Clearing system

A clearing system consists of a series of norms and coordinated processes by which financial institutions systematically collect and mutually exchange data or documents on funds or securities transfers to other financial intermediaries at an agreed place called "clearing house". These procedures can also involve the determination of partici- pants' bilateral and/or multilateral net positions and aim at simplifying the discharge of respective obligations on a net or net net basis in a settlement system. Occasionally, the expression "clearing system" implies a mechanism of multilateral netting by novation and the settlement of the corresponding payments or, imprecisely, the process itself of settling transactions. Since their functioning involves "a moderate stock of solid Money [. . .] [while] a large proportion of both solid and paper Money might be spared" (Seyd, 1871, p. 5) and they naturally aim at "eliminating or reducing cash transfers" (Einzig, 1935, p. 66), clearing systems gained particular success in the nineteenth century.

In light of their revolutionary implications for central banking, clearing systems have been also defined as "the greatest of all economic financial machines" (Howarth, 1884, p. 3) or "the machinery that saved thousands of business concerns from ruin during panics and financial depressions" (Thralls, 1916, p. iii). In particular, at international level, several countries stipulated exchange clearing agreements to overcome shortages of gold and foreign currency reserves in the aftermath of the Great Depression in the early 1930s. International credits and debits recorded by each national clearing house were therefore cleared at the end of a given period of time and no foreign currency outflow occurred, unless the nation's net balance was negative. Only in the latter case would the debtor country have disbursed the sum exceeding the cleared amount.

Although clearing systems gained predominance in banking in the early nineteenth century, their historical origins remain rather obscure. They seem to go back to the foun- dation of the London Clearing House in 1773 or, according to some historiographers like Lawson (1850, p. 260), even to the year 1755 and to specific bank clerks called "clearers". Walk clerks' or collectors' duties in the second half of the seventeenth century were to collect sufficient liquidity from banks in order to cover banking instruments hoarded daily. Legend has it that some walk clerks eventually met in a coffee house and acciden- tally discovered that they held a similar amounts of receivables against the other's bank. Through exchanging and trading of these claims they saved time and established consoli- dated clearing procedures, "which would eventually become the centre for the exchange of banker's charges" (Matthews, 1921, p. 1). Despite clearing systems' remoteness in time, their definition remains an ongoing process and any "detailed prescription of a specific payment system will be outdated rather quickly" (Heller et al., 2000, p. 1).

See also:

Central bank money; Keynes Plan; Settlement balances; Settlement system.