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 w
ich 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.