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The Use Of Credit Instruments In Payments In The United States


One of the most important functions of commercial banks is the
collection for their customers of checks and drafts drawn on other
institutions. When these documents are received, the accounts of
customers who deposited them are credited with the amounts, less a
small fee for collection, unless by agreement this service of
collection is performed free of charge. The checks are then assorted
according to the banks upon which they are drawn and the cities in
which those banks are located.

Checks drawn upon home banks are collected either through messengers
who present the checks at the counters of the banks upon which they
are drawn and secure payment therefor, or through the local clearing
house. This is a place where representatives of the banks meet for the
exchange of checks. After the representative of each bank has
distributed all the checks held by his institution against the others
participating in the clearing, and received from them those drawn
against his bank, a balance sheet is prepared showing the balance due
by or to his bank after the total of the checks distributed has been
balanced against the total received. If said balance is adverse, it is
paid to the master of the clearing house, and if it is favorable, it
is received from him.

The checks received through the clearing house or presented by
messengers from other banks and paid, are debited to the accounts of
the persons who drew them and returned to such persons as vouchers,
the net result of the entire transaction being the same as if all the
parties involved had been customers of a single bank, with the
exception that some means of paying balances had to be found. Since
balances are sometimes paid by checks on some central institution in
which credit balances may be obtained by rediscounts of commercial
paper, this necessity can be met without the use of any form of
currency other than that furnished by banks themselves.

Checks drawn upon out-of-town banks are, in this country, collected
through so-called correspondents. Each bank enters into an
arrangement with a few other banks, distributed throughout the country
and conveniently located for the purpose, by which the correspondent
bank agrees to conduct with it a checking account on which it will
credit at par or at a stipulated discount the checks sent it for
collection and debit checks drawn against such an account. A
comparatively small number of such correspondents suffices, since
certain banks in the larger cities, by making a business of such
collections, conduct checking accounts with a large number of banks,
and can thus make collections by mere transfers of credits on their
own books or by the use of the local clearing house. The so-called
reserve cities in this country constitute clearing centers for the
territories contiguous to them, and New York, Chicago, and St. Louis,
for the entire country.

Checks received from correspondents and drawn against themselves are
debited to the accounts of the customers who drew them and returned as
vouchers in the same manner as checks received through the clearing
house or paid over their own counters.

Through this interchange of checks between banks and the conduct of
checking accounts with each other, intermunicipal and international
exchanges are conducted through the bookkeeping processes of
commercial banks with the same ease and economy as are exchanges
between people living in the same town.

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