Part 24

"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 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 accounts 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 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.

"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 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 96-1/2 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 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.

"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 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 suggestion 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 coöperation 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. 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. 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.

_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 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 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 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, 7-1/2 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.