the most thorough manner. If they did, they could not make their round annually. Examiners appointed by a court have all the time they need, and, consequently, if capable men are appointed, their work is more exhaustive. 8. Examinations by Banks. Lastly may be mentioned examinations made by the banks themselves. In England this is a very common practice. The usual method is to call in expert accountants to make examinations, the result of which is made known to the public. This is made with a view of satisfying the managers of the soundness of their institutions. They had no doubt before; but an examination is made to fortify their assurance still

more.

XXVIII. CLEARING HOUSES

1. How Banks receive Checks. A bank clearing house. is one of the most noteworthy of all modern business inventions, as an economizer of time, effort, and money. It is an institution for exchanging and settling checks.

Banks receive checks, drawn either on themselves or on other banks, in four different ways that may be briefly explained.

First, they receive from their depositors, who leave the larger number of them.

Second, a bank may receive them for a debt due itself. Thus a man, who may or may not be a depositor, borrows money of a bank and in paying gives a check for the

amount.

Third, often checks are received by a bank from the maker, indorsers, or guarantors of notes left there for collection. Every bank is doing business of this kind, collecting notes for its customers or others, and receiving checks in payment.

Fourth, a bank, especially in a large city, receives checks for collection sent by its correspondents. A bank customer in Philadelphia deposits a check received in payment for a bill of goods that is drawn on a bank in Newark. Instead of sending the check to the Newark bank and demanding payment, the Philadelphia bank sends the check to its correspondent bank in New York, knowing that, as Newark is only a few miles away, it probably has an account with the Newark bank on which it is drawn, or

with another in that city, through which it can more easily obtain payment than by a direct presentation through the mail or by express.

In these four ways, therefore, a bank is constantly receiving checks. It is a great reservoir into which they are always flowing.

2. Checks classified. The checks thus received by a bank may be divided into three classes: those drawn on itself; those drawn on other banks in the city; those drawn on outside or country banks. The first class of checks are at once liquidated by crediting the amount to their depositors and making a corresponding charge to the drawers. Furthermore, when this is done, the act is final, unless some mistake has been made in the operation, and the entries can not be changed. The unwelcome discovery of an insufficient balance to pay a check will not justify a bank in withdrawing the credit. In such a case, therefore, if the bank can not recover the deficiency from the drawer, it must be the loser. Thus checks drawn on a bank that are presented directly for payment or for credit do not pass beyond itself for settlement.

3. Economy of the Clearing House. A bank deals with the second class of checks very differently. These must be presented to the bank on which they are drawn for payment. But, instead of doing this directly, the operation is conducted through the clearing house. As every bank in a city receives checks daily drawn on almost every other, it is evident that the easier way to settle. them is to exchange them and pay the balance in money, or in some other agreed manner. Thus, suppose $100,000 of checks have been deposited during the day in the First National Bank of New York, drawn on the Fourth National, Chemical, Park, Chatham, and Central banks, $20,000 on

each; also, that in each of these banks there has been deposited during the day $20,000 of checks drawn on the First National Bank. Let us suppose that six persons representing the six banks should come together bringing all of these checks, amounting to $200,000. By the simple process of exchanging them, all would be liquidated without the payment of a dollar. On this idea is founded a bank clearing house. It is an expeditious method of liquidating checks, not by paying, but by exchanging them. Let us now explain how the work is done.

4. Membership. A room or building is prepared where the representatives of the various banks belonging to the association meet daily to exchange checks. Not every

bank can be a member, only those which are in good standing and are willing to conform to the rules of the clearing house. In most associations three fourths of the banks represented at a meeting must vote in favor of admission; furthermore, it may, by a similar vote, impose such conditions on the admission of a bank as the association may deem expedient. As the privilege is a valuable one, especially to banks established in the large cities, they are required to pay an admission fee based on the amount of their capital. This fee in New York is $1,000 for a half a million dollar bank; $2,000 for a bank with a capital twice as large; and increasing until $7,500 must be paid by a five million dollar bank.

5. Authority over its Members. The rules adopted by every clearing house are designed to preserve and enforce the methods of conservative banking. Thus one of its standing committees has power for clearing house purposes to examine all books and assets of any member of the association whenever it may deem it necessary; again, in a case of extreme emergency it may suspend any member

from the privileges of the clearing house until the pleasure of the association can be ascertained. If a bank is lending too much money, is frequently below the reserve line, very likely the clearing house committee will make a request for an examination. This is a kind of notice that its methods are regarded with suspicion. If a bank should refuse to comply, it would be at once suspended or expelled. The exercise of this supervision by a clearing house over its members is most salutary.

Sometimes when a bank is "overtrading," as the banks say, loaning too much money, which is revealed in checks drawn thereon and deposited with other banks for collection, it is required to deposit security that may be used, if need be, to pay its checks. This is rarely done; it is one of the measures of discipline sometimes administered to reduce a bank to more prudent ways of doing business.

The clearing house association, therefore, is an organization composed entirely of banks within a city or limited area that are willing to conform to a code of well-defined rules. The advantages are so great that every bank desires to be a member that can come within these rules. 6. Clearing through Another Bank. In some cases, however, of deprivation to a bank by reason of its charter, location, size, or other peculiarity, it may, with the consent of the clearing house, have its checks cleared through a member. Every bank that can clear through another is known to all the members of the clearing house; and when they prepare their checks for clearing, those drawn by non-clearing banks are presented to those which have agreed to clear for them. Thus no bank in Brooklyn or Jersey City is a member of the New York clearing house; but all of the banks in those two places have arrangements with New York banks for clearing through their assistance.