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NEW YORK CLEARING HOUSE

Historical Perspective
The New York Clearing House Association,
the nations first and largest bank clearing
house, has played a variety of key roles
supporting the development of the banking
system in the nations financial center. At
first, in 1853, its role was to establish order
from confusion, to simplify the chaotic
exchange and settlement process among
the banks of New York City.

Until the Federal Reserve System was


established in 1913, the Clearing House
served to stabilize currency fluctuations and
carry the monetary system through recurring
times of panic. Since then, the Clearing
House has applied its organizational talent
and technological innovation to meet the
demands of a banking system that is
increasingly diverse and handling an everincreasing volume of business.
Today, the Clearing House remains at the
crossroads of the financial world: it is a
place where payments meet, mix and move
expeditiously to their final destinations.

Order from Confusion


In the decade before the Clearing House
was founded, banking had become
increasingly complex. From 1849 to 1853
years highlighted by the California gold rush
and construction of a national railroad
system the number of New York banks
increased from 24 to 57. Yet settlement
procedures remained unsophisticated. As
had been the practice for years, banks
settled their accounts by employing porters
to travel from bank to bank to exchange
checks for bags of coin, or specie.

As the number of banks grew, exchanges


became a daily event. The official reckoning
of accounts, however, did not take place
until Fridays, often resulting in record
keeping errors and encouraging abuses.
Each day, the porters would gather on the
steps of one of the Wall Street banks for
their Porters Exchange. There, as one
historian described it:
They accounted to each other for what had
been done during the day. Thomas had left a
bag of specie at Johns bank to settle a
balance, which was due from Williams bank
to Roberts; but Roberts bank owed twice as
much as Johns. What had become of
that!It is entirely safe to say that the
Presidents and Cashiers of the banks could
not have untangled this medley.
In this atmosphere of growing business
volume and already inadequate exchange
practices, several American bankers came
to view the London Clearing House system,
which was established in 1773, as a model
that offered a solution to New Yorks
banking problems. In 1831, Albert Gallatin,
past Secretary of the Treasury and
President of the National Bank of New York,
wrote that the lack of a daily exchange of
drafts among banks produces relaxations,
favors improper expansions and is attended
with serious inconveniences. Twenty years
later, a bank bookkeeper named George D.
Lyman proposed in an anonymous article
that banks send and receive checks at a
central office. On August 18, 1853, he
resubmitted his article with his name affixed
and asked that cashiers contact him if they
supported his idea.
The response was tremendous. The New
York Clearing House was organized officially
on October 4 of that year by a group of
cashiers headed by Francis E. Edmonds of
the Mechanics Bank. One week later, on
October 11 in the basement of 14 Wall
Street, 52 banks participated in the first
exchange.

On its first day, the Clearing House


exchanged checks worth $22.6 million.
Within 20 years, the average daily clearing
topped $100 million. Today, the average is
in excess of $20 billion.
The formation of the New York Clearing
House brought order to what had been a
tangled web of exchanges. Specie
certificates soon
replaced gold as
the means of
settling balances
at the Clearing
House,
further
simplifying
the
process.
Once
Clearing House
certificates were
exchanged
for
gold deposited at member banks, porters
encountered fewer of the dangers they had
faced previously while transporting bags of
gold from bank to bank. Certificates also
relieved the strain on the banks cash flow,
thus reducing the likelihood of a run on
deposits. Requirements placed on member
banks weekly audits, minimum reserve
levels and daily settlement of balances
further assured more ordered, efficient
exchanges.

Calming the Panics


Between 1853 and 1913, the nation
experienced rapid economic expansion as
well as financial panics, on average, every
five and one-half years. One of the Clearing
Houses first challenges was the panic of
1857. When the panic began, leaders of the
member banks met and devised a plan that
would shorten the duration of the panic
and more importantly, maintain public
confidence in the banking system. When
specie payments were suspended, the
Clearing House issued loan certificates that
could be used to settle accounts. Known as
Clearing House Loan Certificates, they
were, in effect, quasi-currency, backed not
by gold but by discounted county and state
bank notes held by member banks. Bearing
the words Payable Through the Clearing
House, a Clearing House Loan Certificate
was the joint liability of all the member
banks, and thus, in lieu of specie, a most
secure form of payment.

The certificates appeared in smaller


denominations during the panic of 1873, and
continued to be used as a substitute
currency among the member banks for
settlement purposes during panics in
subsequent decades, including the Panic of
1893. Although they represented a potential
violation of federal law against privately
issued currencies, these certificates, as a
contemporary observer noted, performed
so valuable a servicein moving the crops
and keeping business machinery in motion,
that the governmentwisely forbore to
prosecute.
Because of their stability during times of
panic, the value of Clearing House Loan
Certificates became an accurate measure of
the economys financial health. Secured by
discounted collateral, each certificate was
worth more than its dollar equivalent. The
currency premium, or exchange rate,
between Clearing House money and
greenbacks (or gold) thus acted as an
indicator of the gradual restoration in bank
money. When the premium fell to zero, a
one-to-one relationship existed between
certificates
and
currency,
making
substitution no longer necessary.
As the Clearing House continued to push for
banking efficiency and fiscal stability
throughout the nineteenth and early
twentieth centuries, it grew to symbolize the
concern of financial institutions that had
united in times of national crisis and their
determination to restore order and
confidence in banking. In 1913, however,
Congress passed the Federal Reserve Act,
thus creating an independent, federal
clearing system modeled on the many
private clearing houses that had sprung up
across America. The new monetary system,
with its stringent audits and minimum
reserve standards, assumed the role that
clearing houses had played in offsetting the
nations fears of future panics.

The Clearing Process


Since the inception of the Federal Reserve
System, the New York Clearing House has
concentrated on facilitating the smooth
completion of financial transactions by
clearing the payments involved.

The clearing process, while highly


structured, is in theory, quite simple.
Member banks exchange checks, coupons
and other certificates of value among
themselves, after which the Clearing House
records the resulting charges to their
accounts. Entries are posted on the books of
the New York Federal Reserve Bank to
settle any differences. Settlement is
prepared each business day at 10:00 a.m.
after approximately three million pieces of
paper have been presented for payment.
The Clearing House also facilitates
exchanges among non-member banks.
Through the City Collection Department,
non-member institutions can gather their
checks and other items, which are
presented to the Clearing House by member
banks and the Federal Reserve Bank of
New York, and pay for the items received.

balances
resulting
exchanges,

from

such

To promote the interests of its members,


and

To maintain conservative banking


through wise and intelligent cooperation.

Although these principles have remained


unchanged, the scope of banking today is
far more expansive than the original 52
member banks had envisioned. In response
to evolving needs, the Clearing House itself
has evolved into a modern administrative
organization that continues to meet the
demands of todays larger, more complex
banking community.

The essentially simple process of exchange


and settlement, however, has been
complicated in recent decades by the sheer
volume of transactions now involved and the
variety of new payment instruments
developed to meet the needs of American
commerce and facilitate U.S. integration into
the world economy. To maintain its
traditional efficiency while minimizing risk,
the New York Clearing House turned to
electronic technology. Computers and
communication lines have been performing
increasingly more of the payment and
financial information exchange functions that
once required paper processing. The
Clearing
House
Interbank
Payments
System, or CHIPS, began operation in 1970.
The New York Automated Clearing House,
or NYACH, followed in 1975 and became
the Electronics Payment Network in 2000.
The Clearing House Electronic Check
Clearing System, or CHECCS, was added in
1992. These systems are testimony to the
increasing role that technology has assumed
in the Clearing Houses operations.
Even with the introduction of hightechnology, the New York Clearing House is
still guided by the same principles set forth
in its founding constitution. Its primary goals
remain:

To effect the daily exchange between


the members thereof and to settle the

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