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The New York Clearing House Association
A clearinghouse is an important part of the plumbing infrastructure of the financial system that is jointly owned by its member banks. One specific clearinghouse— the New York Clearing House Association— will be the central player in what follows. The Supreme Court of the State of Pennsylvania defined a clearinghouse as follows: It is an . . . ingenious device to simplify and facilitate the work of the banks in reaching an adjustment and payment of the daily balances due to and from each other at one time and in one place on each day. In practical operation it is a place where all representatives of the banks in a given city meet, and, under the supervision of a competent committee or officer selected by the associated banks, settle their accounts with each other and make or receive payment of balances and to “clear” the transactions of the day for which the settlement is made. (Crane, Parris & Co. v. The Fourth Street National Bank, Kress 1896, 578)
Many writers have explained clearinghouses in the following way. Imagine that there are two banks in a town. To bring some historical texture to the discussion, we use the names of banks from the past— Corn Exchange Bank and Butcher’s and Drover’s Bank— as the two operating example banks. In the course of daily business, many checks will be written, some on the Corn Exchange Bank and some on Butcher’s and Drover’s Bank. Suppose a shopkeeper receives a check written on Corn Exchange Bank, but the shopkeeper has a bank account at Butcher’s and Drover’s Bank. The shopkeeper need not take the check to Corn Exchange Bank to receive cash. Instead, he deposits the check in his own bank, Butcher’s and Drover’s Bank. Butcher’s and Drover’s Bank will present the check to Corn Exchange Bank for the cash, which will
