Bankers' clearing house
Encyclopedia
A bankers' clearing house is an organization that transfers money between member banks, originally to clear checks
. For more than a century, this service has been expanded to include several other banking services now done electronically.
began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street
in the City of London, to exchange all their cheques in one place and settle the balances in cash.
, who was a friend of a founder of the Clearing House, published a book on mass production The Economy of Machinery and Manufactures in which Babbage described how the Clearing House operated:
Beginning at 5 pm, a clerk for each debtor bank was called to go to a rostrum to pay in cash to the Inspector of the Clearing House the amount their bank owed to other banks on that day. After all of the debtor clerks had paid the Inspector, each clerk for the banks that were owed money went to the rostrum to collect the money owed to their bank. The total cash paid by the debtor banks equaled the total cash collected by the creditor banks. On the rare occasions when the total paid did not equal the total collected, other clerks working for the Inspector would examine the paper trail
of documents so that the numerical errors could be found and corrected.
The United States improved on the British check clearing system and opened a bankers' clearing house
in the Bank of New York
on Wall Street, New York in 1853. Instead of the slow London procedure in which each bank clerk, one at a time, stepped up to an Inspector's rostrum, in the New York procedure two bank clerks from each bank all worked simultaneously. One clerk from each bank sat inside a 70 foot long oval table, while the second clerk from each bank stood outside the table facing the other clerk from the same bank. Each of the outside clerks carried a file box. When the manager signaled, all of the outside clerks stepped one position to the left, to face the next seated clerks. If a seated clerk represented a bank to which money was owed or from which money was receivable, the net amount of cash would change hands, along with checks and paper documents. Thus several such transactions could be conducted simultaneously, across the oval table. When the manager signaled again, this procedure was repeated, so that after about six minutes, the clerks had completed all their assigned transactions and were back to their starting locations, and holding exactly the amount of cash their papers said they should be holding. Clerks were fined if they made errors and the amount of the fine increased rapidly as time passed.
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
. For more than a century, this service has been expanded to include several other banking services now done electronically.
Predecessors
In England, cheques were used from the 17th century. Up until around 1770 an informal exchange of cheques took place between London Banks. Clerks of each bank visited all of the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearingsClearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street
Lombard Street, London
Lombard Street is a street in the City of London.It runs from the corner of the Bank of England at its north-west end, where it meets a major junction including Poultry, King William Street, and Threadneedle Street, south-east to Gracechurch Street....
in the City of London, to exchange all their cheques in one place and settle the balances in cash.
The first Banker' Clearing House
The first organization for clearing checks was the "Bankers' Clearing House" established in London in the early 19th century. It was founded by Lubbock's Bank on Lombard Street in a single room where clerks for London banks met each day to exchange checks and settle accounts. In 1832 Charles BabbageCharles Babbage
Charles Babbage, FRS was an English mathematician, philosopher, inventor and mechanical engineer who originated the concept of a programmable computer...
, who was a friend of a founder of the Clearing House, published a book on mass production The Economy of Machinery and Manufactures in which Babbage described how the Clearing House operated:
- "In a large room in Lombard Street, about 30 clerks from the several London bankers take their stations, in alphabetical order, at desks placed round the room; each having a small open box by his side, and the name of the firm to which he belongs in large characters on the wall above his head. From time to time other clerks from every [banking] house enter the room, and passing along, drop into the box the checks due by that firm to the house from which this distributor is sent."
Beginning at 5 pm, a clerk for each debtor bank was called to go to a rostrum to pay in cash to the Inspector of the Clearing House the amount their bank owed to other banks on that day. After all of the debtor clerks had paid the Inspector, each clerk for the banks that were owed money went to the rostrum to collect the money owed to their bank. The total cash paid by the debtor banks equaled the total cash collected by the creditor banks. On the rare occasions when the total paid did not equal the total collected, other clerks working for the Inspector would examine the paper trail
Paper Trail
Paper Trail is the sixth studio album by American hip hop artist T.I., released September 30, 2008 on Grand Hustle Records and Atlantic Records. He began to write songs for the album as he awaited trial for federal weapons and possession charges...
of documents so that the numerical errors could be found and corrected.
The United States improved on the British check clearing system and opened a bankers' clearing house
Clearing House Association, LLC
The Clearing House Association, LLC is the nation’s oldest banking association representing 17 of the world's largest commercial banks, which collectively employ over 2 million people and hold more than half of all U.S. deposits...
in the Bank of New York
Bank of New York
The Bank of New York was a global financial services company established in 1784 by the American Founding Father Alexander Hamilton. It existed until its merger with the Mellon Financial Corporation on July 2, 2007...
on Wall Street, New York in 1853. Instead of the slow London procedure in which each bank clerk, one at a time, stepped up to an Inspector's rostrum, in the New York procedure two bank clerks from each bank all worked simultaneously. One clerk from each bank sat inside a 70 foot long oval table, while the second clerk from each bank stood outside the table facing the other clerk from the same bank. Each of the outside clerks carried a file box. When the manager signaled, all of the outside clerks stepped one position to the left, to face the next seated clerks. If a seated clerk represented a bank to which money was owed or from which money was receivable, the net amount of cash would change hands, along with checks and paper documents. Thus several such transactions could be conducted simultaneously, across the oval table. When the manager signaled again, this procedure was repeated, so that after about six minutes, the clerks had completed all their assigned transactions and were back to their starting locations, and holding exactly the amount of cash their papers said they should be holding. Clerks were fined if they made errors and the amount of the fine increased rapidly as time passed.
See also
- Clearing house (finance)Clearing house (finance)A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...
- Automated Clearing HouseAutomated Clearing HouseAutomated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...
(ACH) - Electronic funds transferElectronic funds transferElectronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
(EFT) - Direct DepositDirect depositDirect deposit also known as Direct credit is a banking term used to refer to certain payment systems used to transfer money where a payment is initiated by the payer not the payee, namely:* In Europe, the giro system...
- The Electronic Check CouncilElectronic Check CouncilThe Electronic Check Council is a US organization that provides a forum for stakeholders of NACHA-The Electronic Payments Association to design, propose, monitor, and promote solutions that enable the conversion of paper checks to electronic entries....
(ECC) - FedwireFedwireFormally known as the Federal Reserve Wire Network, Fedwire is a Real Time Gross Settlement Funds Transfer system operated by the Federal Reserve Banks that enables financial institutions to electronically transfer funds between its more than 9,289 participants...
- Electronic Benefit TransferElectronic Benefit TransferElectronic Benefit Transfer is an electronic system in the United States that allows state governments to provide financial and material benefits via a plastic debit card. Common benefits provided via EBT are typically sorted into two general categories: Food and cash benefits...
- Electronic payments