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CLEARING HOUSE LOAN CERTIFICATES, HOW
ISSUED AND WHY.
I N the regular course of its daily business each bank in any of
our large cities receives checks drawn on other local banks. How shall these checks be promptly presented for payment and how shall the settlement of the claims of each bank upon all the other banks be effected? The answer to these questions has been found in the establishment of the Bankers' Clearing House. Prior to 1853, the settlement of the balances between the several banks of New York City involved considerable confusion, much loss of time and great inconvenience and risk. The checks held by each bank against the other banks were presented for payment at the counters of the several institutions, and large sums of money changed hands, to be carried through the streets from bank to bank by porters and messengers.
Since 1853, the simple machinery of the Clearing House has effected these settlements, and has made it possible to settle exchanges amounting to thousands by the use of a few hundred dollars of money, to liquidate obligations running up into the millions by the actual transfer of a few hundred thousand dollars. Thus the settlement of $103,424,953.62 average daily exchanges in New York City is now effected by the daily transfer of but $6,300,006.26. In times of panic the use of Clearing House Loan Certificates still further reduces the need for actual money in adjusting the balances due from one bank to another, by furnishing a method by which the daily payment of balances may be made in credit instruments and not in money.
In the United States weekly returns are now rendered by 83 Clearing Houses, in which the method of settling balances is not at all uniform. In the largest cities the payments are usually made in lawful money. This of course excludes silver certificates and national bank notes, although any form of currency is accepted in some places. In many of the smaller clearing houses the balances are paid by drafts on New York City banks.
While payment in lawful money is perhaps preferable, any form of payment satisfactory to all the members may be adopted by any Clearing House. With ample reserves, the banks can freely use their specie and currency to pay the balances resulting from the daily exchanges of the clearing house. With diminished reserves, their specie and currency must be saved for their business dealers, and another medium used in the settlement of obligations between the banks themselves. Under normal conditions the balances at the New York Clearing House are paid either in gold coin, legal tenders, United States legal tender certificates, United States gold certificates, or Clearing House gold certificates. The first two are by statute legal tender for the discharge of all debts. The last three are not legal tender, and are in effect warehouse receipts, issued by the United States Treasury against deposits of gold and legal tenders or by the Clearing House against deposits of gold only. Such receipts have in recent years been the means of settlement most frequently adopted. Under panic conditions these warehouse receipts take on a somewhat different form.2 The Government ceases to act as warehouseman, and the Clearing House alone issues the warehouse receipts. Its Loan Committee receives securities on deposit instead of gold, and issues therefor its certificates of deposit. These certificates are, in common parlance, “Clearing House Loan Certificates," and are analogous to the Clearing House gold certificates of common usage.
The latter are issued against the deposit of gold, and are non1 During the year ending October ist, 1897, the debit balances at the New York Clearing House were paid as follows: U. S. gold coin,
$ 141,000.00 U. S. bearer gold certificates,
41,000,00 Clearing House gold certificates,
13,735,000.00 U. S. Treasury notes,
71,260,000.00 U. S. legal-tender certificates,
1,100,065,000.00 U. S. legal-tenders and change,
$1,908,901,897.67 ? In the year ending October ist, 1893, $229,783,000 debit balances in New York were paid by Clearing House Loan Certificates.
interest-bearing. The loan certificates are issued against the deposit of approved securities, and bear interest.
The interest is fixed at such a rate as will ensure the speedy retirement of the obligation, as soon as the special demands which called for its issue have been satisfied. The certificates are issued under the approval of the Loan Committee to the amount of 75% of the value of the securities deposited. Against government bonds receipts are sometimes issued up to 80% or even 100% of their full par value. In time of financial peace a bank will pay a debit balance at the Clearing House of, say $75,000 in United States legal tender certificates or Clearing House gold certificates. During financial storm the same bank will pay its balance by means of loan certificates to the amount of $75,000, having deposited with the Loan Committee bonds, or bills receivable, to the extent of $100,000.
The total balances of any day may amount to, say $6,000,000. The banks whose reserves are greatly depleted may perhaps pay their entire balances in loan certificates, while others may be disposed to use specie or legal tenders. The total balance of $6,000,000 is paid, let us say, as follows:
Loan Certificates, $4,000,000.
Legal Tenders, $2,000,000.
This balance the Manager apportions to the creditor banks, each bank receiving in loan certificates four-sixths of the amount due, and in legal tenders two-sixths of the amount.
As long as the loan certificates are outstanding, an interest charge is running against the banks which have made use of them, and the interest, when paid, is distributed among the several banks which have been carrying the loan certificates among their assets.
In this way and in this way only do the loan certificates circulate. They are not in any sense to be considered as currency or as bank notes; they are not passed over the counter to bank depositors or check-holders; they do not pass between man and man as a medium of exchange. They do not in any way measure, determine or express the value of commodities, nor is the value of anything quoted in their terms. By paying its balance in loan certificates, the debtor bank is enabled to utilize
its reserve for the benefit of its business dealers, instead of parting with it in the settlement of a clearing-house balance.
The value of the loan certificate lies in the fact that it renders effective the bank reserves. It makes new loans possible at a time when the public most needs them.
In form the certificates issued by the Clearing Houses of the several Eastern cities have been very similar. An example of the most familiar one reads as follows: No.........
$20,000. Loan Committee of the New York Clearing-House Association,
1890. This certifies that the name of bank) has deposited with this committee securities in accordance with the proceedings of a meeting of the Association held November 11, 1890, upon which this certificate is issued. This certificate will be received in payment of balances at the clearing house for the sum of twenty thousand dollars from any member of the Clearing House Association.
On the surrender of this certificate by the depositing bank above named the committee will endorse the amount as a payment on the obligation of said bank held by them, and surrender a proportionate share of the collateral securities held therefor. $20,000.
Baltimore Clearing House.
Almost the same phraseology is used in the loan certificates of
BALTIMORE CLEARING House.
BALTIMORE, ---..1893. This is to certify that the (name of bank) has deposited with the committee appointed by the Associated Banks on June 24th, 1893, Approved Securities, which are held as a special deposit to secure the redemption of this certificate in compliance with resolutions adopted by said Banks on the day above named.
This Certificate will be received for the sum of one thousand dollars without endorsement, in settlement of balances resulting from the exchanges between the Banks, will bear interest at the rate of six per cent. per annum until redeemed, and will be negotiable only between the Associated Banks. $1,000.
The form used in Philadelphia is still different, but the certificates have the same character as in the cities mentioned.
In Detroit, Buffalo and Pittsburgh the form of the New York certificates is closely followed. This is still substantially the same as that used in New York in 1873, while in the text of the Philadelphia certificates issued in 1890 special reference is made to the agreement entered into on September 24, 1873, authorizing the issue.
The interest which the loan certificates bore ranged from six to nine per cent., as follows:
Rate per cent. of interest on Loan Certificates. Cities.
1893 New York,
30 days. Boston,
6 Baltimore, 6
6 New Orleans, carried no interest in 1873 and 1879,
6 and 8 Pittsburgh,
Bearing a substantial rate of interest, a policy of speedy retirement was of course followed by the banks for whom they were issued. Self-interest dictated a short term of existence for the certificates, which have seldom been outstanding for more than four or five months at a time.
1 All retired in 47 days except about $7,000,000 issued to Metropolitan National Bank, which had failed.