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51. CLEARINGS OF NON-MEMBER BANKS IN CHICAGC

BY JAMES G. CANNON

Besides the regular members there are about forty non-member banks clearing through the Chicago Clearing-House. In other words, there is an average of two to each member. Most of those clearing in this way are private banks and trust companies.

Up to January, 1907, the Chicago Clearing-House exacted no compensation for permitting outside institutions to clear through its members. About that time an amendment was added to the constitution making it imperative for a member bank to first obtain the consent of the clearing-house committee before it could clear for an outside institution, and further obligated such a member to pay as follows: For each bank having a capital of

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The amendment further provided that such banks and bankers should, under proper authority, consent to the same examinations and render the same statements of their condition as are required of the members of the association, and be subject to all such rules and regulations in matters of common interest arising from or affecting relations with banks in other localities, and the fostering of sound and conservative methods of banking, as have been or may from time to time be adopted by the association, and sign an agreement so to do in such form as the clearing-house committee may require.

B. The System as a Whole

(1) GENERAL RELATIONS

52. COLLECTING OUT-OF-TOWN CHECKS

BY JAMES G. CANNON

It is evident that a bank receives from its customers in the daily course of business checks drawn on banks in distant towns and cities, but before a bank can realize any return from such checks it must 'Adapted from Clearing-Houses, pp. 288-89. (National Monetary Commission, 1910.)

Ibid., pp. 59-78.

collect them. That is, it must send them to the banks upon which they are drawn, or to some near-by bank which will act as its agent, for payment. For the purpose of collecting or clearing these foreign checks the clearing-house is not available. 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 charges made by banks for exchange are usually extremely vexing to customers, and to the layman appear indeed quite unreasonable. It is obvious, however, that the banks are asked to perform an important service for their customers. When A, who lives at a distance from a financial center, buys a bill of goods from B, living in the city, and sends a check drawn on his local bank for payment of the amount, he subjects someone to the expense of collecting the check, and, further, someone is out the use of the money until the collection has been made.

For instance, a check on a bank in Massillon, Ohio, presented for payment in New York City might be sent to a bank in Cleveland, which in turn would send the check to the Massillon bank for collection. In an actual case like this two checks had to be drawn, four letters had to be written, 8 cents in postage stamps were used, and seventy-five or more handlings of the check were involved by a score or so of clerks, in five different banks, located in three different cities.

It would seem that the banks could not be expected to advance funds pending collection; but the competition among the financial institutions in the larger cities is so keen that the bank does not stand upon its rights and insist that the check shall be held for collection and credited to B's account only when collected, but passes it to his credit at once through fear that he will withdraw his account and deposit with some other bank that will extend that accommodation to him. This practice is quite general.

During the past few years great strides have been made by the clearing-houses throughout the country in the matter of establishing uniform rates for the collection of country checks, and at the present time there are few associations in the United States that have not some sort of a schedule for this purpose, however crude it may be.

53. LOST MOTION IN COLLECTING CHECKS1

BY JAMES C. HALLOCK

I. A check for less than $50 on Stonington, Conn., started at Westerly, R.I., six miles from Stonington, which it reached only after many days and a thousand miles of travel by the following route: Westerly to Providence, Providence to Boston, Boston to New York, New York to Boston again, but to another bank; Boston to New York again, but to another bank; New York to New Haven, New Haven to Saybrook, Saybrook to New London, and New London to Stonington. It passed through Boston twice, New York twice, and New Haven four times. It was put through nine banks, two of them in Boston and two in New York.

The following diagram pictures the circuitous journey:

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Clearing Out-of-Town Checks, pp. 12 and 21. (Copyright by the author, 1903.)

2. A check drawn in Hoboken and payable to a Sag Harbor firm, visited New York, Boston, Tonawanda, Albany, Port Jefferson, Far Rockaway, New York again, Riverhead, and Long Island City. The journey was as shown in the diagram below:

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Banks are the chief agencies for the conduct of exchanges between persons who do not reside in the same place. If a person buys goods beyond the limits of his home town he often pays for them by sending a draft purchased from a local bank and drawn either upon a bank in the place in which the goods were purchased or upon a bank in some other place which has frequent business relations with this one. In order to render this service to their customers banks are obliged to keep funds on deposit in other cities, not necessarily in every city in which the customers may desire to do business, but in certain commercial centers through the banks of which arrangements may be made for the conduct of exchanges with any place desired. The banks selected for this purpose in this country are usually called correspondents. In countries in which branch banking is practiced

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Adapted from Money and Banking, pp. 117-21. (Henry Holt & Co., 1910.)

a great deal of business of this kind is conducted between the central institution and its various branches.

By way of illustration let us consider the way in which a small city in Wisconsin conducts its exchanges with the outside world. We may assume that its banks have correspondents in Milwaukee, Chicago, and New York. Its out-of-town business results from the purchase and sale of goods and the adjustment of credit relations between its inhabitants and outsiders. Purchasers of outside goods will pay for them by sending checks on a local banker, by buying drafts on Milwaukee, Chicago, or New York, provided exchange on these places is acceptable to their customers, or, if not acceptable, on other places, such drafts being furnished by the correspondents of the local bank. These payments do not necessarily correspond in time with the purchases. Some are deferred. On a particular date the demand for exchange due to purchases comes from those made on time in the past, the payment for which falls due on that date and includes those made on a cash basis. To this demand must be added that arising from the adjustment of credit relations with outsiders. Under this head belong loans made to outsiders and investments in outside enterprises. Gifts to outsiders or transfers of property from any cause would also add to this demand.

To meet these drafts the banks have the checks, drafts, bills of exchange, etc., drawn on outside institutions and sent to the city in payment for goods sold, on account of loans, gifts, and other transfers of property to citizens and on account of investments of outsiders in local enterprises. These credit instruments are deposited with the local banks and sent by them to their correspondents for collection. Whether or not they will be sent to Milwaukee, Chicago, or New York, or distributed between the three places, will depend in part upon the location of the banks on which these instruments are drawn or at which they are payable and in part upon the condition of the local banks' accounts with their correspondents. Instruments drawn on Milwaukee or on banks in towns which do their banking business chiefly through Milwaukee will usually be sent to correspondents in that city, and the others, on the same principle, to Chicago and New York correspondents. Certain checks and drafts may be indifferently sent to either place, in which case the condition of the banks' balances in these three centers will determine the distribution.

It is obvious that on a given date the balance between the drafts made by the banks of a town on their correspondents and the credits

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