Clearing Houses

In an isolated community where there exists a single bank, the business of banking is fairly straightforward: people deposit and withdraw gold from the same stockpile and money moves from one account to another whether directly or indirectly (withdrawn coins are re-deposited, paper money is cashed, etc.). There would be no need to transfer funds from one bank to another.

Given the multitude of banks and the globalization of commerce, there would be a great need for the transportation of specie across great distances in order to resolve debts, but this is mineralized by clearing houses which aggregate and cancel out debts: where two banks' accountholders owe one another, a certain amount of that debt can be exchanged to reduce the need to move specie. Where multiple banks are involved, it can be a tangled web of funds passing one another on their way from one to another that, with some effort, can be reconciled against one another to minimize the movement of gold. The amount can be significant: in 1902 the London Bankers' Clearinghouse settled "ten thousand millions" pounds of payments among participating banks.

The origin of clearing houses is uncertain, but the author imagines it to be an informal meeting among clerks to sort out their accounts by exchanging paper debt rather than coin o that each could return to his own bank and journal the funds from one account to another. The process likely became more regular, formal, and institutionalized leading to the creation of the independent clearing house that would handle this task more efficiently.

The author describes in detail the process of clearing that requires multiple sessions of matching debts within a bank, among banks in a given region (town clearing), among regions in a nation, and internationally, to settle debts daily. It's also mentioned that while the debts are settled daily, this does not mean that specie is moved daily - banks may extend credit to one another from one day to the next until specie is actually transferred, or checks that have not been cleared may be held and re-processed the following day.