The cheque clearing is an operational arrangement or system that enables cheques to be exchanged in bulk and settled between banks or branches in order to transfer funds from one customer’s account to another. Settlement is effected on the net difference between cheques exchanged (i.e. sent to and received from the other banks) rather than on the gross value of the cheques, transaction by transaction.
Up until around 1770 an informal exchange of cheques took place. Clerks of each bank visited all of the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. After this date the practice of clearing was officially recognised by the private bankers in the City and gradually evolved into a process that those early bankers would still understand even in the early 21st century - although that will change when cheque imaging is introduced.
Daily cheque clearings began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street in the City of London, to exchange all their cheques in one place and settle the balances in cash. We do not know how many cheques were in circulation at that time but as demonstrated by today’s € clearing and also the US$ clearing – both managed by the Cheque and Credit Clearing Company - banks consider it worthwhile to operate a clearing even if there are only a few hundred items a day.
By 1773 a separate room in the Five Bells had been set aside for exchanging cheques. However, this room soon became too small and the clearing process moved to a larger room in a private house next door. In 1805 clearing took place next door to the offices of Messrs Smith, Payne & Smith in Lombard Street but it was not until 1821 that a permanent committee was formed to regulate the clearings. The group of private bankers involved later became known as the Committee of London Clearing Bankers. The first Bankers’ Clearing House was built in Lombard Street in 1833, with money subscribed by the 39 founding bankers, which included Barclays, Glyn, Martin and Williams. Apart from when the clearing was transferred to Stoke-on-Trent during World War II, cheques were exchanged in Lombard Street for over 220 years.
Also during 1833, legislation was introduced which permitted joint-stock banks – those owned by a corporate body rather than one or more individuals - to be established in London, provided they did not issue notes.
Some joint-stock banks were admitted as members of the Bankers’ Clearing House in 1854. In the same year settlement in cash was replaced by settlement across accounts held at the Bank of England, using cheques drawn on the Bank – an arrangement that continues today, albeit by electronic means rather than using cheques. The Bank of England itself was admitted as a member in 1864.
It was the joint-stock banks, along with the development of the branch banking system, that were responsible for popularising and encouraging the banking habit amongst the population generally. During the first 30 years or so of its existence, there was a fivefold increase in the turnover of the clearing house. In the mid-1850s the owners of the clearing house bought the premises next door at 3 Abchurch Lane. The basement of the building was let to a wine merchant whose cellars extended underneath the clearing house to Post Office Court, and the upper floors were let out as offices. By the late nineteenth century cheques had become more widely used, so more space was needed and in 1892 the clearing house took over all of the upper floors as well (although the wine merchant retained use of the cellars until 1915).
By 1895, the original founding bankers of the Bankers’ Clearing House had reduced from 39 to 4, either through bankruptcy or sale. A new ownership arrangement was needed so, that year, a private company, limited by shares, was formed under the name of the Bankers’ Clearing House Limited. Shares in the company were issued to the clearing bankers on favourable terms so that all members of the Bankers’ Clearing House would have equal shares in the company and premises. It was also agreed that such equality was to be maintained in the future and this agreement persists today – the Cheque and Credit Clearing Company is owned in equal shares by its members.
In 1902 the clearing house acquired additional space at 84 and 85 King William Street, which enabled a Burroughs adding machine to be installed and amendments to be made to the clearing system.
The clearing rules allowed the same day settlement of cheques exchanged within the City of London, which was originally defined as within walking distance of the clearing house. These cheques were called “walks” items.
The town clearing process evolved directly from this system and continued, with a few variations to its boundaries, until it ceased operation in 1995. High value, same-day payments were then made via CHAPS, as they are now.
Meanwhile, outside the City of London, many towns and cities in England and Wales operated their own clearing arrangements, which eventually became recognised provincial clearings. However, it wasn’t until 1858 that there was a formal mechanism for clearing transactions outside London. From 1858 the country cheque clearing, which operated outside a radius of 65 miles around London, allowed for provincial banks to effect settlement for items on the second business day after exchange. The country cheque clearing was open to all provincial banks in England and Wales, which only needed to appoint a London clearing bank as their agent and print the agent’s details on the bottom of their cheques.
All cheques drawn on other country banks could then be despatched in one parcel to their London agents, and the country banks received in turn the majority of items payable by themselves. Branches that were not covered by the “walks” or the mail collections, received parcels that were sent by the regular post, with payment made by return of post by an order on the bank’s head office. Over the years there was sufficient growth in transactions falling between the country clearing area and the City of London “walks” area (and enough confusion between the boundary lines which applied) to warrant the establishment of the metropolitan clearing in February 1907.
Just as in England and Wales, cheque clearing in Scotland started with bank clerks being dispatched to other banks to exchange cheques, eventually leading to having one central place of exchange. The first Scottish cheque clearing house was founded in Glasgow in 1856. The Edinburgh Clearing House opened in 1865. Following clearing houses being established in Glasgow and Edinburgh, other towns followed suit and, by the 1880s, there were local clearing houses in Aberdeen, Dundee, Dumfries, Greenock, Paisley and Perth.
World War Two
By 1936, when the District Bank joined the clearings, there were 11 banks participating as well as the Bank of England. The others were: Barclays Bank, Coutts & Co, Glyn, Mills & Co, Lloyds Bank, Martin’s Bank, Midland Bank, National Bank, National Provincial Bank, Westminster Bank and William Deacon’s Bank.
Reliability and continuity have been two of the guiding principles of protecting the integrity of the clearings and this was never more important than with the threat of war. Clearing operations were moved to Stoke-on-Trent under the War Emergency Clearing Scheme. Planning for the move began in 1938, in anticipation of war breaking out.
Trentham Gardens, three miles south of Stoke-on-Trent, was identified by the Committee of London Clearing Bankers during these planning stages. The public pleasure gardens at Trentham had been developed on the estate of the Dukes of Sutherland and a dance hall was built there just after the First World War. An agreement was signed in February 1939 to ensure that the clearing would be able to relocate to Trentham Gardens immediately if war broke out.
General clearing came about as a direct result of the move. Before the war, there were three separate clearings sorted through the Bankers’ Clearing House: the country, metropolitan and town clearings.
Rather than leave any part of the clearing exposed to the risks of war it was decided that, with the exception of a small part of the former town clearing, all items would pass through the new Central Clearing House. Before the war, inter-branch items did not pass through the Bankers’ Clearing House but during this time most banks took up the option of relocating their own branch clearing to Trentham as well.
The collection of any London sundries (items drawn on non-clearing banks, money orders etc.) was dealt with by dividing the London area into 12 ‘walks’. Each one was assigned to one of the 11 clearing banks and the Bank of England, who then undertook the collection of these articles from its designated area and responsibility for their delivery to the Central Clearing House.
Before the move to Trentham, the daily settlement consisted of: the balances of the country clearing, exchanged two days previously; the metropolitan clearing, exchanged the previous day; and the town clearing of the same day. Once the Central Clearing House was in operation, the daily settlement consisted of all items passing through the house the previous day.
Another change was concerned with letters lost in the post. Previously, the presenting banker would have to obtain duplicate cheques if a letter was lost between the clearing department and the branch, and would be charged accordingly by the paying banker. At Trentham, however, each item was photographed prior to despatch using Recordak microfilm apparatus (made by Eastman Kodak). This allowed duplicate prints of any missing items to be made and the drawer’s consent obtained to apply the debit. Today, banks use sophisticated imaging equipment to create digital images of cheques for use in their back office processes. Would Messrs Eastman and Kodak ever have thought that their invention would have led to a change in the law in 2015 that would enable digital images of cheques to be exchanged between banks rather than the physical paper?
Space in the new site was divided up according to the number of clearing articles handled by each bank. The big five (Barclays Bank, Lloyds Bank, Midland Bank, National Provincial Bank and Westminster Bank) found themselves on the dance floor, one of the smaller members took the stage, another was based in an outbuilding and the Bank of England was above the kitchen.
The clearing function officially started at Trentham on Monday 28 August 1939 just days before the Second World War began and, as the staff and operations had moved over the weekend, there was continuity of clearing services as normal. Once the war was over, the clearings moved back to the City premises in 1946.