Clearinghouses
CLEARINGHOUSES
CLEARINGHOUSES. The method of clearing—matching offsetting items so that only the balances due after the clearing need to be settled—has been used for centuries by many different kinds of organizations, although by far the most common use of clearing in the United States has been in connection with bank checks.
The pattern for this kind of transaction was set in 1773, when the first London clearinghouse was organized to replace the coffeehouse at which weary bank runners regularly gathered to exchange their batches of checks. American cities copied this example, and by the end of the Civil War there were clearinghouses in New York, Boston, Philadelphia, and Chicago. Others followed as the country expanded westward. In 1900 there were eighty-seven clearinghouses in the United States, and the number reached a peak of 198 in 1920. Small towns with more than one bank either used the facilities of the nearest city clearinghouse or devised an informal local clearing place.
In addition to handling check collections, many of the larger clearinghouses assumed other responsibilities for the banking community until the Federal Reserve period: they conducted examinations of their member banks, published reports of their condition, and aided those in difficulty during crises by issuing loan certificates to be used in settling clearing balances. These functions became less important when one state after another, even before the Civil War, began to regulate the banks they had chartered, and the national government, in the National Banking Act of 1863, created the office of comptroller of the currency to regulate banks under national charter. In 1914 the Federal Reserve System took over some of the regulation of all banks that became members of the system.
The establishment of the Federal Reserve system affected check clearing in a number of ways. The twelve Federal Reserve banks handled intercity clearing within their respective districts, leaving intracity checks to local clearinghouses. The time needed for long-distance clearing also decreased. Checks between New York and San Francisco, for example, which had formerly required eight days' travel, were put on a two-day basis, regardless of delays in the actual physical arrival of the checks.
Developments outside the banking system also affected the work of the clearinghouses. Many stock and commodity exchanges cleared the transactions of their members, thus reducing payments made through banks. Greatly increased use of charge accounts and credit cards after World War II reduced the number of transactions by increasing the average size of check payments. Gradual adoption of accounting machinery and computers also altered the nature of clearing.
When American clearinghouses were first organized, their published reports provided important information on the state of the economy, since there were few other available measures of business activity. These figures became less significant after the Federal Reserve banks began in 1918 to collect and publish the monthly totals of "debits to individual accounts." These included all checks drawn, even those exchanged between customers of the same bank and not included in that bank's clearings. The ratio of total clearings to total debits declined steadily. Despite these changes, in the early 2000s the work of the clearinghouses continued to be an essential feature of financial activity.
BIBLIOGRAPHY
Garvy, George. Debits and Clearings Statistics and Their Use. Rev. ed. Washington, D.C.: Board of Governors of the Federal Reserve System, 1959.
Spahr, Walter Earl. The Clearing and Collection of Checks. New York: Bankers Publishing, 1926.
Margaret G.Myers/c. w.
See alsoClearing House, New York .
Clearing House, New York
CLEARING HOUSE, NEW YORK
CLEARING HOUSE, NEW YORK (NYCH), founded in 1853 when thirty-eight New York City banks organized it as the first bank clearinghouse in the United States. The previous system of Friday settlements had created enormous confusion and danger of loss as runners with bags of currency dashed about the financial district. Even more serious had been the possibility that some bank might accumulate large adverse balances during the week and threaten the stability of the whole group. The change to daily settlements through the NYCH was so effective a reform that within a few weeks four of the more reckless banks were obliged to close.
The inflexible currency of the mid-nineteenth century and the impotence of the Independent Treasury forced the new clearinghouse to take, sometimes reluctantly, a position of leadership. (The Independent Treasury was established in 1845 to handle its own receipts and payments without utilizing bank services; it was never completely successful in that effort but was not abandoned until 1920.) After the banking crisis of 1857 it required its members to hold reserves against their deposits—a device copied by the national banking legislation of 1863 and by the Federal Reserve Act of 1913. Ten times between 1860 and 1914, in order to tide the banks over during a crisis, the NYCH issued loan certificates for use in the settlement of daily balances. It published reports of the condition of member banks and of daily, weekly, and yearly totals of clearings, which served as useful indicators of business conditions when other statistical measures were scarce. Clearings at New York City banks reflected the volume of transactions in the stock market; "outside" clearings of other centers reflected business transactions much more closely than speculative activity.
The NYCH steadily increased the number of its daily clearings and the range of its activities, including clearings of stock certificates, coupons, and foreign trade bills as well as checks of member banks. In the last three decades of the twentieth century, computers became increasingly important in the NYCH's activities. In 1970 it inaugurated its first electronic payments system, called the Clearing House Interbank Payments System (CHIPS), followed by the New York Automated Clearing House (NYACH) in 1975 and the Electronic Payments Network (EPN) in 2000. Despite its great growth in membership, the increasing sophistication of its clearing methods, and the steadily increasing volume of daily clearings into the tens of billions of dollars, the relative importance of the NYCH had declined by the mid-twentieth century as the Federal Reserve banks took over intercity clearing and as the overall national and international economy grew and diversified.
BIBLIOGRAPHY
Garvy, George. Debits and Clearings Statistics and Their Use. Rev. ed. Washington, D.C.: Board of Governors of the Federal Reserve System, 1959.
Spahr, Walter Earl. The Clearing and Collection of Checks. New York: Bankers Publishing, 1926.
Margaret G.Myers/c. w.
clearinghouse
clear·ing·house / ˈkli(ə)ringˌhous/ (also clear·ing house) (abbr.: c.h. or C.H.) • n. a bankers' establishment where checks and bills from member banks are exchanged, so that only the balances need be paid in cash. ∎ an agency or organization that collects and distributes something, esp. information.