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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

New York Clearing House Association

What it is:

The New York Clearing House Association, founded in 1853, is the country's first and largest bank clearing house. The Clearing House was created to streamline the bank settlement process, which had grown convoluted during America's "Expansionist" period of unregulated capitalism. The Clearing House became part of the Federal Reserve System forged in 1913.

How it works (Example):

In the early 1800s, before the creation of the Clearing House, banking had grown complicated and chaotic. During the California Gold Rush and the construction of the transcontinental railroad, from 1849 to 1853, the number of New York banks burgeoned from 24 to 57. Procedures to settle accounts were rudimentary and crude; porters traveled among banks, exchanging paper checks for hard currency. The process was inefficient and open to corruption. To remedy this problem, banks banded together and formed a centralized office in which banks could send and receive checks.

On its inaugural day of operation, the Clearing House swapped checks worth $22.6 million. Today, the average exceeds $20 billion. The Clearing House placed mandatory conditions on its member banks, such as minimum reserves, regular audits and the daily settlement of all balances.

In 1913, Congress passed the Federal Reserve Act, creating an independent, federal clearing system that used the New York-based Clearing House as a model. Since then, the New York Clearing House focuses on ensuring the unencumbered completion of financial transactions by clearing payments.

In essence, the "clearing" process kicks in when member banks exchange checks, coupons and other certificates among themselves; as an objective third party to these transactions, the Clearing House marks the subsequent charges to their respective accounts.

Why it Matters:

As the nation underwent fast economic expansion in the 19th century, the Clearing House expedited the orderly function of basic banking transactions, helping ensure confidence in the system and mitigating panic-induced crashes and panics. It still serves this function today. It reassures investors that certain rules are being followed and that entities such as the Clearing House are acting as impartial referees. Without these stabilizing influences, the markets could not properly function and investors would be vulnerable in an unfettered "wild west" environment rife with fraud and imbalances.

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