clearing-room; but the exchanges must all be made before a specified time.

When the clerks begin the exchanges at the same time, they all start upon the signal from the manager with their items on their arms or in bags or cases strapped over the back, and proceed in the same direction, passing along the desks until they have deposited all their paper. In the large cities, where the clerks are numerous, order and method are necessary in delivery to prevent confusion and to save time. But in small cities, where the clerks usually deliver their items as soon as they arrive, more liberty is allowed in personal conduct; also by this method an opportunity is afforded to the less proficient clerks to arrive early and list their items as fast as they are delivered to them from the other banks.

When the clearings have been made, the next step is for each settling clerk to determine the amount of the balance of his own bank, which is found by taking the difference between the amount brought to the clearing-house and the amount taken away. A certain amount of time is allowed for the proof. In some cases the settling clerks do not remain until the proof is made, but leave for their respective banks as soon as they make out their tickets for the amounts brought, amounts received, and balances. If the manager of the clearinghouse, or his assistant in charge of the proofsheet, finds, after he has made all the entries and additions, that his work does not prove, he first determines whether the error was made by one of the settling clerks or by himself. If by one of the clerks, it is usually discovered in a short time at the bank, whereupon the latter reports the error to the manager at the clearing-house either by messenger or by telephone. If the bank fails to report the error in due time, the manager takes the debit and credit slips and finds it.

The speed with which the business of a clearing-house is transacted seems almost incredible. The actual time required to make the exchanges varies from one and one-half minutes to ten minutes. When the exchanges are made simultaneously, the time varies, as a rule, in proportion to the number of members. In view of the shortness of time required to make its exchanges, the New York Clearing-House affords, perhaps, the best example in existence of the success of modern business methods as compared with the old way of doing things. The clearances exceed on the average $300,000,000, and yet this enormous amount of paper is exchanged between the banks in ten minutes, and often in less time.

Clearing-houses may be divided into two classes with reference to the funds used in the settlement of balances: first, those clearinghouses which make their settlements on a cash basis, and, second, those clearing-houses which make their settlements on some other basis.

About 17 per cent of the clearing-houses in the United States settle their balances entirely on a cash basis. Among the clearinghouses that do not settle with cash no less than five different methods of settling are in vogue. They are (1) by manager's check on debtor banks given to creditor banks; (2) by borrowing and loaning balances without interest; (3) by borrowing and loaning balances with interest; (4) by the use of one or more of four forms of certificates, viz., gold and currency depository certificates, United States assistant treasurer certificates, and clearing-house loan certificates; and (5) by draft on another city. These methods, however, are often found in combination.

Where manager's checks are used the creditor banks send clerks to the clearing-house to receive the manager's checks. These may be taken to the debtor banks and cashed, exchanged for cashier's checks or drafts on other cities, or sent through the clearings on another day.

Clearing-house certificates are of two kinds: those issued upon the deposit of gold coin (and in New York City and Boston on gold and silver certificates and legal-tender notes) and those issued upon the deposit of collateral securities. The former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. The latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing-house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. The certificates issued upon the deposit of gold, etc., are termed "Clearing-house certificates," and those issued upon the deposit of collateral security are very properly termed "Clearing-house loan certificates."

Generally speaking, about 40 per cent of the clearing-houses of the United States use drafts on other cities in paying their balances. About 30 per cent settle by manager's check and about 25 per cent settle by cash alone, the remaining 5 per cent settling by a combination of two or more of the foregoing methods.

50. SPECIAL FUNCTIONS OF CLEARING-HOUSES1'

BY JAMES G. CANNON

The tendency has been marked, especially in recent years, to include within the legitimate field of clearing-houses all questions affecting the mutual welfare of the banks and the community as a whole. The most important of the special functions of a clearinghouse are (a) the extending of loans to the Government, (b) mutual assistance of members, (c) fixing uniform rates of interest on deposits, (d) fixing uniform rates of exchange and of charges on collections, (e) the issue of clearing-house loan certificates, and (ƒ) examining individual banks.

a) Less than a decade after the inauguration of the clearinghouse system in America the Civil War broke out and threw the Government into a condition of acute financial embarrassment. The ordinary sources of income were insufficient to meet the demands of the approaching crisis. Thereupon the banks, members of the clearing-houses in New York and Boston, responded with practical unanimity to the call of the Government for loans, by which the latter was enabled to put armies into the field and maintain the struggle for national unity.

b) In times of panic it is not infrequently the case that a bank in good standing becomes temporarily embarrassed. Unfortunate report may cause a run on it, and, being unable to call in a sufficient amount of its outstanding loans to meet the demands of its frightened depositors, it must either secure a loan or fail. In such an emergency the other members of the clearing-house are usually willing to render assistance until the strain is relaxed. To secure such aid, however, a bank must be sound in its management and of good repute in every respect. Otherwise the members of the clearing-house are likely to decline assistance, being quite willing to get rid of a weak and illmanaged member.

c) Another of the special functions of a clearing-house is the fixing of uniform rates of interest on deposits, and in a few instances on loans. In some associations the legality of such action is still regarded as a moot question, and hence they are reluctant to enforce such a rule. Other associations, however, have not hesitated to regulate the members on these points. As early as 1881 rates of interest were agreed

Adapted from Clearing-Houses, pp. 11-22, 139-49. (National Monetary Commission, 1910.)

upon in Buffalo, and were observed practically without friction or violation for some nine years thereafter. They were broken at last only because of their non-observance by new banks, which at the outset refused to become members of the clearing-house organization.

The Sioux City Clearing-House Association has fixed a maximum rate of interest of 2 per cent per annum, to be paid by the members upon bank accounts or balances, and on time certificates of deposit 3 per cent. Without any special clearing-house regulation on the subject, it is generally understood by the banks that 6 per cent is the minimum rate that shall be charged on first-class loans, and that the rate shall range from that to 8 per cent, according to the character of the risk.

At St. Joseph, Missouri, the clearing-house rules provide that interest (not naming the rate) may be paid on balances to banks, bankers, trust companies, the St. Joseph Cattle Loan Company, deposits of the Government, State, county, city, etc., or to individuals, firms, corporations, not located or doing business in St. Joseph or Buchanan County, but that no interest may be paid to individuals, firms, or corporations located or doing business in St. Joseph or Buchanan County, except by unanimous consent. Trust companies may pay interest on checking accounts at the rate of 2 per cent per annum, while savings banks, trust companies, and savings departments of commercial banks may pay interest on savings accounts, at a rate not to exceed 3 per cent. Interest is not allowed on demand or time certificates for a less period than six months, and then at the rate of three per cent per annum. No interest is allowed for any fractional part of a six months' period.

The banks of Savannah, Georgia, under clearing-house regulation, may pay interest not to exceed 3 per cent on individual accounts, and then only when the balances in such accounts exceed $25,000. On bank balances without limitation as to amount they may pay not to exceed 3 per cent.

The question of clearing-house regulation of the rates to be charged on local loans has been considered by many associations in different parts of the country, but, generally speaking, has not met with much favor. It is quite evident that on this one point the individual banks are jealous of their prerogative to loan their money at whatever rate they choose. The nearest approach to clearinghouse rate regulation of loans seems to be in the arrangement in vogue at Chattanooga, Tennessee, by which the minimum rate to be charged

by the banks in making their loans is determined from time to time by a committee appointed by the associated banks for that purpose.

d) Still another of the special functions of a clearing-house is the fixing of uniform rates of exchange and of charges on the collection of items. In 1881, the year in which the clearing-house in Buffalo was organized, a prominent banker in that city succeeded in uniting the banks on rates. The promoter of the enterprise, though well known for rate cutting, was a successful banker and had always been able to meet competition successfully. Hence, when he proposed a uniform-rate system the other banks were only too glad to consider his propositions. Meetings were accordingly held, schedules of charges were drawn up, and rules were formulated for the guidance of the banks. In a short time a schedule was adopted and put into successful operation. The rates were not high, but were arranged so as to do justice, as far as possible, to the banks on the one hand and the depositors on the other, and so satisfactory was the new régime that it remained in harmonious operation for nearly nine years. It is said that the increase in profits or collections, to the twelve banks interested, over the former method of doing business free of charge, paid the dividends of all the banks each year, and whatever profit was made on loans and discounts was used to build up the surplus. But the formation of new banks finally played havoc with the uniformrate system. While it lasted it was made obligatory upon every bank, but in 1891 the newly organized banks began to cut on rates. The clearing-house members endeavored to induce the new banks to join the association, but did not at first succeed. It was regarded as unjust to the member banks to hold them to the existing agreement when their competitors were free, and accordingly, in June, 1891, the schedule of rates was made no longer obligatory.

In 1895 the Rochester (New York) Clearing-House Association put into operation a schedule of collection charges, and the results have been most satisfactory. All of the banks were in favor of it, though there was at first some complaint on the part of customers.

Up to a comparatively short time ago no other association in the country had approached that of St. Joseph in the detail with which it worked out a system of regulations governing the conduct of its members in regard to making collections. In the past few years, however, considerable attention has been given to the subject by the