Where did the idea of check clearing houses come from, you ask? (Okay. We know you didn’t ask.) You’re in luck! We spent some time researching it, and here’s what we found.
We can thank those crafty Romantics and Victorians for their meticulous attention to detail. They started clearing checks informally in the 1770s and formally during the 1800s. What became the Banker’s Clearing House was the world’s first formally conceived payment system; but, like most great ideas, it developed out of need. And it started in a tavern.
Woe to the risk of a bank’s walking clerk! Once upon a time (this is not a fairy tale), when a business or a person received a check in exchange for a good or service, the recipient would deposit it into their bank account. How, then, was the bank on which the check was drawn supposed to know that their customer wrote a check drawn on their bank and issued to a vender or person in exchange for a good or service?
To “clear” the check, the bank would send a clerk who presented it in person to the originating bank. There, the clerk would exchange the check for cash, and return the cash back to the bank for which the clerk worked.
As check writing grew, banks formalized the role of the clerk who walked the checks and cash back and forth into the title of “walking clerk.” They walked the streets of London with large stacks of cash, which sounds like a risky proposition.
For an example of the above using the The Fresh Prince of Bel Aire’s characters, click here.
The walking clerks recognized the inherent risk of their jobs, so they started meeting in Five Bells Public House, a tavern, at Lombard Street. Their employers saw the benefit of this, and they formalized the walking clerk’s arrangement as the Banker’s Clearing House.
Charles Babbage, famous polymath and, to some, the “Father of the Computer”, observed the clearing house’s process and wrote about it (pages 126-7, entries 172-3).
“In a large room on Lombard Street, about 30 clerks from the several London banks take their stations, in alphabetical order, at desks placed around the room; each having a small open box by his side, and the name of the firm to which he belongs in large characters on the wall above his head. From time to time other clerks from every house enter the room, and, passing along, drop into the box the checks due by that firm to the house from which this distributor is sent.”
Each day at 5 p.m. the Inspector of the Clearing House positioned himself at the front of the room where the debtor banks went up and paid what they owed. Then the banks that were owed money went to the front to collect their payments. If everything worked according to plan, the Inspector was left with a zero balance.
This process made its way to New York in 1853 on the fourth floor of the Bank of New York. The Yankee traders evolved the system by adding a 70-foot-long oval table. One banker sat on the inside while another stood on the outside. When the clearing house manager initiated a signal to begin, the clerks on the outside would take one step forward, where they would perform the days’ transactions. It took approximately six minutes.
Today checks are cleared electronically through the Federal Reserve Automated Clearing House System. Whereas it used to take weeks for checks to clear, now they do so overnight. Most banks, including Andover State Bank, make a certain amount of money available immediately. This is known as funds availability, and banks base it off of a customer’s existing balance on deposit as well as the ongoing relationship between the bank and the customer.
The historical information gathered here is adapted from Martin Campbell-Kelly’s essay “Victorian Data Processing: Reflections on the First Payment Systems”, published in Communications of the ACM in October 2010; as well as other sources, including the website for the Cheque Credit and Clearing Company.