In celebration of Citigroup's 200th Anniversary, we are sharing stories from our rich history here on this blog. The third installation below covers our role in the development of the New York Clearing House. Read the second installment about our contributions to transportation here.
Bank shields clients from panics
Sixty banks cooperate in setting up the New York Clearing House, underpinning the strength of the financial system
Former U.S. Treasury Secretary Albert Gallatin called for a clearing house for New York banks as early as 1841. According to him, the absence of an arrangement similar to that adopted by British banks and the Bank of England "produces relaxation, favors improper expansions, and is attended with serious inconveniences." After considerable disagreement, the banks finally set up the New York Clearing House in 1853.
Under arrangements based on the London Clearing House, each of the 60 New York banks had a settling clerk and a specie clerk (who handled money in the form of coins or gold) to clear transactions at set hours daily. The settling clerk from City Bank would receive gold from the specie clerks of the 59 other banks and the City Bank specie clerk would pay gold to the settling clerks of the other banks. Other banks set up clearing houses in Boston in 1856 and Philadelphia in 1858.
To help stabilize the banking system during crises, the New York Clearing House developed a form of emergency currency based on loan certificates secured by sound assets that were temporarily illiquid. If that did not work, the banks would impose a small fee on those wishing to convert their deposits into cash during a crisis.
The role of the New York Clearing House in countering potential instability was passed to the new Federal Reserve system in 1913.