trust the banks.1 On the other hand, the opponents of deposit insurance contend that it is unjust to ask the strong, well-managed banks to guarantee the depositors of badly-managed banks against loss, and that such a system would encourage loose and careless banking methods. This objection, however, seems not to be sustained by the experience of Kansas, Nebraska and Texas.2 If depositors in all banks are protected equally, irrespective of management, the chief inducement would be liberality in loans or in interest rates and great waste would result. To • prevent reckless overbidding for deposits the guaranty laws of some states provide that the banking commissioner may fix the maximum rate of interest on deposits. One of the chief difficulties of a state system of deposit insurance is the very heavy burden that may have to be borne by the banks when a single large failure occurs, especially when such a failure comes before a considerable guaranty fund has been accumulated. This difficulty would be greatly reduced in a system of national insurance embracing many thousands of banks. Mr. Thornton Cooke, who has made a most thorough study of deposit insurance, expresses the opinion that insurance by private corporations is not the solution of the problem, "if the problem is found to be worth the solving. While such corporations could select risks and limit their size and distribution, it is obvious, nevertheless that if deposits are to be guaranteed or insured on any considerable scale, it will be through the banking departments of the states or, conceivably, of the United States." 3 Despite the acknowledged success of the guaranty system in a few Western states the plan does not spread. When the Glass-Owen bill to establish the new Federal 1 Thornton Cooke: Quarterly Journal of Economics, Vol. XXIV, p. 85 et seq.; also p. 327 et seq.-Printed as Appendix B in State Banks and Trust Companies (Nat. Mon. Comm.). 2 Ibid., Four Years More of Deposit Guaranty, Quarterly Journal of Economics, Vol. XXVIII, pp. 69-114. 3 Quarterly Journal of Economics, Vol. XXVIII, p. 110 (Nov. reserve system was before Congress the question of the guaranty of deposits was discussed, and as the bill first passed the House it provided that a portion of the earnings of Federal reserve banks should be employed to establish a fund for guaranteeing the deposits of member banks. This provision was not favored by the Senate, and as finally passed the law made no provision for guaranty of deposits. Agitation of the question appears in Congress from time to time, and the Comptroller of the Currency in his annual reports has recommended the guaranty of deposits in national banks when the deposit does not exceed $5000.1 If the Federal reserve system proves effective in preventing the recurrence of banking panics, and if it proves advantageous for state banks to enter the system freely, the guaranty of bank deposits is not likely to have a wide expansion in the near future. READING REFERENCES Fiske: The Modern Bank, Ch. VIII. Kniffen: The Practical Work of a Bank, Ch. V. Moxey: Practical Banking, Chs. VIII-X. Shibley History of Guaranty of Bank Deposits (Prepared for the Senate Committee on Banking and Currency, 1914). White: Money and Banking, Appendix C. 1 Report, Comptroller of Currency, 1918, Vol. I, pp. 156-160. CHAPTER XIV THE CLEARING HOUSE 102. Functions.-A clearing house may be defined as a levice to simplify and facilitate the daily exchange of checks and drafts and the settlement of balances among the banks associated together for the purpose. In recent years clearing houses have tended to expand this primary function so as to provide "a medium for united action upon all questions affecting their mutual welfare." As a device for economizing time and labor the clearing house is one of the most important aids in the banking system. A check, as we have seen, is an order upon the deposit or's bank to pay a certain sum of money from his account either to himself or to some other person. In an active business house many such checks or orders are issued every day in payment of bills or other obligations, and in turn many checks are received from debtors living in the same city or in other places. Checks so received must be presented for payment to the various banks on which they are drawn. Now the merchant has neither the time nor the facilities for collecting these checks; moreover, the expense involved would be considerable. He therefore turns these orders over to his bank which undertakes to collect them from the several banks on which they are drawn. In this way every bank is constantly receiving checks, some drawn upon itself, some drawn upon other banks in the city, and some upon out-of-town banks. Checks upon itself are paid in cash over the counter, or are credited to the account of the depositor and charged to the drawer's account. The method of handling checks upon out-of-town banks will be explained later. To simplify the process of collecting checks which each bank receives drawn upon other banks in the same city, the clearing house was devised. In the absence of some clearing house arrangement, each bank would have to present for payment to every other bank in the city the checks which its customers deposit and receive the money in payment. This would involve a great waste of time, much inconvenience, and some risk of losing the money. In all cities having several banks, and even in the smaller towns with but few banks, the daily exchange of checks and the settlement of balances between banks is now made through the clearing house. Where no clearing house arrangement exists and in those cases where for some reason a bank is not a member of the clearing house association, all city collections must be made by messenger or runner. 103. Clearing.-Before describing the process of clearing checks, mention should be made of the preparations at the bank. During the day as checks are received, those drawn upon city banks are placed in pockets or pigeon-holes marked with the clearing house number of the several banks. At the close of business each day these checks are entered or listed on a "settlement sheet." Items received in the early mail the following morning are added to this sheet and the totals are entered as debit items on the settling clerk's statement which he takes to the clearing house. The checks are put up in envelopes for the respective banks on which they are drawn and these are arranged in consecutive order corresponding to the clearing house numbers of the banks. A "delivery sheet" is prepared on which each of these envelope totals is entered opposite the name of the bank on which the checks are drawn. This sheet also has a column for the amount of checks presented for settlement and a space for the signature of the settling clerk of each bank. The footing of the settlement sheet showing the total amounts of the checks against each bank is entered on a "credit ticket" which the settling clerk delivers to the clearing house manager. The settling clerk and the delivery clerk now proceed to the clearing house and take their places at the desk belonging to their bank, the settling clerk inside the inclosure, the delivery clerk outside. In the larger cities each of these clerks may have an assistant to facilitate the work. Generally the arrangement of desks is oval or circular to permit of easy passage from one desk to another. At the appointed hour the manager appears at his desk and rings a bell as a signal to begin. Instantly the line of delivery clerks outside the cage or oval begins to move. The clerk of bank No. 1 steps forward to the desk of No. 2, delivers the envelope marked No. 2, and places his delivery sheet in front of the settling clerk who receipts for it by writing in the proper place his initials or name. No. 1 clerk passes on to No. 3, and so continues the operation until he has delivered all his envelopes and reaches his own desk again. In the same way the other delivery clerks follow, delivering their packages and getting their sheets receipted. In some places it is the rule to deliver a blank ticket to any bank against which any other bank may not have collections on a particular day. This may simplify the correction of errors as it shows that no item has been lost or mislaid. The delivery clerk having completed his deliveries |