A work dealing with the subject of the Money Market would not be complete without reference to the Clearing House—the institution by which our enormous financial operations are adjusted. Without such arrangements as are carried out so practically and automatically by the Clearing House, it would be impossible to carry on our present trade, and our banking system could not have developed into such a high state of efficiency as we at present find.

Although our Clearing House has now been established for more than a century and a quarter, London cannot lay claim to be the originator of the clearing system. Edinburgh established such a system some years before its adoption in London, and a somewhat similar arrangement appears to have been in vogue in certain continental towns, it is said, since the sixteenth century.

Up to the year 1775 all the cheques which a London banker held on other London bankers were presented daily to the bankers on whom they were drawn, and paid in cash or notes. Such a system was very inconvenient to both the collecting and the paying bankers, as not only did it entail the trouble of sending out clerks to present the various cheques, but every banker was bound to keep an unnecessarily large stock of cash and notes in his till, in order to be prepared to meet in cash any demand which might be made upon him. There was also considerable risk in the clerks’ carrying about such large amounts of notes and gold.

In the year 1775 certain of the private bankers of London arranged a scheme between themselves whereby to minimise this inconvenience and risk. They hired a room in which the representatives of each bank met daily, and exchanged the cheques and bills which they held on each other. The balances only which each bank had either to receive or pay were settled in cash. By this means a great saving was effected in the use of actual cash, and the risk of transfer of large sums from bank to bank was to a large extent reduced.

At a later date the use of actual cash was still further economised. Each of the banks represented in the Clearing House was compelled by regulations to keep an account at the Bank of England. After this regulation came into force, instead of cash being paid or received at the end of the day, as was formerly the case, each banker’s account at the Bank of England was either credited or debited with the balance due to or by him on the aggregate of his daily transactions.

When the Clearing House was first established it met with much opposition, although its advantages were so apparent. Several of the largest bankers refused to countenance it. In course of time, however, the great advantages it possessed wore down all opposition, other bankers joined the “clearing,” a regular set of rules was drawn up for the conduct of its business, and a committee of bankers was appointed to supervise its working.

On the establishment of joint-stock banks in 1833 they were prohibited from enjoying the facilities of the clearing system, owing to the jealousy of the private banks. It was not until 1854 that this jealousy was overcome, and the joint-stock banks permitted to join the Clearing House; but the Bank of England did not take advantage of the system until ten years later.

In the year 1858 the Country Clearing system was established. Under this arrangement all cheques on country banks held by other banks are passed through the Clearing House into the hands of the London agents of the banks on which they are drawn. The London agent sends by post each night to the various country banks which he represents, a parcel of cheques consisting of the whole of the cheques on each respective country bank which have been passed to him through the clearing. Each of the country banks has thus but one remittance to deal with each morning, instead of numerous remittances from banks situated all over the country. On the other hand, the trouble to which each bank was formerly put of forwarding all country cheques received direct to the various banks on which they might be drawn was done away with.

The West End and suburban banks of London cannot, by reason of distance, be directly represented in the Clearing House. A system, however, is in operation by which practically the total of their daily transactions becomes merged in the total figure of each day’s clearing. Cheques presented to these banks by other banks are paid by what is known as a “payment.” A “payment” is in effect a draft on their head office or clearing agent, and these drafts are passed through the Clearing House.

By these various developments it has come about that the vast majority of bills and cheques passing through the hands of bankers, throughout the country, become focussed in the London Clearing House, and the returns of that institution, showing the total of the daily transactions with which it has dealt, consequently afford a good barometer of the state of trade throughout the country, the figures rising or falling as prosperity or depression affects our commercial condition. The returns are now published weekly, and the figures there shown are stupendous in their amount—the average daily clearing on ordinary days for the year 1902 amounting to £15,559,600, and on Stock Exchange settling days to £38,961,800, while the grand total for the year amounted to the record figure of £10,028,742,000.

Without going into detail as to the exact mode of procedure carried out in the working of the clearing system, we will roughly delineate the manner in which the transactions are brought to a head at the close of each day’s work.

The clerks of each bank represented in the Clearing House make out a summary at the end of each day, showing the amount of the “articles” (cheques, bills, and drafts) which they have handed to the representatives of other banks, and the amount of the articles handed to them by other banks, and the difference of these two figures shows the net amount which has to be received or paid as the result of the aggregate of all their transactions.

All the clearing banks must keep an account at the Bank of England, and a nominal account is kept at the Bank, called the “Clearing Bankers’ Account.” At the close of each day the amount owing by each bank, which on balance has to pay, is debited to that bank’s account at the Bank of England, and credited to the “Clearing Bankers’ Account”; while as regards those banks which have to receive on balance, the “Clearing Bankers’ Account” is debited, and the account of those banks credited. Thus while the Clearing Bankers’ Account at the Bank is automatically balanced each day—as, in the aggregate, the credits of one set of banks must be balanced by the debits of the other set—the whole of the enormous total of transactions thus brought to one head is settled by a few dozen entries in the books of the Bank of England.

Quite recently, and not before it was absolutely necessary, the building of the Clearing House was largely extended, and the internal arrangements reorganised, giving greater facility for the work carried out there; and an innovation has been made in supplying Burroughs’ Automatic Adding Machines for the use of the clerks of the house. About one hundred and forty of these machines are now in use, and though when they are all at work the Clearing House is certainly not the quietest spot in the City, yet the convenience and great economy of time and labour resulting from their use cannot be fully appreciated by any except those in daily touch with the work.[3]