New York Clearing House Association

What Is the New York Clearing House Association?

The New York Clearing House Association, known since 2004 as the Clearing House Payments Company, is a private organization that was established in 1853 to simplify the settlement of interbank transactions in New York State.

Modeled after the London Clearing House, founded nearly one century earlier in 1773, the New York Clearing House Association was the first of its kind in the United States and helped to stabilize the nation's monetary system, prior to the Federal Reserve System (FRS) being set-up in 1913.

Understanding the New York Clearing House Association

A clearinghouse enters the picture after a buyer and seller have executed a trade. Its role is to act as an intermediary between both parties, consolidating the steps that lead to settlement of the transaction.

The New York Clearing House Association, or the Clearing House Payments Company as it is now known, is the oldest banking association and payments company in the U.S. It was initially created to streamline the bank settlement process during a period of rapid economic expansion and unregulated capitalism.

The New York Clearing House Association stepped in to ensure that basic banking transactions were conducted orderly. Acting as an impartial referee, it helped to stave off fraud and panic-induced crashes, bringing much-needed stability to financial markets.

These core duties have continued into the 21st century. On its first day of operation, the New York Clearing House Association swapped checks worth $22.6 million. Today, it handles approximately $2 trillion in transactions, largely electronically, each day.

History of the New York Clearing House Association

From 1849 to 1853, an economic boom, triggered by the California gold rush and construction of the transcontinental railroad, led the number of banks in New York to more than double from 24 to 57. However, the processes they used were inefficient and open to corruption.

Before the New York Clearing House Association was founded, procedures to settle accounts were primitive. Prior to 1853, banks sent porters out on the streets to exchange their checks for coin, with settlements occurring just once a week. As the number of banks increased and exchanges became more frequent, the potential for record-keeping errors and abuses grew. 

Amid all this chaos, George D. Lyman, a bank bookkeeper, proposed the concept of a centralized clearinghouse. Eventually, his suggestion came to fruition and the entire archaic, malfunctioning system of before was gradually overhauled.

Specie certificates soon replaced the use of gold in the exchange process, reducing the likelihood of bank runs and helping to stabilize the monetary system. Requirements were also placed on member banks, including regular audits, minimum reserve levels, and daily settlement of balances.

Benefits of the New York Clearing House Association

The New York Clearing House Association's legacy extends beyond simply ensuring that people get paid the money they are owed. Before the FRS was established in 1913, it also functioned as a quasi-central bank.

In the period between 1853 and 1913, the U.S. experienced multiple financial panics. The New York Clearing House Association played a pivotal role in ensuring anxiety did not spiral out of control by issuing loan certificates that were backed not by gold but with bank notes held by member banks.

These certificates were a form of quasi-currency that helped support the monetary system and stabilize the currency through times of financial panic. When Congress passed the Federal Reserve Act in 1913, the federal clearinghouse system that was established was modeled on the New York Clearing House Association, among other private clearinghouses that had emerged during the time of American expansion.

To this day, America's first clearinghouse continues to play an influential role. On its website, it claims to have "served as a resource" to policymakers and regulators, helping them to develop and implement appropriate regulations in the aftermath of the 2008 Great Recession.