Communications - October 2010

the new York clearing house circa 1853.

amateur scientist in his spare time and both he and Babbage were members of the Royal Society. Using this connection, Babbage talked his way in.

Walk clerks

The origins of the Bankers’ Clearing House are obscure, but they date back to at least the late 1700s. 3 At that time, when a firm or an individual received a check (still spelled “cheque” in the U.K.), it would be deposited in the recipient’s bank. It was then necessary for a clerk to physically present the check to the originating bank, exchange it for cash, and return with the money to his home bank. As the volume of checks grew, each bank employed a “walk clerk” whose job it was to take all the checks due for payment, visit each bank in turn, obtain payment, and return to his bank with a large amount of cash. Walking through the City of London with a large bag of money was, to say the least, unwise, although it went on for many years.

Around 1770, the walk clerks made
an informal arrangement to aban-
don their walks and instead meet at
an agreed time in the Five Bells pub-
lic house in Lombard Street. There
they could perform all their financial
transactions within the safe confines
of four walls. In the early 1800s, the
proprietors of the banks at last recog-
nized the merit of this arrangement
and formally created the Bankers’
Clearing House. When Babbage wrote
his account in 1832, it had already
been running for a quarter of a cen-
tury. Babbage described the opera-
tion of the Bankers’ Clearing House
almost in terms of an algorithm—
though one executed by people, not
machinery. He wrote: “In a large room
in Lombard Street, about 30 clerks
from the several London bankers take
their stations, in alphabetical order,
at desks placed round 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.”
Thus during the day each bank

Babbage described
the operation of the
Bankers’ clearing
house almost in terms
of an algorithm—
though one executed
by people, not
machinery.

dropped off the checks on which it was owed payment and received checks on which it was due to make payment. By adding up all the checks on which it owed money, and all those on which it had to pay out, a bank could calculate exactly the total amount it would have to pay out or would receive that day. At 5 p.m. precisely, the Inspector of the Clearing House took his place on a rostrum, and the debtor banks went up one-by-one to pay what they owed on the day. When this was complete, the banks that were owed money stepped up to the rostrum for payment. When the last bank had been paid, the Inspector was left with a balance of exactly zero. That, of course, assumed that no one had made an arithmetic error. A paper trail of preprinted forms completed by each bank enabled any errors to be traced—but this was a rare occurrence.

transaction Processing

The amount of money flowing through the Bankers’ Clearing House was staggering. In the year 1839, £954 million was cleared—equivalent to $250 billion in today’s currency. However, one of the benefits of the system was that the banks now needed to bring only a relatively small amount of money to the Clearing House. On any day, the totals of checks received and checks paid out would tend to cancel each other out, so that a bank needed only the difference between these two amounts. For example, on the busiest single day of 1839, when £ 6 million was cleared, only approximately £1/2 million in bank notes was used for the settlement. In his account of the Clearing House, Babbage noted that if the banks were to each open an account with the Bank of England, no money in the form of cash would be needed at all. All that the Clearing House would have to do would be to adjust the account that each bank held with the Bank of England at the close of the business day. This innovation was instituted in 1850, and the physical movement of money was entirely replaced by pen-strokes in an accounting ledger. It was a key moment in both fiscal and information processing history, and Babbage recognized it as such.