13. Suppose that any number of the customers of the same bank have transactions amongst themselves, and give each other cheques on their accounts. Then, if the receivers of the cheques do not actually draw out the money, any amount of transactions may be carried on by simple transfers of Credit from one account to the other without a single piece of money being required. The Clearing system is a device by which all the banks which join in it are formed into one huge banking institution for the purpose of transferring Credits from one bank to another, just in the same way as Credits are transferred within the same bank.

The Clearing System arose in this way. Every London banker has every morning claims against most of his neighbours; and of course most of his neighbours have claims against him. It used to be the custom for every banker, the first thing in the morning to send out a number of clerks to collect the claims he had against his neighbours, who of course were obliged to keep cash or notes to meet them. The metropolis is portioned out into districts called "walks," and each clerk had to collect all the bills, cheques, etc. within his walk. These claims are called banker's charges, and were paid in Bank Notes, in some cases by cheques drawn upon the Bank of England. This clumsy and barbarous method of settling banker's charges caused a great waste of Bank Notes. Every banker had to keep by him a sufficient amount of bank notes to meet the charges of all his neighbours. It was stated in evidence before the House of Commons that one Bank alone, was obliged to keep £150,000 in Notes for this sole purpose: and if this bank alone was obliged to keep this quantity of notes for this unprofitable purpose, what must have been the total amount wasted in this manner by all the banks?

About 1775 the inconvenience of sending out to collect these charges led a number of the city bankers to organise an exchange among themselves, on a similar plan to that already practised by the Edinburgh banks. They engaged a room in which their clerks met and exchanged their mutual claims against each other, and paid only the balance in cash, or bank notes. The Bullion Report says that in 1810 there were 46 bankers who cleared; and that the average amount of cheques, bills, etc. which passed through the Clearing House every day was about £4,700,000, and that all the balances on this account were settled by about £220,000 in Bank Notes. In 1854 the Joint Stock Banks were admitted to the clearing house, and in 1864 the Bank of England.

The mode of doing business is as follows - The bills and cheques which each banker holds on the other clearing banks are sorted in separate parcels, and at 1030 a clerk from each bank arrives at the Clearing House. He delivers to each of the other clerks the obligations he has against his house, and receives from each clerk the obligations due from his own. When these obligations are interchanged, each clerk returns to his own bank. The same process is repeated at 2·30. Each bank has till 4·45 to decide whether it will honour the drafts upon it: if it does not return any drafts upon it before that hour it is held to have made itself liable on them to the clearing house. At 4·45 the business closes and the accounts are made up: and so admirable is the system that not a single Bank Note or sovereign is required for the settlement of the claims.

Each clearing bank keeps an account at the Bank of England, and the Inspector of the Clearing house also keeps one. Printed lists of the clearing banks are made out for each bank, with its own name at the head, and the others are placed in a column in alphabetical order below it. On the left side of the names is a column headed "Debtors," and on the right side a column headed "Creditors." The clerk of the clearing house then makes up the accounts between each bank, and the difference only is entered in the balance sheet, according as it is debtor or creditor. A balance is then struck between the debtor and creditor columns, and the paper delivered to the clerk, who takes it back to his own bank. The balance then is not paid to, or received from, the other bankers as formerly, but it is settled with the clearing house, which keeps an account itself at the Bank of England. The accounts are settled by means of a species of cheque appropriated to the purpose, called Transfer Tickets. They are of two colours, white and green: white, when the bank has to pay a balance to the clearing house; green, when it has to receive a balance from it. By this admirable system, transactions to the amount of many millions daily are transferred from one bank to another, without the use of a single Bank Note or coin. In the course of last year Credits to an amount exceeding £6,000,000,000 were thus interchanged between the clearing banks.

In most country towns of any size a similar system of exchanges is organised, and the differences settled by a draft upon London: and in 1860 a clearing establishment was instituted in London for country bankers. All these institutions have the tendency to constitute, as it were, all the banks in the kingdom into one vast banking institution, and to transform the monetary business of the country, into mere transfers of Credit, without the use of Bank Notes and coin.

London : Printed By

8POTTISWOODE AND CO., NEW-STREET SQUARE

And Parliament Street

OCTOBER 1879.

General Lists Of New Works

Published By

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HISTORY, POLITICS, HISTORICAL MEMOIRS etc.

Armitage's Childhood of the English Nation. Fcp. 8vo. 2s. 6d. Arnold's Lectures on Modern History. 8vo. 7s. Gd. Bagehot'e Literary Studies. 2 vols. 8vo. 28s. Buckle's History of Civilisation. 3 vols, crown 8vo. 24s. Chesney's Indian Polity. 8vo. 21s.

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