecy. Mr. Gilbart tells us that even in this form it was regarded as a questionable innovation, and some of the principal bankers refused to have anything to do with it. By degrees, however, the convenience of the arrangement made itself apparent, more bankers were admitted to the Society, and a distinct committee and set of rules were formed for its management. Although it remains to the present day a private and voluntary association, unchartered, and in fact unknown to the law, the Clearing House has steadily grown in importance, and in the publicity of its proceedings.
"Several important extensions of the clearing work have been made in the last twenty-five years. After the[Pg 292] rise of the London joint stock banks, subsequent to 1833, they were for a long time refused admittance to the Clearing House; but in June, 1854, they were at last allowed to join the Association. The Bank of England long remained entirely outside of the confederation, but more recently, it has become a member." (Written in 1875.)
The establishment of Clearing Houses in English cities, outside of London, did not take place until a century, almost, after that in London went into operation, or as late as 1872, which was just five years short of a century later.
As early as 1831 Albert Gallatin presented a plan for a Clearing House in New York, and so perfectly outlined the scheme, finally adopted, that I want to read it to you. And I want to impress upon you the fact that Gallatin was one of the very ablest economists that we have ever produced.
"There is a measure which though belonging to the administration of banks, rather than to legal enactment, is suggested on account of its great importance. Few regulations would be more useful in preventing dangerous expansion of discounts and issues on the part of the city banks, than a regular exchange of notes and checks, and an actual daily or semi-weekly payment of the balances. It must be recollected that it is by this process alone that a bank of the United States has ever acted or been supposed to act as a regulator of the currency. Its action would not in that respect be wanted in any city, the banks of which would, by adopting the process, regulate themselves. It is one of the principal ingredients of the system of the banks of Scotland. The bankers of London, by the daily exchange of drafts at the Clearing House, reduce the ultimate balance to a very small sum; and that balance is immediately paid in notes of the Bank of England. The want of a similar arrangement among the banks of this city produces relaxation, favors improper expansion, and is attended with serious[Pg 293] inconvenience. The principal difficulty in the way of an arrangement for that purpose is the want of a common medium other than specie for effecting the payment of balances. Those are daily fluctuating; and a perpetual drawing and redrawing of specie from and into the banks is unpopular and inconvenient.
"In order to remedy this it has been suggested that a general cash office might be established, in which each bank should place a sum in specie, proportionate to its capital, which would be carried to its credit in the books of the office. Each bank would be daily debited, or credited, in those books for the balance of its account with all the other banks. Each bank might, at any time, draw for specie on the office for the excess of its credit, beyond its quota; and each bank should be obliged to replenish its quota whenever it was diminished one half, or in any other proportion agreed on. It may be that some similar arrangement might be made in every other county, or larger convenient district of the State. It would not be necessary to establish then a general cash office. Each of the banks of Scotland has an agent at Edinburgh, and the balances are there settled twice a week, and paid generally by drafts on London. In the same manner the balances due by the banks in each district might be paid by draft on New York, or any other place agreed on."
James C. Hallock, the highest authority in this country upon Clearing House operations, has so succinctly stated how the checks were disposed of, before the Clearing House was established, that I am going to read that to you, and show you two diagrams, which we will keep on file for future reference. "In 1853, the Banks of New York City organized a Clearing House, the first in America; until then they had done business without one. The method had been laborious.
"Each of the fifty-two banks had daily received over its counter, or by mail, checks on every other bank in town. To collect them the banks had opened deposit ac[Pg 294]counts with one another. Each had become a depositor in fifty-one city banks. Each also had had the others as depositors and kept fifty-one accounts with them. The pass books used had been of the ordinary form as 'Merchants' Bank, in account with Chatham Bank.'
"According to the common usage of depositors, each bank would have sent messengers to fifty-one banks daily, and each would have had fifty-one messengers come to its own counter from the other banks. They had done a little better than that. The Chatham Bank, for instance, would have checks on the Merchants' Bank. It would list them on a deposit slip, charge the Merchants' Bank with the amount in its pass book, and place the checks in the book which the messenger would now carry to the Merchants' Bank, and deliver to its Receiving Teller. The latter would remove the checks, and having some on the Chatham Bank with list attached, he would credit his bank with the amount in the pass book, place the package in it and hand it back, thus refilled to the messenger.
"This exchange of checks by two banks at the counter of one was a rudimentary clearing which, like all bank clearings, saved labor, time and trouble. To deposit these checks in the customary manner would have required two messengers and two pass books. By this clearing arrangement one messenger and one pass book sufficed. Perceiving the sensibleness of this saving, the New York banks had for many years tacitly agreed that each should send messengers to one-half of the banks for six months, and the other half for the next six months. They had thus reduced the number of banks to be visited daily by each from fifty-one to twenty-six banks, and accordingly reduced the number of pass books in use by each.
"The accompanying diagram representing the banks arranged in a circle, with two of them sending messages to twenty-six each, indicates how toilsome the exchange of checks still was, up to the formation of the New York[Pg 295] Clearing House, which commenced operations on Oct. 11, 1853; though only two banks are represented as sending, in fact, all were really sending, or being sent to; for every bank sent to all others that did not send to it.
pic
Without a Clearing House in New York.
Diagram showing a Bank Messenger's 26 Trips to Exchange Checks with other Banks.
"When two banks exchanged checks the amounts were almost always unequal, leaving a balance for one to pay and the other to receive. Every day every bank, if they had settled daily, would have had fifty-one balances to pay, or receive. They were payable in coin. Instead of attempting the daily adjustment of accounts, which[Pg 296] would have consumed hours, and caused much annoyance, it had become a tacit agreement that a weekly settlement of balances should be made after the exchange of Friday morning. On settlement day, the cashier of each bank would draw checks for every debt due to him by other banks, and send out the messengers to collect them. Over fifty porters were out all at once, wrote a bank officer of the time, with an aggregate of several hundred bank drafts in their pockets, balking each other, drawing specie at some places, and depositing it in others, and the whole process was one of confusion, disputes and unavoidable blunders of which no description could give an exact impression.
"The second diagram, representing the fifty-two banks in a circle around the Clearing House, indicates how completely all this misdirection and waste of energy stopped upon the installation of that marvelous method which affects such amazing economy. Every bank now sends straight to a common point. Every bank sends there all the checks it has on all the city banks, and charges the whole amount against an imaginary debtor—the Clearing House. Every bank receives there all the checks all the other city banks have on it, and admits its indebtedness for the whole amount to an imaginary creditor—the Clearing House. The balance can now be struck. If the bank loses, it pays the Clearing House the difference. If the bank gains, the Clearing House pays the bank; and there is the end of it, reached by the shortest path with the greatest ease and quickness.
"The principal results may be summarized:
"The Clearing House saved every bank in New York City on the average twenty-six trips daily to exchange checks with other banks. It abolished sending to other banks for this purpose. It substituted one trip to the Clearing House—an economy of 96? per cent.
"The Clearing House saved every bank in New York the payment or receipt, mostly in coin, of fifty balances on settlement day (Friday). It abolished settling at the[Pg 297] counter of banks, except for checks, sent through the clearing and returned 'not good.' It substituted one payment, or receipt, of a net balance to or from the Clearing House, an economy of 98 per cent.
pic
With a Clearing House in New York.
Diagram showing Single Trips to Exchange Checks with all other Banks in the City.
"The Clearing House saved the banks of New York all the drudgery, irritation and anxiety which had made daily settlements impracticable. It abolished the weekly settlement; it substituted daily settlements to the Clearing House—an economy of considerable importance.
"The Clearing House saved all the banks of New York[Pg 298] the trouble of keeping accounts with one another. It abolished accounts of city banks with city banks—closed 2,652 accounts. It substituted one account for each bank with the Clearing House—an economy of 98 per cent.
"These savings, not to mention others, proved beyond dispute, that clearing checks economizes."
It was twenty-two years before Gallatin's suggestion was adopted, and a Clearing House was established, which, as stated, was in 1853. The first clearing was effected on Oct. 11, 1853, and amounted to $22,648,109.87. The balances amounted to $1,290,522.28.
Boston followed in the footsteps of New York, and established a Clearing House in 1856, and Philadelphia in 1858.
The next step in the line of progress, in the matter of bank clearings, came, as Hallock says, as a result of cheap postage and the railroads in England, and included country checks.
He says: "Somewhat less than half a century ago London recognized the fact that the out-of-town check was an indispensable instrument of civilized man, at least in Great Britain. He would use it, contrary to custom, and despite the remonstrances of city bankers, who thought only London drafts should be sent to London.
"A product of modern times and method, country checks came to London with the railroads. Few at first, when the average postage on a letter consisting of a single sheet, was nine pence, and another sheet, or any enclosure, however small, doubled the rate, making the postage on a letter enclosing a check thirty-six cents, on the average. With penny postage established in 1840, regulating the rate on a letter by its weight (one penny per half ounce), without regard to the number of sheets, or enclosures, country checks began to stream into London.
"In 1858 the city bankers, perceiving their inability to suppress, or exclude them, decided to adopt the sugges[Pg 299]tion of some country bankers, and collect English and Welsh checks through the Clearing House.
"The idea originated in the spring of 1858 with a young country banker, William Gillett, the son and grandson of country bankers. He visited the provincial banks, and interested them in the project. When prepared to carry it out the country bankers met in London on Sept. 29th of that year, and communicated the plan to the London clearing banks to obtain their support. The Londoners opposed it; they suggested doubt as to the utility and feasibility of any change in existing systems. However, their co?peration being solicited, the London bankers held a meeting at the Clearing House on Oct. 12th, to take the matter into consideration, and appointed a special committee to confer with the country bankers.
"Then, on reflection, it appeared to another young man, the son and grandson of clearing bankers, that the organization of a large and entirely new establishment, which the country bankers proposed, was unnecessary, as the London bankers could give them all the facilities they required, without any great additional labor, or expense. This junior officer in the private bank of which his father was the head, has since gained world-wide celebrity in science and literature as Sir John Lubbock (now Lord Avebury). Even with the aid of such talent and opportunities as his, it required unflinching resolution to establish country clearing in London. After devising a method that conformed as closely as practicable to actual usage in clearing city banks, young Lubbock had to call at every London bank, at most of them several times, and explain fully the exact manner in which he proposed to carry out the system. It was very difficult for him to convince his brother bankers. Finally the special committee requested him to meet the principal clerks of the different banks. These clerks unanimously recommended the adoption of his plan.
"The London bankers then adopted it, and on Nov.[Pg 300] 16th submitted it to their country correspondents. The plan for an independent country Clearing House was abandoned by the country Bankers' Committee on Nov. 19th, and the clearing of country checks commenced in London on Nov. 23, 1858. In less than eight weeks, after the idea was broached in London, it was put in practice there."
This system covers 60,000 square miles.
Mr. Hallock says, "Sedalia bankers unconsciously imitated the London plan, but modified it, as had been done abroad elsewhere; for out-of-town checks are cleared, not only in London, but also in other English cities, as Manchester, Liverpool, Birmingham, Newcastle-on-Tyne, Leeds, Sheffield and Bradford, in some eight Scotch towns and Dublin."
The next advance, which is undoubtedly destined to revolutionize clearing in the United States, was started in Boston in 1899 by making New England a free check zone.
Hallock says: "The clearing of out-of-town checks, though opposed for years by a small minority of Boston banks, was successfully established at Boston in 1899. The system includes checks on all points in New England, and maintains a free zone of nearly equal extent.
"Proposed in 1877 and 1883, the Boston movement at first resulted in a deadlock, based on the supposed importance of having certain city banks, who declined to come in, participate. After twenty-two years through another movement started among the Connecticut banks, the deadlock was broken by substituting the manager of the Boston Clearing House for any abstaining members, and giving him checks on their correspondents to collect. The association finally decided that all checks passed through the out-of-town clearing should be collected by him.
"The only opposition exhibited by country banks has been in the refusal of a few to pay the Clearing House in full for their checks, deducting so-called exchange.[Pg 301] Boston checks passed through the Clearing House are paid in full, or not at all. New England checks should be. This can be effected, either as in London, by Boston banks returning checks, drawn on such banks, as not collectible through the Boston Clearing House, or by the manager, charging to collect checks, bearing indorsement of the non-par banks, which would cut them off from the use of the New England free list, now enjoyed by them, without reciprocity; that is, without being themselves on the free list."
Mr. Charles A. Ruggles, manager of the Boston Clearing House, says: "In the thirteen years that we have made collections in this way, we have collected over eight thousand million dollars ($8,000,000,000).
"Our cost now is, and has been for ten years, seven cents for a thousand dollars. That includes the clerk hire of fifteen men, postage and stationery, and we collect seven or eight hundred million dollars a year; furthermore, 90 per cent of the banks in New England remit at par. We collect 95 per cent of it in twenty-eight hours."
It is an interesting and important historical fact that the country banks of England and Wales forced the clearing of country checks at London; so, too, the banks of Connecticut, thirty of them in number, by combining under the advice and leadership of Mr. James C. Hallock, succeeded in having the plan adopted by the Boston Clearing House. As a result New England became a free check zone. I think we should note in this connection that the father of Mr. James C. Hallock was the organizer, if not, indeed, the originator of the New York Clearing House in 1853.
Mr. Laboringman: Mr. Lawyer, you talk and talk and talk, when you could say what you really have to say, in one-tenth of the time, and in about as many words. We have spent a whole hour in the history of the origin of the Clearing House, and have just learned what I could repeat in about two minutes.
[Pg 302]
First: London, in a kind of a sneaking way, began to clear checks in 1775, and kept a Clearing House in a blind alley. Nothing more was done in England by way of advance until 1858, when the country banks of England and Wales, covering a territory of 60,000 square miles, by threatening to start their own Clearing House in London, compelled the London banks to clear their checks. Not till 1872, nearly one hundred years later, did any other city adopt it. But today many cities in Great Britain are clearing country checks.
Second: Gallatin proposed a Clearing House for New York in 1831. Hallock established it in 1853. Boston and Philadelphia followed in three and five years, respectively. In 1899, New England became a free check zone, all checks being received at par at Boston. Since then several other cities have followed suit. Atlanta, Macon, Nashville, Sedalia and Kansas City. Now, I have said everything you said. Next!
Uncle Sam: Mr. Laboringman always gets a "B" line on things.
Mr. Lawyer: That is true in substance, but the very fact that Mr. Laboringman has stated the case so well is the greatest compliment he could pay us. It is only by iteration and reiteration, word upon word, and precept upon precept, that has made this whole subject so plain to all of us. We have made haste by going slowly, and we don't want to get into a hurry now.
Mr. Banker: I agree with you, Mr. Lawyer, patience has been our best and truest friend in all these talks, and we should not desert her now.
Mr. Laboringman: That's all right, but let us get down, right down to business. Just where are we at now? And where are we going to in the Clearing House matter?
Mr. Banker: We are now going to discuss the Clearing House from five points of view.
First: The Clearing House, from its original standpoint—New York was the pioneer, and is probably our[Pg 303] highest type. Its clearings are certainly by far the largest in the world.
Second: The clearing of country checks, of which Boston was the pioneer in a large way, although preceded in point of time by Sedalia, Mo., a country city of only 15,231 people in 1900.
Third: The examination of all banks clearing through the Clearing House, of which Chicago was the pioneer, starting June 1, 1906—and probably the best type, although there are today about twenty cities following in her footsteps, including the following: Minneapolis, Feb. 1, 1907; St. Paul, May 1, 1908; St. Louis, Oct. 11, 1907; Los Angeles and San Francisco following upon the heels of St. Louis; Kansas City, March 1, 1908; St. Joseph, the early part of 1909; Philadelphia, April 5, 1909; New York, 1912, with others, not mentioned, making twenty in all.
Fourth: The centralization of the reserves of the banks at the Clearing Houses, as a matter of convenience in settling balances, and carrying on their common business generally, but subsequently for the purpose of facilitating the issuance of Clearing House certificates.
Mr. Lawyer: Let me repeat to you, gentlemen, what may have been stated before, that there is no law providing for the existence of the London Clearing House, nor is there a single law in a single state in any way authorizing or affecting a single Clearing House in the United States. Therefore, all that they have done has been without any authority of law. They are a law unto themselves; and it is not at all certain that that has not been wise. Indeed, I am of the opinion that it has been most fortunate for the business interests of the country. What do you think, Mr. Banker?
Mr. Banker: I am of the same opinion; in confirmation let us return to the consideration of the points suggested.
First: The New York Clearing House, as stated, had its first clearing Oct. 11, 1853. Mr. Cannon says that[Pg 304] not until August, 1854, did the New York Clearing House have a constitution. This instrument, with the subsequent changes, is in force today, and constitutes as perfect an illustration of the evolution of law by practice, as can be found anywhere.
This institution had various homes until it took up its present quarters in one of the most beautiful buildings in the whole country—worthy in every way of its use and purpose. It has cost $1,130,000 and is owned by the Clearing House Banks of New York, under the name of the Clearing House Building Company.
Mr. Cannon says: "The administration of the Clearing House is vested in a President, Secretary, Manager, Assistant Manager, and five standing committees.... The manager under the control of the Clearing House committee, has full charge of all business at the Clearing House, but before entering upon his duties, he is required to give bond, in the sum of $10,000.... Although the Constitution provides for the appointment of a manager, annually, it is the custom to retain the same one in office, year after year. As a matter of fact, there have been only three managers in the whole history of the association.... The Clearing House committee is clothed with almost absolute power, being second in authority only to the association itself. The ablest and most experienced bank officers, therefore, are usually chosen to serve on it. The committee is elected annually. The association at present, 1912, consists of sixty-three members and twenty-two non-members, and the United States Sub-Treasury, 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 Sub-Treasury enjoys of making its exchanges through the Clearing House is a matter of great accommodation, both to the Sub-Treasury and to the banks. The New York post office clears through one of the members, but[Pg 305] 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.... 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."
In 1899, the large number of trust companies that had come into existence attracted the attention of the Clearing House and the Clearing House Committee adopted a rule that no trust company could clear that had not been in existence for at least one year, and that every trust company clearing through a member shall furnish a weekly statement of its condition to the manager of the association.
The New York State law did not then provide that any trust company should carry cash reserves, although state banks were required to have 15 per cent cash in their vaults. It was tacitly understood that all banks clearing, should have 25 per cent reserve. Of course the trust companies could ride the banks, and they took advantage of their opportunity. This caused great dissatisfaction, and rightly so. On Feb. 11, 1903, the association passed a resolution requiring that every institution (not a bank required to maintain specified reserves) "shall after June 1, 1903, keep in its vaults a cash reserve, equal to 5 per cent; after Feb. 1, 1904, 7? per cent; after June 1, 1904, not less than 10 per cent, nor more than 15 per cent, as the association might determine."
The trust companies kicked and protested, and almost, without exception, withdrew from the Clearing House; but, after the panic of 1907, the New York legislature passed a law requiring them to carry 15 per cent cash reserves.
On June 13, 1908, the association passed a resolution[Pg 306] compelling all trust companies, who were members, to carry a cash reserve of 25 per cent, and on Jan. 16, 1908, the association for the first time in its history made a rule compelling all its members to keep a cash reserve of 25 per cent.
Every member of the New York Clearing House is required to furnish to the manager, weekly, for publication, a statement showing its condition, showing the average amount of loans, and discounts, specie, legal tender, notes in circulation and deposits. The capital and net profits are also given, this being the only association which gives the latter item.
Along the same line of legislation controlling the action or conduct of its members, the Clearing House committee, having plenary power to do so, passed a rule—determining just what every member and bank, clearing through members, should charge for collections.
The rule made some cities free, that is, there were no charges for collection made compulsory. Some cities were under a fixed charge of one-tenth of one per cent, and others under a fixed charge of one-quarter of one per cent. Upon April 3, 1899, this rule became obligatory, and if any member violated it, the penalty was $5,000 for the first offense; for the second offense it might be expelled from the association.[1]
Mr. Laboringman: That is precisely the same rule we have in our union, only our limit is not so high. We fine a member $5.00 for his first offense, and for the second offense we take away his card. By Jove, that is a hot proposition. And these are the very fellows who are always cussing us because of our union rules.
Mr. Lawyer: I want to tell you something else, gentlemen, that combination among the banks is clearly in restraint of trade and in violation of the Sherman Anti-Trust Law. Anybody who wants to can bring those banks to time.
[Pg 307]
Mr. Banker: Now, gentlemen, don't you perceive that this institution, step by step, has evolved its own laws, or rules of action, slowly developing its present system, and regulating and controlling the conduct of those outside institutions which enjoy its privileges? The story of this Clearing House is the record of all of them in principle. They are, each and every one of them, self-centered, self-contained, and a law unto themselves.
The operation of the New York Clearing House is practically that of all the others. Its room is sixty feet square. Four rows of desks occupy the floor. Each member has its own numbered desk separated from its neighbors' by a wire net work.
At one minute to ten o'clock the manager sounds the gong and all are instantly ready for the exchange which begins promptly at ten o'clock.
At the expiration of forty-five minutes usually, but sometimes in thirty-seven minutes, and even in thirty-five minutes, every member of the association has in its possession all the paper drawn upon itself, which the other members have credited on their books, and has delivered all the paper drawn upon all the other members of the association in exchange which it has credited upon its books.
Mr. Cannon states that the amount delivered by any member has never been exactly equal to the amount received but has come within one cent upon a single occasion. To complete the clearing transaction, it is necessary, of course, for those who owe anything to pay it to the Clearing House, and for the Clearing House in turn to distribute what is paid to it among those who are entitled to receive it.
As a matter of convenience for the purpose of settling the balances, the members of the Clearing House deposit with the Clearing House gold coin, gold certificates, silver certificates and legal tender notes, and receive clearing house certificates, therefor, in denominations of $1,000, $2,000, $3,000, $4,000, $5,000, $10,000, $20,000, $50,[Pg 308]000 and $100,000 each. All notes of a smaller denomination than $5.00 should, according to practice, be put up in packages of not more than $5,000. All packages are sealed and marked with the name of the institution depositing them with the amount, date and kind of money they contain.
The banks, also, deposit at the Sub-Treasury in New York gold coin, for which certificates are issued by the Assistant United States Treasurer. These certificates are in two denominations, $5,000 and $10,000 each; the holders of these certificates are the absolute owners of them.
It is stated upon high authority that the amount of such money now deposited at the various Clearing Houses throughout the United States exceeds the sum of $200,000,000. In other words, that we have today in the United States centralized our reserves to that extent for certain purposes.
Mr. Merchant: Mr. Banker, your history of the development of the Clearing House and your description of its operations have certainly been very clear, and most interesting. The second point you mention, the clearing of country checks, will appeal to all the business men of the country as it has to me for a long time; especially since I have a great deal of business up in New England, where this practice has been in force since 1899. I was up there the other day, and my partner took me to see Mr. Charles A. Ruggles, the manager of the Boston Clearing House. After he had described the system of clearing country checks, he handed me a little pamphlet giving the history of its development in Boston and setting forth its reasons and advantages so graphically, that I am going to quote from it in telling you gentlemen about it.
Let me say to you that I am confident that when this principle is fully understood, and carried out, as it soon will be, to its logical conclusion, checks, precisely like our bank notes, will be par everywhere in the United[Pg 309] States. I am fully aware that you are greatly surprised at this statement; but take my word for it and remember that what I have prophesied is going to happen. Free zones are going to increase until every check will be free within its own zone, and almost immediately as a consequence, the zone centers will settle with each other daily; that is all checks will not only be free in their own zones, but will be free between all zones, that is all checks will be par everywhere.
However, let me tell you how it developed in New England. Ruggles describes it in these words:
"That the use of checks has increased rapidly in the past ten years is an undisputed fact, and the question of how to handle them to advantage, or without loss, is a problem that has caused much discussion. All large cities have had the same experience, and have dealt with the question in various ways. Rather than ask his bank to draw exchange, the country merchant sent his check to Boston in payment of his account, and in this way, he was encouraged by the city merchants who deposited the check in his bank, where it was received at par. This continued until the volume handled reached such proportions as to make the item of exchange quite prominent in the expense account, which the city bankers sought to reduce by various methods. In many cases checks were not sent directly to the banks upon which they were drawn, some other route being selected to avoid exchange charges; as, for example, a check on Stonington, Conn., deposited in Westerly, R.I., only six miles distant, after many days, during which it traveled one thousand miles, perhaps, passed through Providence, Boston, Newport, then New Haven and New London and reached its destination bearing the endorsement of nine banks. Mr. Cannon in his work on Clearing Houses cites a remarkable case of zigzagging to avoid collection charges; a check on Sag Harbor, N.Y., paid to a Hoboken firm was eleven days reaching its destination. Had it been collected through the New York Clearing House ten days'[Pg 310] time, fifteen hundred miles of travel and a vast amount of clerical work might have been saved."
Here are two diagrams showing the route and the indorsements of the check to which Mr. Cannon referred, taken from Mr. Cannon's work on Clearing Houses.
Mr. Ruggles further says: "The subject of the collection of the country check in a more expeditious and economical method than that then in force in Boston, was first agitated in 1877, when a committee of five was appointed to consider the question. A majority reported that the annual cost to the banks of Boston was two hundred and twenty-nine thousand dollars for collecting New England checks and recommended that the business be consolidated, which would very materially reduce labor and expense. This report was received and placed on file. A minority report was also submitted in opposition to any change, on the ground that it would sever the social and business relations which then existed, and the clerical force required to handle the entire business would incur so heavy an expense that the cost of collecting would be as much, if not more, than was the case by the method then existing. No further action was taken until 1883, when another committee was appointed to consider the same question. They reported that returns from all the banks showed that double the business reported by the former committee was then being transacted and that the probable cost was four hundred thousand dollars; they suggested that an agency similar to the Clearing House be established for the purpose of making the collections. The banks failed to endorse this proposition and the matter was dropped until 1898, when a committee was appointed by the Bank Presidents' Association to again consider this important question; in their report it was recommended that the Clearing House Association act on the matter and undertake to make the collections. A committee was appointed by that body, who endorsed the previous report. Their report was accepted and the Clearing House Association author[Pg 311]
[Pg 312]ized the Clearing House committee to put in operation the present system, and the banks of Massachusetts were first addressed on the subject on April 14, 1899, the result being a conference between the Massachusetts Bank Cashiers' Association and the Clearing House committee. This conference revealed a decided difference of opinion at first, but both sides were brought to a clear understanding of the situation eventually. The position taken by the Clearing House was that it did not propose to dictate to the country banker how he should transact his business or coerce him into acting in conjunction with the Clearing House; nevertheless, the Boston banks claimed the right to use their own methods in making collections, and should the country banker decide to charge exchange, checks on his bank would not be accepted at par in Boston, and might be collected by express or such other means as was thought advisable. Comparatively few of the banks in Massachusetts appeared in opposition when the subject had been fully discussed. At a second conference the Cashiers' Association asked the privilege of making payments in New York Exchange if more convenient for them, and this request was readily complied with. They also asked that they might ship currency when necessary, at the expense of the Boston banks; this request was also granted, and in a few months all were remitting at par and checks from all the Boston banks were being collected through the Clearing House. On Sept. 21st, Maine was added to the list, followed by Rhode Island and Connecticut on Nov. 9th, and New Hampshire and Vermont in January, 1900.
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Fac-simile of the Back of the Check, Showing the Numerous Indorsements it Bore on Finally Reaching the Bank on which it was Drawn.
From James G. Cannon's Work on Clearing Houses.
"The first year the amount collected was $541,000,000 at a cost of ten cents per thousand dollars; the second year $565,000,000 at a cost of eight cents; the third year $607,000,000 with cost reduced to seven cents. Since the opening of the Foreign Department, as we term it, the average yearly business has been six hundred million dollars, and the average cost seven cents. The expenses are met by an assessment levied on the banks based[Pg 314] on their daily average business. There are at present in New England six hundred and thirty-seven banks and trust companies to whom checks are sent daily, and the number of packages handled will average five thousand."
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Map Showing the Check's Itinerary.
From James G. Cannon's Work on Clearing Houses.
Mr. Banker: Mr. Merchant, I am very much surprised that you have made such a thorough study of this feature of the banking problem, but I am also equally gratified. You have certainly explained the question so clearly and fully that no one can fail to be impressed with the future possibilities of this plan of clearing country checks, and I am convinced that you are absolutely right that the time is not far distant when every check in the United States will be par everywhere precisely as our bank notes are today; and why should they not be so, since both are identically the same thing in principle.
Mr. Lawyer: I can see what a tremendous advantage that would be to our commerce, indeed, incalculable, and I can see that there is no substantial difference between a check on a bank and a bank note, which is a check of the bank on itself; both are mere credits, and as you say, when fully comprehended and rightly understood, will be treated in precisely the same way in the exchanges of the country. But it does seem to me as though we shall have to have a better knowledge of our banks, and the business houses of the country, too, if this great reform is to be brought about.
Mr. Banker: That is true, but the bankers of the country have realized for a long time that their greatest peril came from the unsound practices and reckless methods of some of their own number and have already taken steps to protect themselves against such practices.
You, gentlemen, will all of you, no doubt, remember the Walsh failure at Chicago in 1906. You will also remember that Walsh had control of three different banks with approximately $30,000,000 resources; one was a National Bank, under national supervision; one a Trust Company and one a Savings Bank; both of the latter being under State supervision. This enabled Walsh to flim-flam the[Pg 315] examiners, one examiner being national and the other state, by juggling the assets and then finally diverting practically all of the deposits into his own enterprises; certainly the best part of them was used in promoting his business schemes. It took this kind of an earthquake to wake up Chicago and bring into the banking fraternity, or business world, one of the greatest reforms of the commercial life of the country. I say commercial world advisedly because about the same time Chicago had an experience with a fish house that was really the biggest fish story that was ever told. The sad thing about this fish story was that it was true and cost the fishermen, the Chicago banks, and the fishermen and bankers elsewhere, about $3,000,000.
These two experiences capped the climax and illustrated perfectly the need of just what followed in the Clearing House at Chicago.
This brings me naturally to the third point that I mentioned as important and vital in the evolution of the American Clearing House.
On June 1, 1906, the Clearing House Association of Chicago, Illinois, acting upon a resolution introduced by Mr. Fenton, Vice-President of one of its banks, established an independent system of Clearing House bank examinations. Only recently the chairman of the Clearing House used this language:
"The result of our experience in Chicago is most satisfactory and gratifying. The banks have almost unanimously adopted every suggestion made by the Clearing House Committee for their betterment and strength. In several instances the Committee, from its wider knowledge of the financial situation, has been able to save some of the smaller institutions from loss by enabling them to take hold of conditions in time. I cannot properly go into such details as would illustrate the effectiveness of Clearing House examinations as we have experienced it, and can only say in a general way that[Pg 316] it has been even more satisfactory than I anticipated it would be before it was undertaken."
Mr. Lawyer: Right on this ............