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The current money and banking system of the Philippines

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The current money and banking system of the Philippines

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Content THE CURRENT MONEY.AND BANKING SYSTEM
OF THE PHILIPPINES
A Thesis
Presented to
the Faculty of the Department of Economics
The University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Master of Arts
By
Milagros R. Magno
May 194-9
UMI Number: EP44688
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UMT
Dissertation PLbi.shsry
UMI EP44688
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This thesis, written by
Milagros R. Magno
under the guidance of h ..§7 ? .. Faculty Committee,
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fu lfill
ment of the requirements fo r the degree of
Master of Arts
Emory S. Bogardua
DEAN
Faculty Committee
Chairman
TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION..................................... . 1
PART I
MONEY
II. PHILIPPINE MONETARY REFORM......................... U
A. Pre-Spanish Period............................ 4 -
B. Spahish Period............................... 4.
C. American .Period ................. 6
III. THE PHILIPPINE GOLD EXCHANGE STANDARD................ 8
A. Philippine Gold Standard Act.................. 8
B. Fundamentals of the Gold Exchange Standard ..... 11
C. Introduction of the New Currency................ 12
D. The Recoinage............................ 13
IV. THE GOLD STANDARD FUND............................. 15
V. THE CURRENCY RESERVES AND THE PHILIPPINE NATIONAL BANK . 19
VI. THE MONETARY SYSTEM............................... 21
PART II
BANKING
VII. COMMERCIAL BANKING ............................... 25
A. Banks Established in the Philippines . ......... 26
B. Incorporated Foreign Banks................. 28
C. Domestic Banks ............................ 29
CHAPTER PAGE
VIII. THE PHILIPPINE NATIONAL BANK....................... 31
A. Post Far Foreign Trade Activity............... . 4-3
IX. BANKING LAWS AND AMENDMENTS....................... 45
POUR BANK BILLS ................................ 45
A. Bill No. 1422 45
B. Bill No. 1418.......... 46
C. Bill No. 1417................................ 50
D. Bill No. 1427 50
X. AMENDMENTS TO THE BANKING LAWS PRIOR TO THE
PASSAGE OF ACT 377 ................................ 51
A. Capital and Surplus.............. 51
B. General Powers ...................... 52
C. Limitations on Bank Loans to Any one Borrower ... 54
D. Speculative Loans......................... •. 56
E. Loans and Discounts.......................... 57
F. Loans to Directors and Officials .............. 58
G. Reserve Requirements.............. 59
XI. NON-COMMERCIAL BANKING............................. 62
A. Rehabilitation Finance Corporation.......... 62
B. Agricultural Credit.......... 63
C. Building and Loan Associations.................. 67
D. Trust Corporations ............ 70
E. Savings and Mortgage Banks.......... 71
XII. DEFECTS OF THE PHILIPPINE BANKING SYSTEM ............ 74
CHAPTER PAGE
XIII. THE GENERAL BANKING A C T ........................... 84-
A. Establishment of Domestic Banks................ 84
B. Licensing of Foreign Banks.................. 85
C. Commercial Banking Corporation ............. 86
D. Branch Banking , . .. . ......... 87
E. Final Provisions ............ 88
PART III
THE PHILIPPINE CENTRAL BANK
XIV. THE CENTRAL BANK.................................. 89
A. Steps Taken Leading to the Establishment of
the Central Bank ....................... 89
B. The Monetary Board ...................... 93
C. Bank Supervision............ 97
D. Guiding Principles for Central Bank’s Action .... 98
E. Instruments of Central Bank Actions ....... 101
XV. FOREIGN BANKING SYSTEMS........................... 115
A. American Banking System ................. 117
B. Canadian Banking System......... 123
C. English Banking System......................... 126
D. French Banking System ............ 129
XVI. CONCLUSIONS...................................... 131
BIBLIOGRAPHY............................................ 142
PART I
M-O-N-E-Y
CHAPTER I
INTRODUCTION
The problem presented. The most recent development in the banking
system of the Philippines is the passage of a bill creating a central
bank. The problem here submitted is a study of the currency and banking
problems of the Philippines from the pre-Spanish regime until the country
became a republic.
Banking reforms are decidedly imperative. An analysis of the
operation of the Philippine currency system shows that it is not elastic
enough to meet the credit needed for economic development. The automatic
feature of the present monetary system of the Philippines and the absence
of a bank of last resort have rendered sterile large amounts of the cur
rency reserve and have made it necessary for banks to maintain excessive
amounts of cash reserve which ecu Id otherwise be utilized for the economic
development of the country. There are many defects in the banking system.
In this study, the writer will endeavor to present the development
and progress of the Philippine banking system under the Spanish regime
and under the American occupation up to the present under the new republic.
I will try to show the political and economic conditions which influence
the banking system, the defects and weaknesses of the banking legislation
and the system as a whole, and the necessary steps made to improve said
problems.
Method of Procedure. In the preparation of this study, the method
I used was that of library research supplemented by correspondence with
the Philippine Congress, the Philippine National Bank, and the Library
of Congress, Washington, D. C.
The study is divided into three parts: Part I, Money; Part II,
Banking; and Part III, The Philippine Central Bank.
Part I is intended to show the historical background of the cur
rency and banking situation of the Philippines. It is a presentation of
the development of the currency system, how it stands, and the progress
made as a result of -the changes that have taken place in the banking and
monetary system of the Philippines.
Part II deals with banks and the banking problems of the country.
The banking laws of the country and the subsequent amendments made are
emphasized in this part, and the weaknesses of the banking system as a
whole, including the defects of the banking laws, are pointed out.
Part III is a study of the further reorganization of the monetary
and banking system of 1he country. It is a study of the Philippine Cen
tral Bank, which, is still being organized, its aims and its proposed
reforms.
With respect to the bibliography, I have used the very best
authorities on the subject, such as C. B. Conant, E. W. Kemmerer, G.
Luthringer and Dr. P. H. Willis. The writer is quite fortunate to have
studied directly under leading Filipino bankers and economists, such as
M. Cuademo, former Secretary of Finance of the Philippine Republic and
the present Governor of the Philippine Central Bank; N. Tomas, economist
of the Rehabilitation Finance Corporation; A. Calalang, Vice President
of the Philippine Bank of Commerce and member of "the Monetary Board of
the Philippine Central Bank; and C. Balmaceda, former Secretary of Com
merce. The said Filipino authorities enabled the writer to obtain informs
tion of primary importance regarding the banking situation of the country.
Through the courtesy of Mr. Juan Quintos, Vice President of the Philippine
National Bank, I was able to get direct information with respect to the
operation of the present by-laws of the said Bank.
I have also based most of the facts regarding the banking system
from the Records of Legislative hearings dating back to the Report of
the First Commission of the Philippines to the most recent bank bills
Passed in 1948.
CHAPTER II
PHILIPPINE MONETARY REFORMS
Am Pre-Spanish Period.
The early assumption that there was an absence of any system of
currency among the ancient Filipinos is being discounted. Traces of
ancient coins used by the du-Malayan Empire^show evidences of a system
\
of currency being in existence. The various forms of money used in dif
ferent parts of the Islands were seashells or sigay. metal rings which
are still used by the Subans, and triangular gold coins stamped with
Sanskrit characters. The first thing used as money was the sigay; the
next object used was the metal ring. The next object which came into
use was the triangular gold coin. The latter was still in use when the
Spaniards came, but because its form was different from the coin then in
us.e in Europe and because of 1he ignorance of the first Spanish con
querors of 'the Sanskrit characters stamped on the coins, early Spanish
historians say that ancient Filipino used only gold dust as money. In
the eleventh century, the sultans of Jolo manufactured coins of various
metals.^
Rice, coarse cloth, metal bills, silverware, gold and silver-.were
used as money. These were later succeeded by coins which came from Mexico,
Spain, South America, China and India.
■4he Du-Malayan Empire which existed 11 B.C. included Indo-China,
Java, Borneo, Celebes and the Philippines and was greater than the old
empire of Shri-Visaya or Madjapahit.
^Philippine Finance Review. April 1930; III, No. 3> P» 9.
5
B. Spanish Period.
In 1861, the first and only mint, called Casa de Moneda. was
established. Gold was used until about 1884 when silver drove it out
3
of circulation. At the time of the American occupation, the currency
consisted of an assortment of Mexican, Alfonsinos and Spanish pesos, an
assortment of silver and copper coins and notes issued by the Banco
Espafiol-Filipino. The Alfonsinos. the Spanish coins and the Mexican
pesos, though their bullion contents were dissimilar, circulated at par
with one another.^ In the early eighties, up to the time of the American
occupation in 1898, the Philippines was on a fiduciary coin standard and
according to Kemmerer, the silver coins had no free coinage and no free
movement into and out of the country circulating at a scarcity value.
The Spanish-Filipino Bank.^ The Banco Espaflol Filipino de
Isabel II was created by the Junta de Autoridades of the Islands on
August 1, 1851* Its original capital was 400,000 pesos, which was
increased from time to time until by the revision of the bank statutes
in 1897, it was fixed at a maximum of 4,500,000 pesos. The bank was
authorized to issue bank notes three times the amount of its capital.
Its organization was that of a State bank patterned after that of the
3j. Lawrence Laughlin, Principles of Money. Credit and Prices.
(Chicago, Illinois: University of Chicago Press, 1931), P- 403*
^George Luthringer, The Gold Exchange Standard of the Philippines.
(Princeton: Princeton University Press, 1934)> P* 1*
^Charles Conant, A History of Modern Bank of Issue (New York and
London; Putnam’s and Sons, 1915)>PP* 585-90.
Bank of France and Bank of Spain. It had the exclusive right to issue
notes, which it later renounced. Its note issues were limited to
2, 4- 00,000 pesos based upon capital and surplus, and 600,000 pesos based
upon the deposit of securities with the Treasurer of the Philippines.
It had the power to increase its note issue in case of an increase of its
capital stock, but not in excess of 9,000,000 pesos. The notes based on
capital and surplus were to be taxed at the rate of one half of one per
cent per annum and those based on securities, at the rate of 1 per cent.
The total resources of the Spanish-Filipino Bank at Manila on
March 31, 1908 were 9,285,444- pesos, of which 3,401,928 pesos represented
overdrafts, 675,903 pesos loans and discounts, and 3, 401,928 pesos cash.
The outstanding note issues were 1,365,450 pesos and individual deposits
1,880,686 pesos. Capital stock amounted to 3,000,000 pesos and surplus
to 900,000 pesos.
C. American Period.
Conditions necessitating monetary reforms. The standard of the
Philippine Islands was gold, until silver expelled gold from circulation,
and the Islands passed from a fiduciary coin standard to a silver stand
ard. Up to 1904, the Mexican dollar was virtually the unit of value
until it became necessary to adjust the American money to the local con
fused currency, owing to the fact that the silver had declined to about
7
one half its nominal value in gold at the old coinage ratio.
^Charles Conant, A History of Modem Bank of Issue (New York and
London: Putnam's and Sons, 1915), P* 589-91*
7Ibid.. p. 590.
In order to maintain a ratio of value of two Mexican dollars for
one -American dollar, two laws were passed, the first prohibiting the
importation of Mexican currency, Spanish-Filipino currency, or any other
metallic currency which was not on a gold basisj and the second, an act
restricting after a certain fixed date in the future, the use of all
money except the legal tender currency, by imposing a tax upon all
written contracts payable in the former local money.^ But as American
money declined to $1.95 in Mexican, there was a fear that it might con-
Q
tinue to fall. 7 By January 1, 1902, the government gave up the effort
to keep up the ratio of two to one between the peso and the dollar.^
Obviously, reforms were necessary.
Report on the Introduction of the Gold Exchange Standard into
China, Philippine Islands, Panama and other silver-using Countries and
on the Stability of Exchange, published as H. Document 144, Fifty-
eighth Congress, 2nd Session, p. 21.
^Charles Conant, A History of Modem Bank of Issue (Hew York and
London: Putnam’s and Sons, 19}-5)> P* 587.
"^J. Lawrence Laughlin, Principles of Money. Credit and Prices.
(Chicago, Illinois: University of Chicago Press, 1931), P* 406.
CHAPTER III
THE PHILIPPINE GOLD EXCHANGE STANDARD
The Philippine Coinage Act, passed by the Congress of the United
States on March 2, 1903, laid down the fundamental features of the
systems^
1. A theoretical gold peso composed of 12.9 grains of gold
nine-tenths fine. This is exactly one half the gold dollar.
2. An actual silver peso weighing 4-16 grains composed of
silver nine-tenths fine.
3. Silver certificates in the denominations of two, five and
ten pesos.
4. United States gold coins and the pesos were to be unlimited
legal tender.
The other coins in circulation were to be legal tender only for
a short period.
A. Philippine Gold Standard Act.
On the basis of the law passed by Congress, the Philippine Com
mission on October 10, 1903, passed Act No. 938, entitled "An Act
Constituting a Gold Standard Fund in the Insular Treasury to be Used
for the Purpose of maintaining the parity of the silver Philippine
Ijames Magee, Introduction to Money and Credit. (New York: Crafts
and Company, 1927), p. 363.
peso with the gold standard peso, and organizing a division of the cur
rency in the Bureau of Insular Treasury through which such fund shall be
maintained, expenditures made therefrom, and accretions made thereto,
and- providing regulation for the exchange of currencies and for the issue
and redemption of silver certificates which, for brevity in this report,
is termed 'Gold Standard Act1 ."
The Act provided for the creation of a separate trust fund to be
set up in the Insular Treasury. This find was made up, first, of the
proceeds of a $10,000,000 bond issue which Congress had authorized;
second, it was to receive the profits from the coining of the overvalued
o
silver peso and the profits on the exchange transactions. Part of the
fund was to be held in New York and part in Manila, In order to main
tain parity, the Division of Currency was created.
In order to maintain parity, five special provisions were mades^
The treasurer was authorized, first, to exchange at the Insular Treasurer
in Manila for Philippine currency offered in the sum of not less than
10,000 pesos or United States currency offered in the sum of not less
than $5,000 drafts on the gold standard fund deposited in the United
States or elsewhere, charging for the same a premium of three-fourths
of one per cent for demand drafts and 1-1 /8 percent for telegraphic
transfers, and to direct the depositaries of the funds of the Philippine
^James Magee, Introduction to Money and Credit (New York: Crofts
and Company, 1927), p. 363.
%. Documents 144, 58th Congress, Second Session, p. 288.
10
Government in the United States to sell upon the same terms and in like
amount exchange against the gold standard fund in the Philippines. The
premium charged might be increased or decreased temporarily by order of
the Secretary of Finance and Justice should conditions in his judgment
need such action.
Second, to exchange at par, on the approval of the Secretary of
Finance and Justice, United States paper currency of all kinds for Philip
pine currency and vice versa.
Third, the exchange of United States gold coins or gold bars for
Philippine currency in amounts of not less than 10,000 pesos or $5,000
charging for the same a premium sufficient to cover the expense of trans
porting gold coins from New York to Manila, the premium to be determined
by the Secretary of Finance and Justice.
Fourth, to withdraw Philippine currency exchange and deposited in
the treasury from circulation until paid out in response to demands made
upon it, in accordance with the provisions of the Act.
Fifth, to withdraw from circulation United States paper currency
and gold coin and gold bars received by the Insular Treasury in exchange
for Philippine currency until the same shall be called out in response
to the presentation of Philippine currency or until an insufficiency of
Philippine currency made necessaiy an increased coinage, in which event,
*
for the purpose of providing such coinage, the coin so obtained became
part of the gold standard fund.^
^•H. Documents 144, 58th Congress, Second Session, p. 289.
11
B. Fundamentals of the Gold Exchange Standard.
The characteristics of the Gold Exchange Standard consist of a
‘ 'Gold Standard without a gold circulation"j that is, the standard mone
tary unit of value is kept at parity with a certain amount of gold only
by means of redemption in drafts at rates corresponding to the gold
points. Part of the Gold Standard Fund was held in New York on which
drafts could be drawn in Manila on presentation of the pesos, and the
withdrawal of these pesos from circulation in order to make pesos scarce
and raise their value. Exchange in New York on the gold standard fund
in Manila was sold for which pesos would be paid out in Manila, thus
increasing the quantity of pesos in circulation and lowering their value,
so that the “parity is maintained through a reduction in the circulating
in time of relative redundancy and an increase in time of relative
scarcity.”^
Under the gold exchange standard, the adjustment of the currency
to the currency demand was to be accomplished by the sale and purchase
of exchange at rates representing the “gold points" of the theoretical
7
gold peso with which the silver peso was to be kept at parity.
^Lawrence Laughlin, Principles of Money. Credit and Prices.
(Chicago: University of Chicago Press, 1931), p. 4-09.
6Ibid.. p. 410.
7
George Luthringer, The Gold Exchange Standard of the Philippines.
(Princeton: Princeton University Press, 1934)> p. 7*
12
Thus, if we assume that the balance of payments is heavily
against the Islands, ... exchange rates in Manila on New
York would move to a premium of three fourths of 1 per cent
for demand drafts and one and one-eighth percent for telegra
phic transfers, rates which represent the gold export point
of the peso. No gold ... would actually be exported.
Instead, the government would sell the would-be exporter
of gold a draft on that part of the Gold Standard Fund kept
in New York, charging him therefor a premium equivalent to
the expense he would actually incur if he shipped an equal
amount of gold from Manila to New York. The pesos paid in
by the would-be exporter for a right to an amount of gold
already laid down in New York, including the premium charged,
would then be withdrawn from circulation and accrue to that
part of the Gold Standard Fund held in the treasury in Manila.
The circulation would be contracted in this manner until the
needed adjustments were made and equllibrum restored. Con
versely, if one assume that the balance of payments is
heavily in favor of the Islands ... exchange rates in
New York on Manila would move to a premium of three-fourths
of 1 per cent for demand drafts, rates which represent the
currency shipping point between New York and Manila. How
ever, instead of its being necessary for anyone to settle
balances by exporting currency to the Islands, the author
ized agents of the Philippine Government in New York would
offer a would-be currency exporter a draft on that part of
the Gold Standard Fund kept in Manila, charging therefor a
premium equivalent to the expense of shipping an equal
amount of currency to the Islands. The Gold Standard Fund
in New York would be increased by the dollars paid in for
the draft, including the premium. The draft would later
be cashed in Manila in pesos withdrawn from that part of
the Gold Standard Fund held in the Treasury. Thus, addi
tional currency would enter into circulation until the
relative scarcity was relieved, the foreign balances due
the Islands settled, and price equllibrum restored.”9
C. Introduction of the New Currency.
There were many difficulties in introducing the new money. The
old coins tended to drive out the new coins in circulation as the new
g
George Luthringer, The Gold Exchange Standard of the Philippines
(Princeton: Princeton University Press, 1934-)»PP» 8-9.
9Ibid.. p. 9.
coins were worth more in exchange for gold. The people were accustomed
to the old currency and for a time, new coins circulated at par with
the old coins until they disappeared from circulation. In order to
remedy the situation, Section 13 of the Philippine Coinage Act removed
the legal tender power from all local currency after December 31, 1903*
On January 1, 1904, an order was passed wherein Spanish-Filipino cur
rency would be redeemed until January 1, 1904 at rates fixed by executive
order, and that after October 1, 1904, the old currency would cease to
10
be redeemable. On January 14, 1904, heavy penalties were imposed on
the importation of currencies not on a gold basis. Finally, the old
currency was driven out by the Local Currency Taxation Act of January
27, 1904, which put a heavy ad valorem tax on the use of the currency
after a certain date. The old currency was either exported or pre-
11
sented to the government and taken at its bullion value.
D. The Becoinage.
In 1903, the price of silver rose and created a disturbance by
wiping out the seigniorage which provided a sufficient margin to pre
vent melting. Currency was worth more than bullion, if it could be
exported. On November 17, 1906, an act was passed prohibiting the
10Lawrence Laughlin, Principles of Money. Credit and Prices
(Chicago: University of Chicago Press, 1931), p. 413*
^James Magee, Introduction to Money and Credit (New York:
Crafts and Company, 1927), p. 364*
exportation of pesos, but still, money was smuggled out of the Islands.
Recoinage was essential. On June 23, 1906, the Recoinage Act was passed,
permitting the Philippine Government to lower the gross weight of the
peso from 4.16 to 308.66 grains, and the fineness from .900 to .800. The
subsidiary coins of exactly proportionate weight to the peso had
12
reduced their fineness from .900 to .750.
■^Lawrence Laughlin, Principles of Money. Credit and Prices
(Chicago: University of Chicago Press, 1931), p. 4-15*
CHAPTER IV
THE GOLD STANDARD FUND1
The system is automatic in its regulation of the money supply,
although there is no gold in circulation and no gold reserve exists in
the Philippines. The local unit is not actually coined, is not even
allowed to circulate, and is not actually redeemable in gold coin, yet
it serves effectively the function of a domestic and international
standard of value and unit of account. While gold is full legal ten
der, the local currency is not redeemable in gold coins. Our currency
is not converted directly to gold, but our system is a virtual redemp
tion in gold bullion of the gold exchange standard. In other words,
in the redemption of the gold exchange standard, the would-be exporter
of gold is given a draft against the gold deposited in the United States.
Under normal conditions, exports pay for imports. As long as
the banks are in a position to supply our importers with gold, as long
as exports pay for imports, the Gold Standard Fund is not used. But
the very minute the exchange rate between the dollar and the peso
goes appreciably above the export point, the would-be exporter can buy
a 10, 000-peso worth of exchange at 3 /4 percent for demand drafts and
1-1/8 per cent for telegraphic transfer. The rate of exchange is so
George Luthringer, The Gold Exchange Standard of the Philippines
(Princeton: Princeton University Press, 1934)> Chap. II.
16
fixed as to approximate the gold export point in Manila to New York and
vice versa. This rate also represents the approximate cost of shipping
gold. The rate of exchange is a little above the rate charged by the
bank in order to prevent the government from competing with commercial
banks in the exchange business. It is also a bit lower than the gold
export point to do away the possibility of profit of the would-be
exporter of gold frcan Manila to the United States.
Instead of giving gold for shipment, the government simply main
tains a part of the funds in a gold balance available to anyone who
needs gold, showing that it is virtually redeemable. in gold, for the
would-be exporter of gold is given the very equivalent of gold for the
settlement of obligation. The currency received in exchange for dollar
credit sold in Manila or New York is actually withdrawn from circula
tion. The withdrawal of currency is tantamount to an actual gold
shipment as it contracts the circulation. The local banks do not buy
gold from the Treasury as long as they have sufficient export bills
to replenish their dollars in financing imports. The gold standard
fund is not supposed to be deposited with any local bank, for it will
defeat the underlying principle, for the money received will not
actually be withdrawn from circulation.
The gold exchange standard is worked on the assumption that the
value of money is governed by the law of supply and demand. If the
quantity of circulation within a country can be regulated so as to res
pond to the demand of trade automatically, the monetary unit of the
17
country can be maintained at substantial parity with the gold currency
of any country. The maintenance of the fund is determined on the basis
of the prospective requirements of Philippine trade. Up to the out
break of World War II, the fund was maintained at 15 per cent of the
outstanding circulation until it accumulated to 25 per cent. The
minimum 15 per cent to the maximum 25 per cent was sufficient to main
tain the substantial parity of the peso to the dollar. But the automa
tic nature of the system lessened when in 1911, parts of the Manila fund
were deposited in Manila banks and invested in Philippine enterprise.
If such invested fund was made up of past profits, there could be no
objection to such use, so long as the fund remained adequate to meet
the needs. These deposits contravened the basic principles of the gold
exchange standard for such action prevented the reduction in volume of
domestic currency required to correct the price level and reestablish
equilibrum. The gold exchange standard threatened to break down when
the Treasury was unable to maintain its gold balance in New York from
1919 to 1920, due to the fact that the Treasury was unable to withhold
from circulation the peso which it received from persons purchasing
New York Exchange.
The devaluation of the dollar in 1934- resulted in the legal
o
abandonment of the gold peso. The peso became redeemable only in
2
Rollin Thomas, Our Modern Banking and Monetary System (New York:
Prentice Hail, Inc., 1937), p. U2.
18
fifty cents’ worth of New York Exchange, thus becoming a dollar exchange
rather than a gold exchange standard. At present, our currency system
is backed up by 100 per cent reserve, in part by silver coins in the
Philippine Treasury, but primarily by United States dollars held in
deposit either in the United States Treasury or in American banks. We
will remain on the dollar exchange standard tintil the United States
resumes free convertibility of the representative and credit money to
gold as she had done prior to the devaluation.
CHAPTER V
THE CURRENCY RESERVES AND THE PHILIPPINE NATIONAL BANK
The Philippine Act No. 3053, passed on June 13, 1922, required
the establishment of the Treasury Certificate Fund and a Gold Standard
Fund (-which is now called the Exchange Standard Fund) Part of the
Gold Standard Fund was deposited in the Philippine National Bank, a
step which violated the principle of contraction of the monetary cir
culation by the full amount of the pesos paid in for the drafts on the
United States. The Philippine National Bank dissipated the currency
reserve by utilizing it in the regular course of business in the making
of reckless loans and investments. It did not retire from circulation
the pesos received in exchange for drafts, as was required by law.
This resulted in the collapse of the gold exchange standard mechanism
in 1919, and for three years, the Philippines was on a paper standard.
It was not the unsound investment which caused the breakdown.
The subsequent breakdown would have occurred even had the investments
been as sound as possible from the banking point of view.
Any investment of these pesos, no matter how sound as an
investment, resulted in paying out into circulation money
which should have been withdrawn and held in the vaults of
the Treasury, ... even though the New York balance of the
currency reserve was not gold coin, so long as the currency
•^Great Britain, Department of Overseas Trade, Report on the
Economic Conditions in the Philippines. 1925-1933 (London: H.M.
Stationary Office, 1939).
20
law was obeyed, this balance varied in amount directly with
the volume of money in circulation in the Islands and was
... automatically maintained at an amount sufficient to
prevent the peso from falling below parity with the dollar.
But for the automatic control of the size of the dollar balance
of the reserve, tie discretionary control of the Philippine National
Bank was substituted, which resulted in disastrous consequences. The
Philippine National Bank dissipated nearly four fifths of the dollar
balance of the reserve and left the Islands with a badly inflated mone-
3
tary structure and an inadequate dollar balance in the currency reserve.
The dissipation of currency reserves is an indication of inefficiency
and gross ignorance of the currency system by both the officials of the
bank and the responsible officials of the governmentA
From 1919 to 1922, there was a currency and exchange crisis in
5
the Philippines. In 1922, Act No. 3058 was passed, revising the cur
rency law and providing for essential safeguards to protect the
inviolability of the currency reserves.
p
George Luthringer, The Gold Exchange Standard of the Philippines
(Princeton; Princeton University Press, 1934)> P* 119*
3Ibid.. p. 119.
^Roy Garis, Fort Knox Gold Not Worthless, The Commercial and
Financial Chronicle. November 18. 1948.
' ’ Official Gazette, Volume XX, pp. 1543-8.
CHAPTER VI
THE MONETARY SYSTEM
The present system. The monetary system of the Philippines is
that of a dollar exchange standard with a 100 per cent dollar reserve
requirement against its note issue. The par value of the peso is fixed
by law at two pesos to one United States dollar. Under the terms of an
executive agreement between the United States and the Philippines, pur
suant to the Philippine Trade Act, the Philippine government agreed
that "the value of Philippine currency in relation to the United
States dollar shall not be changed; the convertibility of pesos into
dollars shall not be suspended, and no restrictions shall be imposed
on the transfer of funds from the Philippines to the United States
except by agreement with the President of the United States.'*’ The
International Monetary Fund, of which the Philippines is a charter
member, also provides that the par value of the peso has been set at
one half of the United States dollar of the weight and fineness
effective on July 1, 194-4 •"
Under the present system, the money supply changes automatically
with changes in the international balance of payment of the Philippines,
irrespective of whether the response is beneficial, or harmful to the
^Report and Recommendation of the Joint Philippine-American
Finance Commission, June 7, 1947, p. 46.
22
economy. The 100 per cent requirement tends to freeze unnecessarily a
part of the reserves as dollar reserves have had to be maintained even
against the hard core of circulating peso currency which is always
needed to finance domestic transactions.
Excessive Reserve. The present Philippine currency reserves are
excessive. This is due in part to a provision of Act No. 3058 which
requires that the Gold Standard Fund "shall at all times be maintained
in a sum not less than 15 per centum of the money of the Government of
the Philippines in circulation and available for circulation, includ
ing both coin and treasury certificates. As a result of this provision,
even though Treasury certificates are secured by a 100 per cent reserve
in the form, of bank deposits in the United States balance of the Trea
sury Certificate Fund, an additional reserve of at least 15 per cent
3
must be held against these certificates in the Gold Standard Fund.
Act No. 3058 further requires that all net earnings from the
operation of the currency system be added to the Gold Standard Fund
until it amounts to 25 per cent of the money in circulation, and
though it permits accumulations in excess of this amount to be trans
ferred to the Treasury, such transfers are not mandatory.^
^Grove and Exter, "The Philippine Central Bank", Federal
Reserve Bulletin. August 1947. p. 938.
3
George Luthringer, The Gold Exchange Standard of the Philippines
(Princeton: Princeton University Press, 1934)> P* 235.
^Tbia.. p. 237.
It is uneconomical to maintain a large amount of excessive currency
reserves, particularly if it is needed for rehabilitation purposes.
Because of this requirement, when the government was faced by a budget- *
ary deficit after liberation, the government was forced to borrow
dollars in order to obtain pesos although the dollar reserves are sub
stantially larger than necessary to maintain the free convertibility
of the peso to two to one. However, a 1though the present dollar reserves
are excessive, care must be taken to provide ample margin of safety for
two reasons: first, the chief Philippine exports are raw materials sub
ject to drastic declines in price, thus increasing a likelihood of a
large reduction in the ratio of commodity exports to imports followed by
a drain in currency reserve. In the second place, the change in the
political status of the Philippines may involve certain economic adjust-
5
ments as there might be an attempt to withdraw capital from the Islands.
For the very reason that the 100$ reserve requirement forces the
Government to borrow dollars unnecessarily in order to issue peso, a
system is needed which will permit the expansion of the money supply to
meet the legitimate needs of the Government, as well as those of indus
try, agriculture and commerce.
In order to remedy this, the Philippine Government has organized
a Gentral Bank -which will be the sole monetary and banking authority to
^George Luthiinger, The Gold Exchange Standard of the Philippines
(Princeton: Princeton University Press, 1934-)> pp. 237-8.
supervise a modem managed currency system. A managed monetary system
envisaged with the creation of the central bank will mean a . complete
departure from the conservative currency system of maintaining a 100 per
cent money reserve. It will also mark the definite freedom from the
gold exchange standard system of permanent freezing of reserves. A
modern managed currency system will permit a moderate regulation of the
Philippine money supply in order to meet internal economic demands. At
all times, it would be able to upset any inflationary effects created
by a rise or fall in the balance of payments. Under this system, the
money supply does not necessarily change with corresponding changes in
the balance of payment.^*
^Elpidio Isip, nThe Central Bank”, p. 35 > Commerce. Volume 4-2,
No. 2, 1947.
PART II
B-A-N-K-I-N-G
CHAPTER VII
COMMERCIAL BANKING
Philippine banking today is faced with the need for a soandl
expansion of credit to finance a reviving and expanding economy, and
the need for the improvement and wider distribution of its banking
/
facilities. The demand for credit comes not only from an increasing
volume of trade and commerce, but also from the rehabilitation and
development needs of industry and agriculture. Much of the demand for
long-term capital financing is beyond the customary scope of commercial
banking, and as such, will have to be met in part by the Government and
its special instrumentalities. Better banking facilities are needed
to serve provincial areas not now adequately served and to encourage
the use of banks by a larger number of people everywhere."*"
Commercial banks in the past were chiefly concerned with dealing
in foreign exchange, and with financing foreign trade, local commerce
and agricultural crops on a short-term self-liquidating loan basis.
There are twelve commercial banks in Manila, five of which are branches
of foreign banks and two are domestically incorporated banks largely
owned by Chinese capital. Of the remaining banks, two are partially
owned by the Catholic Church, and one by Americans. The largest single
commercial bank, the Philippine National Bank, is the government bank.
^Condensed from “Reports and Recommendations of the Philippines",
American Finance Commission, (Manila: Bureau of Printing, June 7, 194-7).
26
The Philippine National Bank has ten branches and forty-seven
agencies. Where there are no branches, banking facilities are provided
to the provinces tinder an arrangement wherein the provincial treasurer
and the municipal treasurers act as agents and sub-agents of the bank.
There is adequate credit available to finance the current require-
ment of trade and commerce ■which is shown by the fact that, despite an
increase in loans during the first three months of 1947, the banks still
had excess reserves of one hundred fifteen million pesos as of May 12,
1947.2
There is a large percentage of funds available to finance the
initial reconstruction needs of basic pre-war industries such as mining,
lumber, fishing, sugar milling and coconut processing.^ These funds are
being supplied by private capital, banks and the Government-owned
Rehabilitation Finance Corporation.
I
A. Banks Established in the Philippines.
Banking in the Philippines began as early as 1830 when the first
bank was opened by a certain Francisco Rodriguez. Very little is known
of it, except a passing remark by Foreman in his book entitled "The
4
Philippine Islands".
2
The Evening News Magazine. July 19, 1947, p. 3-
3Ibid.. p. 3
^Earle Schwult, "Commercial Banking in the Philippines",
Philippine Finance Review. Volume III, No. 3, 1930.
The following banks were established in the Philippines:
1851 Banco Esnanol (known as Bank of the Philippine Islands)
1873 Bank of India, Australia and China
1876 Hongkong and Shanghai Banking Corporation
1880 Monte de Piedad and Savings Bank
1902 American Bank
1904. International Banking Corporation
1906 Misaka Bank
1916 Philippine National Bank
1917 Philippine Trust Company
1918 Yokohama Specie Bank'*
1919 Asia Banking Corporation
1920 China Banking Corporation
1924. Merchantile Bank of China
1926 People's Bank and Trust Company
1930 National City Bank of New York
1937 Nederlandsche Indesche Handelsbank
1937 Bank of Taiwan
194-7 Bank of America
^Yokohama Specie Bank is not open for business at present as
has been seized by the Allies.
28
B. Incorporated Foreign Banks.
The Chartered Bank of India, Australia and China, established
in 1873 and the Hongkong and Shanghai Banking Corporation are branches
of English-Oriental banks. Their establishments were rendered necessary
on account of the British-Filipino trade relations.
The American bank was established in Manila in 1902 with a paid-
up capital of $25,000. It was formed as a corporation under the Spanish
laws, no new general law having been passed by the Philippine Commission,
6
and no charter was granted to it by the said Commission. It was placed
in receivership on May 18, 1905.
In 1914-, the Manila branch of the Yokohama Specie Bank was
established. It continued to do business in the Philippines until
World War II when it was closed and seized by the Allied forces.
The Misaka Bank was owned and managed by a single individual,
Shikajero Misaka. It was placed in receivership in 1906 and creditors
were paid 8 per cent of their claims.
Branches of the Asia Banking Corporation of New York and the
Chinese American Bank of Commerce of Peking, China, were established
in 1919 and 1928 respectively. They went out of business in 1924 and
the creditors were paid in full.
. Documents 144. 58th Congress, Second Session.
29
The National City Bank of New York, organized under the laws of
the United States of America, was allowed to conduct a general banking
business in 1930. It has a capital stock of $110,000,000.
The International Corporation of New York established its Manila
branch in 1904 and has been doing business since then.^
The Bank of Taiwan was sanctioned by the Philippine Commonwealth
to establish a branch in Manila on condition that the Bank has a minimum
capital of 500,000 pesos and that no deposits be accepted in excess of
ten times such capital.
C. Domestic Banks.
The Bank of the Philippines, the oldest bank in the Islands, was
organized in 1851 and named after Queen Isabel II of Spain. When she
ceased to be a queen, the Bank became known as "Banco Espanol Filipino."
In 1922, by virtue of the charter granted by the government, it
assumed its present name - The Bank of the Philippine Islands. It had
the exclusive right of note issue until the privilege was granted also
to the Philippine National Bank when it opened in 1916.
The Monte de Piedad and Savings Bank, the only mutual savings
bank established in 1880, was organized as a "benevolent institution
7
Parker H. Willis, "The Philippine National Bank", Journal of
Political Economy. Volume 25, 1917, p. 410.
s »
Great Britain - Department of Overseas Trade, Report on the
Economic Conditions in the Philippines. 1925-1938 (London: H. M.
Stationery, 1939).
30
for the purpose of helping the poor and the needy.” Its capital consisted
of contributions made by religious denominations and pious orders. It
is a non-stock corporation and is under the control of the Roman Catholic
Archbishop of Manila. It is the only Philippine bank which accepts
jewelries as collateral.
The Bank of Pangasinan was organized with a capital of 100,000
pesos, of which 34->250 pesos was paid up on the day of incorporation.
It operated largely on the deposits made by the municipal and provincial
government of Pangasinan. Upon discovering that this public corporation
was not authorized by law to act as a government depository, such deposits
were withdrawn. In 1906, its affair had to be liquidated and claims of
9
depositors and stockholders were paid in full.
The Philippine National Bank was established in 1916 and has
acted as the fiscal agent of the government ever since.
"Proposed Amendment to Banking Law, Explained Amendment",
Philippine Finance Review. Volume II, No. 8, 1929.
CHAPTER VIII
THE PHILIPPINE NATIONAL BANK
The Philippine National Bank was established to remedy serious
deficiencies in the banking system of the Philippines. Dr. Parker H.
Willis, at that time Secretary of the Federal Reserve Board of the
United States, was brought to the Philippines to assist in starting
1
this institution. Prior to its establishment, the banking field was
largely dominated by branches of foreign banks — the Hongkong and
Shanghai Banking Corporation, the Charter Bank of India, Australia
2
and China, and the International Banking Corporation. These foreign
banks concentrated most of their activities chiefly in financing com
mercial transactions, disregarding the need of agriculture. The Bank
of the Philippines had to bear a large part of the burden of the
economic development of the Philippines, which, due to limited capital,
it could not cope with. Because of this inadequacy, money lenders
granted loans at usurious rates. The Government tried to remedy the
situation by establishing an agricultural bank which, however, failed
to meet agricultural needs.
^The Philippine Review. May 1918, p. 321.
^Parker H. Willis, "The Philippine National Bank", Journal of
Political Economy. Volume 25 (May 1917), p. 410.
In 1915> Act No. 2612 providing for the establishment of a bank,
to be known as the Philippine National Bank, was passed.
Provisions. The principal provisions of the by-laws of the
Philippine National Bank as of 194-9, may be summarized as follows:^
Capital. The Bank's capital stock was formerly 50,000,000 pesos
divided into 200,000 shares of the first issue and 300,000 shares of the
second issue. This provision has been amended by Section 1 of Act 3174.
The present ruling regarding capital stock reads as follows:
Section 1: The capital stock of the (Philippine National)
Bank shall be ten million pesos (10,000,000 pesos) divided
into one hundred thousand (100,000) fully paid shares of the
value at par of one hundred pesos (100 pesos) each, which
number shall include the shares at present held by the public.
Provided, that the Bank may purchase the shares held privately
at the price at which they were quoted on the date of the
registration of the sale in the books of the bank, provided
such price does not exceed their value at par.
Banking Transactions. The Philippine National Bank is authorized
to engage in the following operations:
4
First: (Agricultural) Long-term Real estate loans;
Second: Issue of first mortgage real estate bonds;
Third: Exchange and other banking operations;
Fourth: Issue of circulating notes;
Fifth: Other loans as provided by law.
^The Philippine Review. March 1916, pp. 40-42.
^To distinguish agricultural loans, formerly termed "crop
loans", from loans which are called "long-term agricultural loans",
it is deemed proper to call this kind (agricultural) of loan "long
term real estate loans".
33
1. Agricultural loans. To promote agriculture, the (Philippine
National) Bank is authorized to make loans on promissory notes secured
i
by real estate mortgage in an aggregate sum which at no time, is to
exceed 75 per centum of its capital and surplus and all amounts realized
from the sale of real estate bonds. In the old by-laws, the limit fixed
on the aggregate amount of long-term loans which may be granted on the
security of real estate mortgage was 60 per cent of the capital and
surplus and all amounts realized from the sale of real estate bonds.
The increase to 75 per cent has been made by virtue of Commonwealth Act
4-60. Payment of such notes shall be secured by a first mortgage on
real estate. The date of maturity shall not be less than one year nor
more than thirty years. The amount of the loan is not to exceed sixty
per centum of the actual value of the land and improvement mortgaged.
Such loans are to be made only for the following purposes:
First: For the improvement, cultivation and development of
farm lands.
Second: To provide for the purchase of the equipment and live
stock reasonably necessary for the improvement, cultivation, and develop
ment of farm lands, the term ’ ’ equipment” to be defined by the Board of
Directors of the Bank.
5
The term of this kind of loan was formerly ten years. The
increase to thirty years was made by virtue of Commonwealth Act No.
460.
34
Third: To liquidate indebtedness incurred for the improvement,
cultivation, and development of farm lands.
Fourth: To assist in the purchase of farm lands.
However, this long-term real estate loans secured by real estate
are no longer made by the Bank in view of the statement made by the
President of the Philippines on June 9, 1939 to the effect that nwhen
the Agricultural and Industrial Bank shall have been established, there
will be no longer any need for the Philippine National Bank to grant
long-term agricultural loans and that it is to be expected that the Bank
will cease granting such loans and devote its activities purely to
commercial banking, for it is not good policy for a commercial bank
receiving commercial deposits to tie up such a large portion of its
6
assets in long-term credits."
2. Issue of first mortgage real estate bonds. The Philippine
National Bank is empowered to issue real estate bonds in any sum not
to exceed ninety per centum (90$) of the amount of (agricultural) long
term real estate loans held by it. Such bonds are payable in lawful
money of the Philippines or in United States currency at the option of
the Bank. Such bond issues are secured by real estate securities
deposited with the Treasurer of the Philippines.
^By-laws of the Philippine National Bank, Article V, Section
(11) 8.
35
3. Exchange and other banking operations* The Philippine National
Bank is authorized to engage in the following operations:
(a) To accept deposits of funds of the Insular government and its
instrumentalities, and from the public;
(b) To purchase or discount negotiable instruments;
(c) To discount notes secured by, or to make loans on insured
harvested and stored crops to an amount not to exceed seventy per cen
tum ( 7 0 % ) of the market value of such crops.
(d) To make loans on standing crops of the natural products of
the country;
(e) To grant loans to government entities on promissory notes
guaranteed by the Central Government;
(f) To purchase and sell in the open market negotiable
instruments;
(g) To administer trust funds;
(h) To purchase and sell gold and silver;
(i) To make loans on documentary bills of exchange;
(j) To make advances, or discount paper for agricultural,
manufacturing, industrial or commercial purposes;
(k) To act as agent of the government in commercial, financial
and industrial transactions;
(l) To engage in the dollar exchange transaction;
(m) To purchase and sell first mortgages upon farm lands;
(n) To purchase and sell first mortgage real estate bonds issued
by the bank;
36
(o) To buy and sell government bonds.
4* Circulating Notes. The National Bank is given power to issue
circulating notes in the denomination of one ($1) , two ($2), five ($5),
ten ($10), twenty ($20), fifty ($50), one hundred ($100), two hundred
($200), and five hundred ($500) pesos. With regard to the amount of
circulating notes which may be issued against the Bank's capital and
surplus and against (gold coin held by the Bank), Rediscounted Commer
cial Paper, Section (16) 13 reads as follows:
Circulating notes may be issued as follows:
(a) In an amount not TO EXCEED the paid-up capital and
surplus of the Bank (plus the amount of gold coin of the
United States owned and held by it in its own vaults, or to
its order in the Treasury of the Philippines or of the United
States, or in solvent National Banks of the United States, or
in any Federal Reserve Bank.
(b) In cases of emergency and subject to the approval of
the Board of Control, the Secretary of Finance may authorize
the Philippine National Bank to rediscount IN AN AMOUNT NOT
TO EXCEED SEVENTY FIVE PER CENTUM ( 7 5 % ) of REDISCOUNTED com
mercial paper of not over six months' maturity,secured by
exports or imports (and the Philippine National Bank may
issue against said commercial paper circulating notes for
sums not to exceed seventy-five per centum (75$) of the value
thereof), SUBJECT TO THE PROVISIONS OF SECTION 14- OF ACT NO.
2938.
(c) (Whenever in his judgment the needs of commerce and
the public interest require an increased monetary circulation,
the Secretary of Finance, with the approval of the Council of
State, may authorize the Philippine National Bank to issue
notes) in an amount in excess of the limit provided in this
section WHENEVER IN THE JUDGMENT OF THE SECRETARY OF FINANCE
THE NEEDS OF COMMERCE AND THE PUBLIC INTEREST REQUIRE AN IN
CREASED MONETARY CIRCULATION upon depositing with the (Insular)
Treasurer OF THE PHILIPPINES bonds of the Government of the
United States, or of the National Government of the Philippine
37
(Islands) or commercial paper secured by warehouse receipts
for principal products of the Philippines (islands) acceptable
to the Secretary of Finance, SUCH ISSUANCE OF CIRCULATING NOTES
to be,SUBJECT TO THE PROVISIONS OF ACT NO. 2924. (Such securi
ties shall be endorsed and legally transferred to the Insular
Treasurer, as representative of the Government of the Philip
pine Islands, who shall safely keep the same, and who shall,
upon the order of the Secretary of Finance, take possession
of the same, and realize them, in order to use the proceeds
of their sale for the redemption of the notes issued, in ease
the Bank should fail to redeem same, or otherwise fail to com
ply with the conditions imposed by the Secretary of Finance in
accordance with the provisions of Act No. 2924. The total issue
of notes by virtue of this paragraph shall never exceed the par
value of the bonds, nor seventy per centum (70$) of the market
value of the products covered by the warehouse receipts, as
the Secretary of Finance may determine. In case the market
value of the securities deposited as guarantee for the notes
issued shall depreciate to such an extent that such securities
Shall be insufficient to cover the amount of the outstanding
notes, the Bank shall deposit additional securities, or legal
currency, or shall restrict its circulation.)
With regard to the reserve for notes issued against (the) Bank’s
capital.and surplus: reserve for notes issued against rediscounted paper:
(redemption of, and reserve for, notes issued under Act No. 2924* securi
ties for the redemption of circulating hotes), the provisions are as
follows:
SECTION 17. The Philippine National Bank shall hold, a.t
all times, either in its vaults, or in the Treasury of the
Philippine Islands, in lawful money of the Philippine Islands
at least twenty-five per centum (25% ) of the value of the
circulating notes issued against its capital and surplus.
Whenever the Philippine National Bank issues circulating
notes against rediscounted commercial paper, it shall deposit
as a reserve for their redemption, in the vaults of the
Insular Treasury, in lawful currency of the Philippine
Islands, twenty-five per centum (25% ) of said issue.
The notes issued under the provisions of Act No. 2924
shall be redeemed upon the sale of the securities or goods
involved in the guarantee, or within a period to be fixed by
38
the Secretary of Finance. For this purpose, it shall be
sufficient for the Bank to deposit with the Insular Trea
surer legal money in an amount equal to that of the out
standing notes, in substitution for the securities deposited
as original guarantee. As a reserve for the redemption of
these notes, the Bank shall retain, in lawful money of the
Philippine Islands twenty-five per centum (25$) of the issue,
as follows: twenty per centum (20$) in its own vaults or in
the Treasury of the Philippine Islands, and the remaining
five per centum (5$) must be deposited with the Insular
Treasury.
All the securities described in section fourteen (14.) >
paragraph "B" of these By-Laws, and the proceeds thereof,
shall be held and kept for the payment and redemption of
the circulating notes issued by the Bank against its capital
and surplus, and the emergency circulating notes issued by
the Bank against rediscounted paper.
In case the Philippine National Bank issues circulating
notes against gold coin owned and held by it in its own
vaults, or to its order in the Treasury of the Philippine
Islands, or of the United States, or in any Federal Reserve
Bank, such gold coin shall be kept and held by the Bank and
used for no other purpose, except the redemption of the cir
culating notes so issued. The Bank, however, shall have the
privilege of redeeming said circulating notes in any lawful
money of the Philippine Islands.
The reserves for circulating notes issued under Section 13 hereof
shall be as follows:
(a) FOR CIRCULATING NOTES ISSUED AGAINST THE BANK’S
CAPITAL AND SURPLUS, AN AMOUNT IN LAWFUL MONEY OF THE PHI
LIPPINES, OF NOT LESS THAN TWENTY-FIVE PER CENTUM OF THE
VALUE OF SUCH NOTES, TO BE HELD AT ALL TIMES EITHER IN THE
BANK'S VAULTS OR IN THE TREASURY OF THE PHILIPPINES.
(b) FOR CIRCULATING NOTES ISSUED AGAINST REDISCOUNTED
COMMERCIAL PAPER, AN AMOUNT IN LAWFUL CURRENCY OF THE PHI
LIPPINES EQUAL TO TWENTY-FIVE PER CENTUM OF SAID NOTES, TO
BE DEPOSITED IN BANK'S VAULTS OR IN THE TREASURY OF THE
PHILIPPINES.
39
With regards to the securities for redemption of circulating
notes, it reads thus:
SECTION 15. The redemption of circulating notes issued
in pursuance of Section 13 thereof, shall be effected as
follows:
(a) As to notes issued against capital and surplus, or
against rediscounted paper, all the securities described in
Section 11, paragraph (b), hereof and the proceeds of said
securities shall be held and kept for the payment and redemp
tion of such notes.
(b) The Bank shall redeem and cancel its circulating
notes in annual sums as the Secretary of Finance, with the
concurrence of the (Governor-General) PRESIDENT OF THE PHI
LIPPINES, may from time to time determine, until the amount
thereof shall not exceed the amount of the unencumbered
paid-up capital of the Bank.
IN ADDITION TO THE FOREGOING, the National Government of
the Philippines (islands hereby) guarantees the final redemp-
. tion and payment of the circulating notes of the (National)
Bank, and the (insular) Treasurer of THE PHILIPPINES is
(hereby) authorized and directed to set aside from the pro
ceeds of the bonds sold by authority of Act Numbered Twenty-
nine hundred and ninety-nine a sufficient sum to cover the
reserve required by law for the circulating notes of the
Bank, and said sum shall be deposited to the credit of the
(National) Bank in a duly authorized depository or deposi
tories of the funds of the National Government of the Phi
lippine (Islands) in the United States and shall be carried
on the books of the (National) bank as a deposit of said
Government: Provided. That the Bank shall not dispose of
said circulating notes reserve except upon recommendation
of the Secretary of Finance approved bv the (Governor-
General) PRESIDENT OF THE PHILIPPINES.7
Other powers and privileges granted to the bank. The Philippine
National Bank has the right to own such real estate as may be deemed
7
This section is part of Section 17 of the old By-Laws which has
been amended by Sec. 3 of Act 3174-• The old By-Laws did not provide for
the guarantee of the redemption of circulating notes issued by the Bank.
40
necessary to carry on its business. It has the rights to erect bonded
warehouses, guarantee bonds issued by manufacturing corporations, pur
chase bonds issued by manufacturing corporations and purchase shares in
American banks.
The Bank is authorized to receive deposits of funds of the govern
ment and the public. Section 25 of the old By-Laws provides that the
Bank shall be the depository belonging to the Government, of the Philip
pines and all the provincial and municipal governments. This section
has been amended by Sec. 2 of Act 3005 in the sense that Section 23 now
reads:
Section (25) 23. The Bank is authorized to receive deposits
of funds of the National Government, the provinces, municipali
ties, Postal Savings Banks, associations, corporations, and
private persons, and the said (National) Bank, is hereby declared
as the sole depository of the National Government and of the pro
vincial and municipal governments of the Philippine (islands):
Provided, however. That for the benefit of public interest, in
the judgment of the Secretary of Finance, the latter is author
ized to direct that the funds of the National Government, the
province, municipalities and the Postal Savings Bank be deposited
with the (insular) PHILIPPINE Treasury instead of with the
(National) Bankj Provided. further, That the deposits of the
Government with the (National) Bank shall earn interest at the
rate of not less than what said Bank pays to private persons
on similar deposits.
Bank Reserve. Section 7 of Act 3610, amending Section 125 of Act
14- 59, reduced from 20% to 18%, the cash on hand of demand deposits that
must be kept by the Bank in its vaults or in the Treasury of the Philip
pines and provides for a cash on hand of 5% of the total savings deposits.
Thus, a by-law of the Bank reads:
SECTION (34.) 31- The (Philippine National) Bank shall at
all times keep on hand in its vaults or in the Treasury of the
Philippines (islands) a sum in lawful money either of the Phi
lippines (Islands) or of the United States, which shall be
computed as follows:
Twenty-five per centum (25$) of the circulating notes
outstanding, not covered by (gold coin) LAWFUL MONEY OF THE
UNITED STATES, as provided in section (seventeen) FOURTEEN
of these By-Laws.
(Twenty) EIGHTEEN per centum (18$) of the demand deposits
outstanding and credited on its books, and of the fixed depo
sits maturing within thirty days; except such funds as are on
deposit(s) with solvent banks in the United States and colla-
teraled by securities approved by the (Insular) Treasurer of
the PHILIPPINES or in solvent banks approved by (the Insular
Treasurer) SAID OFFICIAL: Provided. That if the (National)
Bank shall have funds subject to check with National Banks
or Federal Reserve Banks of the United States, such funds
may be considered as constituting a part of the (twenty)
EIGHTEEN per centum (18$) specified in this section, up to
a sum, to be fixed from time to time, by the Secretary of
Finance, with the approval of the (Governor-General) PRESI
DENT OF THE PHILIPPINES.
Five per centum ( 5$) of the total savings deposits, but
this reserve may consist of Philippine Government or United
States Government bonds.
Whenever (the lawful money kept by the Bank in all its
vaults, or with the Treasury of the Philippine Islands as)
ANY RESERVE required in this section (shall be below the
amount prescribed) IS NOT FULLY COVERED, the Bank shall not
diminish (the) ITS amount (of such lawful money) by making
any new loans or discounts OR DECLARE ANY DIVIDEND OUT OF
ITS PROFITS until the required proportion between the aggre
gate amount of its deposits and circulating notes and its
lawful money has been restored: Provided. however. That the
Secretary of Finance, at the request of the Board of Directors
of the Bank duly approved by the (Board of Control( PRESIDENT
OF THE PHILIPPINES, whenever in his judgment the general in
terests of the country requires it, shall be authorized to
suspend for such period as may be necessary the requirements
of maintaining the proportion of the reserve specified in
42
this section and in section (seventeen) FOURTEEN of these
By-Laws. The Bank shall make a daily report showing the
condition of its reserve as required (in this section) BY
LAW, and the amount thereof and place where kept
NOTE; (Section 7 of Act 3610, amending Section 125 of
Act 1459, reduced from 20% to 18$, the cash on hand of demand
deposits that must be kept by the Bank in its vaults or in
the Treasury of the Philippines and provides for a cash on
hand of 5 % of the total savings deposits.)
Accomplishment. The Islands, being considered a foreign country,
could not be a full member of the reserve system. It was therefore
authorized by the Federal Reserve Board to act as a representative of a
federal reserve bank, thus becoming the oriental outpost of the Federal
Reserve System. It is to be noted that the Philippine National Bank
q
was the first foreign correspondent of the Federal Reserve System.7
The Bank had a substantial growth and development during the first
five years of its existence. After that, it became involved with oil,
hemp and sugar companies during the boom period of World War I and post
war epochs. When business depression set in, much of its credit was
frozen and severe losses were sustained.
Sec. 7 of Act 3610, amending Sec. 126 of Act 1459, provides
that reserve deficiencies shall be penalized at the rate of one per
centum per month upon the amount of the deficiencies and for the
periods of their duration. In case the reserve is continuously defi
cient for a period of thirty days, the business of the Bank may be
wound up by the Bank Commissioner.
^Parker H. Willis, "The Philippine National Bank", Journal of
Political Economy. Volume 25, No. 5, 1917, p. 425.
43
Act No. 3174 known as the "Rehabilitation Act" of the Philippine
National Bank strengthened the financial position of the bank. The
capital of the Bank was fixed at 10,000,000 pesos and provision was
made for the purchase of the shares held by private concerns and by
private individuals."^
A. Post-War Foreign Trade Activity.
11
On July 23, 1945> the Philippine National Bank was reopened.
The Philippine National Bank financed almost all of the Philippine
imports amounting to fifty seven million pesos through letters of
credit and bills purchased in the amount of forty three million pesos.
Out of the one million three hundred pesos exports, the Philippine
National Bank financed 1,006,000 pesos. In 1946, the Philippine National
Bank financed 33 per cent of the 591,000,000 pesos imports. Of the
exports amounting to 128,000,000 pesos, the Bank financed only 296,000
pesos. The reason for this is because in that year, the United States
Commercial Company monopolized the purchase of our export products and
the financing of this exportation was undertaken by the United States
Government itself. In 1947, the Bank financed 139,000,000 pesos or 13
per cent of the imports amounting to 1,022,000,000 and financed
^Miguel Cuaderno, "Our Real Economic Problem", Philippine
Finance Review. Volume 2, September 1929, p. 12.
11
The Philippine National Bank was taken over by the Japanese
during their occupation in 1942.
44
4-2,000,000 pesos of the exports of 531,000,000 pesos. In 1948, up to
November 30th, the bank financed 160,000,000 pesos of the total imports
of 367,000,000 and financed 126,000,000 pesos of the 567,000,000 pesos
of our exports. From the above figures, it can be seen that the Philip
pine National Bank plays a big role in the rehabilitation of our foreign
trade.^
In foreign exchange, the Philippine National Bank occupies a top
position among local and foreign banks. From the first World War up to
the present, the Philippine National Bank has dictated the ruling rate
for exchange operations. This is made possible by its ability to accu
mulate large deposits in the United States banks. It is therefore able
to offer fair rates of foreign exchange.
^Manila Times Midweek Review, December 29, 194-8, p. 5-
CHAPTER IX
BANKING LAWS AND AMENDMENTS
Four Bank Bills. ' * ' To improve the banking laws of the Islands,
the Philippine Legislature passed four bills in 1929.
Under Bill No. 1422, a separate Bureau of Banking having more
complete and better adapted powers than were given in the laws to
supervise all banking institutions within the Islands, were established.
\
At the same time, Bill No. 1418 established regulations concerning
foreign banks to insure depositors similar protection to that already
afforded to depositors in domestic banks. ' Bill No. 1427, as well as
Bill No. 141S, provided for the extension of loans to customers by both
foreign and domestic banks upon the security of staple commodities.
Bill No. 14-17 provided a long-needed extension of the powers of domes-
s
tic banks by permitting such banks to establish branches and agencies
abroad.
A. Bill No. 1422.
This law created a Bureau of Banking and the Office of the Bank
Commissioner. The Bank Commissioner was charged with the supervision
and inspection of banks and banking institutions. All employees of
the bank commission were prohibited from holding office or being a
■^Henry Stimson, "Why I Signed the Four Bank Bills”, Philippine
Finance Review. March 1929, Volume 2, No. 3.
. 4 6
stockholder of any bank subject to inspection by the commission and were
prohibited from "receiving any loan, gift, advance or thing of value from
any such banking institution or from any officer, director or employee
thereof.1 ' Quarterly reports on forms furnished by the Commission were
required from building and loan associations. It was the duty of the
Bank Commissioner to examine the books of banks at least once a year.
The Bank Commissioner was empowered to take charge of the assets of any
bank in case of insolvency.
B. Bill No. 1A18:.
This Act aimed to regulate the operation of foreign banking cor
porations doing business in the Philippines. It provided that no foreign
banking corporation be permitted to do business in the Philippiness
unless it had an amount of assets equal to 90 per cent of deposits pay
able in the Philippines. There was also a provision to permit temporary
investment abroad of idle funds, subject to the approval of the bank
examiners. These restrictions were imposed upon foreign banking corpo
rations to protect the depositors against loss. The amount which such
banks may loan to any single borrower was limited to 5 per cent of its
average deposits during the preceding year, plus 15 per cent of the net
amount owed by such bank to its home office. No restriction was placed
upon the amount which these branches of foreign offices may lend for
the account of their home office.
With regard to domestic banks, there was no provision requiring
the retention of as large a proportion of assets within the Philippines.
However, no domestic bank could begin business unless it had the amount
of paid-up capital prescribed by law. Furthermore, the restriction
upon the loaning powers of banks instead of being based upon the amount
of its average deposits and the new amount due by it to its home office,
was based upon its unimpaired capital and surplus, and was 15 per cent
thereof.
This bill also gave residents and citizens of the Philippines
who were creditors of a foreign bank, first lien upon the assets of the
bank in case of insolvency. The purpose of this provision was to pro
tect local creditors and to extend such preference to foreigners who
were not residents here would defeat the purpose of the restriction by
permitting all of the creditors of the home office to share the Philip
pine assets with local creditors.
The question of constitutionality was raised against this measure
in two respects: first, it violated the section of the Jones Act which
provides that no law shall be enacted which denies to any person in the
Islands the equal protection of the laws because it applies different
standards of regulation to foreign banks from the standards applied to
domestic banks. Second, residents and citizens of the Philippines who
were creditors of foreign banking corporations doing business in the
Islands were given preferential rights in case of liquidation of the
assets within the Islands.
4-8
Foreign banks claimed that they were denied the equal protection
of the law by the provisions requiring them to keep assets equal to 90
per cent of deposits and that their loan be a percentage of their average
deposits, neither of which requirements applied to domestic banks.
Governor General Henry Stimson defended the four bills by showing
the distinctions between the present status in the Philippines of foreign
2
banking corporations and domestic banking corporations, as follows:
(a) The affairs and books of a domestic banking corporation
are at all times open to the examination of the Bank Commissioner,
thus insuring a great measure of safety to depositors whereas
only the books and affairs of the local branch of a foreign
corporation are so open to inspection. It would be quite pos
sible for the branch of a foreign banking corporation in Manila
to be in excellent financial condition while the home office
might be on the verge of insolvency which would necessarily
involve the Manila branch, causing loss to the Philippine
depositors.
(b) There is no requirement that a foreign banking corpora
tion must assign capital to its business in the Philippines,
whereas a locally incorporated bank must, as a matter of law,
start with a certain amount of paid-up capital.
(c) In case of the insolvency of a foreign banking corpora
tion, its affairs would be administered and wound up in the
jurisdiction where its home office is located. This might be
a source of very real hardships to the Philippine depositors
since they would be put to the necessity of proving their
claims abroad and going or sending abroad to realize such
claims. The administration might be under laws which would
be prejudicial to or discriminatory against Philippine depo
sitors and the only protection the Philippine Court could
^ Henry Stimson, , r Why I Signed the Four Bank Bills”, Philippine
Finance Reviews. March 1929, Volume 2, p. 7.
49
afford to local creditors would be the possibility of keeping
here such assets as the branch might happen to have at the
time of insolvency until it was clear that justice was going
to be done by the foreign court to the Philippine creditor.
These three differences afford a reasonable basis for the
differences in requirements which this bill proposes to impose
on foreign corporations from those imposed by the corporation
law upon domestic banks. It is fair that a banking corpora
tion which need have no paid-up capital, whose financial status
cannot be ascertained by local examination, and the administra
tion of which, in case of insolvency will be carried on thousands
of miles from the Islands, should afford to local creditors at
least the measure of security provided in this bill.^
The second constitutional objection was that it was unconstitutional
to give preferential rights to local creditors of incorporated foreign
banks. In answer to this objection, Governor Stimson declared that it
was not unconstitutional. He cited the case of Blake vs. McClung, 172
U.S. 239/"where the Supreme Court decided that a statute of Tennessee,
the provisions of which are similar to this Act, giving a senior lien
to domestic creditors, did not violate the law clause of the Constitu
tion or the due process clause, the substance of both of which were
enacted in the Jones Law. There was ”no provision in the Organic Act
governing the Philippine Islands like Sec. 2 of Article 4 of the
United States Constitution, providing that the citizens of each state
%enry Stimson, "Why I Signed the Four Bank Bills”, Philippine
Finance Review. Volume 2, Ho. 2, p. 30.
^Ibid.. p. 30.
50
should be entitled to all the privileges and immunities of the citizens
of the several states, so that cases holding that such preferential
status are invalid under that section of the Constitution are not
applicable to this bill.®
G. Bill Mo. 14-17.
This bill permitted the establishment of branches and agencies
abroad of banks incorporated in the Philippines. The establishment of
such foreign branches or agencies called for the approval of the bank
examiner, and was subject to inspection by the bank examiner. Such
examination could be done by a reputed firm of public accountants at
the place where the said agency was located, reporting their findings
to the bank examiner who may compel the home office to liquidate the
business of any foreign branch if the business was being conducted
unlawfully or in a manner likely to prejudice the interests of local
creditors.
D. Bill Ho. 14.27.
This let increased the amount by which a borrower can legally
become indebted to a banking corporation in the Islands, specifying
security in the form of staple commodities. It also provided that the
total liabilities to a banking corporation of any person or company,
corporation or firm should not, at any time, exceed 1555 of the unimpaired
capital and surplus of the bank. The total liabilities of a borrower
may amount to a further 15 per cent of the capital and surplus provided
that such liabilities are secured properly.
CHAPTER X
AMENDMENTS TO THE BANKING LAWS PRIOR
TO THE PASSAGE OF ACT 337
To ward off the danger of excessive concentration of bank credits
in a single industry, or in a few industries, and to insure as much as
possible the proper distribution of credit facilities, Act No. 1459, as
amended, imposed restrictions on the loans and investments of commercial
banks.
A. Capital and Surplus.
1
Section 118 of the Corporation Law, or Act No. 1459 as amended,
fixed the minimum capital for a bank located in a city or municipality
with a specified population. Prior to the passage of Act 337, the mini
mum unimpaired capital stock and surplus of such a corporation may not
hereafter fall below one tenth of its total deposits and liabilities.
Act 337 increased this find to 1$ per cent of risk assets. Except when
approved by the bank commissioner, no such corporation may carry on
deposit with another person, firm, corporation or entity an amount in
excess of 25% of its unimpaired capital and surplus after deducting the
sum due by it to such person, firm, corporation or entity.
■^Arturo Tolentino, "Commentaries and Jurisprudence on the
Commercial Laws of the Philippines", Volume II, 194-7, pp. 920-927.
52
Section 118 of the Corporation Law reads as follows:
No commercial banking corporation incorporated under the
laws of the Philippines shall be permitted to commence opera
tions unless its article of incorporation show under oath of
the incorporators that the paid-in capital stock of such
corporation is not less than 500,000 pesos, if located in a
city or municipality the total number of inhabitants of which
amount to 200,000 persons or more. In the case of a commer
cial banking corporation located in cities or municipalities
with more than 50,000 persons and less than 200,000 persons,
the minimum requirement as regards paid-in capital stock
shall be 50,000 pesos.
If the total deposits of such a commercial banking corpo
ration amounts to more than ten times the unimpaired capital
and surplus, additional capital shall be paid in so that as
nearly as possible, the bank shall have at least one peso of
unimpaired capital and surplus for each ten pesos of deposits.
Except with the approval of the Bank Commissioner, no such
commercial banking corporation may carry on deposit with ano
ther person, firm, corporation or entity an amount in exeess
of 25 per centum of the unimpaired capital and surplus of
such commercial banking corporation after deducting the sum
due by it to such person, firm, corporation or entity.
Section 118 (as amended by Act No. 3610, Section 7), makes 50,000
pesos the minimum capital for banks in localities with a population of
fifty thousand and less than two hundred thousand persons.
B. General Powers.
The banking law, as amended, permitted banks, in addition to the
general powers incident to a corporation, to have all such incidental
powers as shall be necessary to carry on the business of banking by
discounting and negotiating promissory notes, drafts, bills of exchange,
and other evidences of debt; by receiving deposits, by buying and selling
53
exchange, coin, and bullionj and by loaning money against personal security
or against securities consisting of personal property of first mortgages
on improved real estate and insured thereon. There was a limit on the time
within which real estate acquired-may be held legally by the bank. Banks
were required to dispose of real estate within five years after its acqui
sition in order to prevent the accumulation of masses of real estate in a
baak*s hands for such an accumulation would divert funds from legitimate
channels of bank investments.
Prior to the passage of Act 3610, banks were not allowed to make
loans upon the security of real estate. This prohibition was inconsistent
with the nature of our fundamental industries, as the Philippines is an
agricultural country in which real estate is the most important form of
wealth. Farmers were thereby barred from securing loans.
Section 117 as amended allowed banks to make loans secured by real
estate mortgages. This section permited commercial banking corporations
t
to make loans upon the security of real estate up to a value not to exceed
sixty per centum ofthe appraised value of such real estate and insured
improvements thereon. Prior to the passage of Act 337, no real estate
loan was to have a maturity in excess of five years, nor was any commer
cial banking corporation to hold in the aggregate more of such loans
than an amount equal to twenty-five percentum of the unimpaired capital
and surplus of such corporation, or one-half of total savings deposits
of such corporation, at its option. Act 337 amended this section and
allowed banks to lend in an amount not to exceed seventy per cent of
5 4 -
the total savings deposits of the bank. Act 337 also extended the maximum
maturity of such loans from five years to fifteen years.
C. Limitation on Bank Loans to Any one Borrower.
Section 119 as amended and Section 2 of Act 3520 placed a restric
tion on the loan and discount operations of commercial banks. Section
119 of Act 3610 placed a limitation of fifteen per centum of the unimpaired
capital stoek and surplus of such bank on the total liabilities to a com
mercial banking corporation, of any person, company, corporation or firm,
for money borrowed. The provision of Section 119 are now applicable to
the Philippine National Bank and the Bank of the Philippines.
Section 119 reads as follows:
The total liabilities to a commercial banking corporation
of any person, or of any company, corporation or firm, for
money borrowed, including in the liabilities of the company
or firm the liabilities of the several members thereof, shall
at no time, exceed fifteen per centum of the unimpaired capital
and surplus of such bank. But the discount of bills of exchange
drawn in good faith against actually existing value and the
discount of commercial or business paper actually owned by the
person negotiating the same shall not be considered as money
borrowed, and in addition to the 15 per centum of the unimpaired
capital and surplus of such banking corporation herein above
provided for, the total liabilities of any borrower may amount
to a further 15 per centum of the unimpaired capital and sur
plus of such banking corporation provided such additional
liabilities are secured by shipping documents, warehouse
receipts or similar documents, transferring or securing title
covering readily marketable non-perishable staples when such
staples are fully covered by insurance, and when such staples
have a market value equal to at least 125 per cent of such
additional liabilities.
No commercial banking corporation shall hereafter make
any loan upon the stock of any corporation as collateral if
the aggregate market value of all such stock held as collattral
55
exceeds an amount equal to 15 per centum of the unimpaired
capital stock and surplus of such commercial banking
corporation.
The provision of this section shall apply to the Phi
lippine National Bank and to the Bank of the Philippine
Islands irrespective of anything to the contrary contained
in their respective characters; provided they agree to
accept the foregoing provisions of sections 125, 126 and
133 of this Act as amended.
The aggregate liabilities to a bank by a borrower could not exceed
15 per cent of the unimpaired capital and surplus of such bank. In addi
tion to the 15 per cent, a borrower could also receive further loans
amounting to another 15 per cent of the bank’s unimpaired capital and
surplus provided these loans were secured by documents covering market
able non-perishable staples at least equal to 125 per cent of such
additional liabilities. This tended to prevent the concentration of
risks by large loans to any one interest and induced the diversification
of risks that the failure of any one borrower would not seriously endan
ger the financial position of the bank. The law also placed a limitation
upon the amount of stocks of any one corporation which could be accepted
as collaterals, thereby curbing any tendency to accept as collaterals a
large amount of stock of any one corporation.
Prior to the passage of Act 3520, there were no limitations regard
ing the amount which a foreign bank could lend to a single borrower as
the limitation was based on the unimpaired capital and surplus. Inasmuch
as foreign banks had no fixed capital in the Philippines, there was nothing
on which to base the 15 per cent limitation. Act 3520 however provided
that the liabilities of any one borrower shall not exceed 5 per cent of
the average deposits payable within the Philippines plus 15% of the amount
56
due by such branch to the home office. An additional 5 per cent of the
said deposits and 15 per cent of the amount due to the home office may
be loaned provided that they were secured by commercial papers and
similar documents.
D. Speculative Loans.
The restrictions, provided for by Section 119 of the Corporation
Law and Section 2 of Act 3520 did not apply to the "discount of bills
of exchange drawn in good faith against actually existing values and
discount of commercial or business paper actually owned by the person
negotiating them. The objective here was to exclude such speculative
papers which do not arise from legitimate business transactions. It will
be noted that in both cases, banks were permitted to make loans on mar
ketable non-perishable staple products thereby liberalizing the lending
power of the banks.
Section of Act 3520 reads as follows:
The total liabilities to a branch of a foreign banking
corporation doing business in the Philippine Islands of any
person, or of any company, corporation or firm for money bor
rowed, including in the liabilities of the company or firm in
the liabilities of the several members thereof, shall not
exceed an amount to be determined as follows: 5 per cent of
its average deposits payable within the Philippine Islands
during the preceding calendar year, plus 15 per cent of the
amount due by such branches to the home office and branches
outside the Philippine Islands after deducting from such
amount sums due such branch from the home office and outside
branches. Provided, however, that additional liabilities may
be incurred by a borrower up to 5 per cent of the said average
deposits and 15 per cent of the said amounts due to the home
office and branches outside the Philippine Islands, provided
57
such additional liabilities are secured by shipping documents,
■warehouse receipts or other similar documents, transferring or
securing title covering readily marketable, non-perishable
staples, when such staples have a market value equal to at
least 125 per cent of such additional liabilities. The dis
counts of bills of exchange drawn in good faith against actual
existing values and the discount of commercial and business
paper actually owned by the person negotiating the same shall
not be considered as money borrowed within the meaning of this
section.
Nothing in this Act shall be considered as restricting in
any manner loans made by a branch of a foreign banking corpora
tion operating within the Philippines for accounts of its home
office or branches outside of the Islands.
During the first year of the existence of a branch of a
foreign banking corporation commencing business in the Phi
lippines after the date when this Act shall take effect, the
Bank Commissioner, with the approval of the Secretary of
Finance, shall determine the maximum amount which may be
borrowed or loaned to any one borrower.
E. Loans and Discounts.
Banks are not allowed to make any loan or discount on the security
of the shares of its own capital stock. This provision is found in all
banking laws of the United States.
Section 120 of the Corporation Law reads thus:
No commercial banking corporation organized under this
Act shall make any loan or discount on the security of the
shares of its own capital stock nor be the purchase or holder
of any such shares, unless such security or purchaser shall
be necessary to prevent loss upon a:'debt previously contracted
in good faith, and stock so purchased or acquired shall, with
in six months from the time of its purchase, be sold or dis
posed off at public or private sale, or in default thereof, a
receiver may be appointed to close up the business of the bank
in accordance with the law.
58
A Bank has no lien on its own shares. Section 35 of the United
States National Banking Act of 1864 contains a similar provision, and
it has been held in various decisions of the United States Supreme
Court that a bank organized under that Act can have no lien on its own
shares for the indebtedness of the shareholders, even when the by-^aws
provide that the shares shall be transferable only on the books of the
corporation and that no such transfer shall be made if the holder of
the shares is indebted to the corporation (First National Bank vs.
Stewart, 107 U.S. 676).2
F. Loans to Directors and Officials.
One of the major causes of the failure of the Mercantile Bank of
China was due to the abuse of privileges by the directors of said bank.
They used the deposits in financing their own private business needs,
thereby resulting in the failure of said bank to make loans to legitimate
borrowers. This tended to narrow the margin of safety.
Section 123 sought to check such abuses which were prevailing
then. It reads:
No such commercial banking corporation shall loan money
to any director or officer thereof, unless such shall pre
viously have been approved in writing by a majority of the
^Arturo Tolentino, "Commentaries and Jurisprudence on the Commercial
Laws of the Philippines", Volume II, 1947, p. 923.
59
directors thereof, excluding the borrowing director, and such
approval shall have been entered upon the records of the bank.
G. Reserve Requirement.
Under the law previous to the amendment, demand deposits and
deposits maturing within thirty days were required to have a reserve of
20 per cent but there was no legal provision with respect to savings
deposits. The amendment to this section reduced the reserve for demand
deposits to IS per cent of the aggregate amount of current demand
deposits but provided for a reserve of 5 per cent against savings
deposits. This reserve may be in the form of lawful money of the Phi
lippines or of the United States, or in bonds issued or guaranteed by
the Philippine Government or the United States and must be kept either in
the vaults of the bank or with the Insular Treasurer, or with any fiscal
agent of the Philippine Government abroad. Unlike provisions regarding
reserves in the United States and other foreign countries, Philippine
commercial banking laws did not require local banks to deposit their
reserves with other banks or with the Treasury unless they wished to do
so.
Section 125 reads as follows:
Every such commercial banking corporation shall at all
times have on hand in lawful money of the Philippines or
of the United States an amount equal to at least 18 per
centum of the aggregate amount of its deposits in current
accounts which are payable on demand and of its fixed
deposits coming due within thirty days. Such commercial
banking corporation shall also at all times maintain reserve
equal in amount to at least 5 per centum of its total savings
deposits. Said reserve may be maintained in the form of law
ful money of the Philippines or of the United States, or in
bonds issued and guaranteed by the Government of the Philip
pines or of the United States. Such bonds may be kept on hand
in the vault of the bank or may be kept on deposit with the
Insular Treasurer or with any fiscal agent of the Philippine
Government abroad. The depositing bank shall have the right
to collect the interest accruing on such securities and to
substitute from time to time other securities issued and gua
ranteed by the Government of the Philippines or of the United
States for those already on deposit. But any such commercial
banking corporation in the Philippines, which shall have given
the security required by Section 625 of Act No. 2711, as
amended, and been designated a government depository as in
said section provided, shall not in addition to such security
be required to hold a reserve of IS per centum and 5 per centum
of the amount of such government deposits as may be made
therein, the provisions of any other law or the by-laws of
the commercial banking corporation to the contrary notwith
standing. The tern "lawful money of the Philippines" shall
include treasury certificates legally issued under the author
ity of the Government of the Philippines, and the term "lawful
money of the United States" shall include gold and silver cer
tificates of the United States and bank notes issued under the
authority of the law of the United States. Provided, however,
that in the case of a bank having branches as provided in section
128 of this Act, as amended, the provisions, regarding reserve
shall be deemed to be complied with if the principal bank and
its branches in the Philippines in the aggregate have on hand
the required amount of reserve.
The percentage of reserve to deposits in the case of the
Philippine National Bank and the Bank of the Philippine Islands
is hereby fixed at 18 per centum of demand deposits and 5 per
centum of savings deposits and fixed deposits, payable within
thirty days and 5 percentum of savings deposits, in the same
manner as prescribed in this section for commercial banking
corporations in general, which reserve against saving deposit
may consist of Philippine Government or United States Govern
ment bonds. (As amended by Act No. 2003, Section 1, and Act
No. 3610, Section 7.)
Section 126, as amended, provided for a penalty of one percentum
month for reserve deficiencies, which would be assessed against the
61
deficiencies as reported on the weekly reserved statements made to the
bank commissioner.
Section 126 now reads as follows:
Whenever the reserve as defined in the last preceding
section of any commercial banking corporation shall be below
the amount required in that section, such commercial banking
shall not diminish the amount of such reserve by making any
new loans or discounts, or declare any dividend out of its
profits until the required proportion between the aggregate
amount of its deposits to its reserve has been restored.
Reserve deficiencies shall be penalyzed at the rate of 1 per
centum per month upon the amount of the deficiencies and for
the periods of their duration in accordance with a regulation
to be issued by the Bank Commissioner. ... In the case
of any commercial banking corporation whose reserve is con
tinuously deficient for a period of thirty days, the business
of such corporation may be wound up by the Bank Commissioner
in accordance with section 1639 of Act No. 2711, as amended,
known as the Administrative Code.
Commercial banks are required to carry ten percent of their net
profit to surplus until the same shall amount to 20 per cent of their
authorized capital stock. This surplus is regarded as a guaranty fund
for the protection of depositors.
CHAPTER XI
NON-COMMERCIAL BANKING
A. Rehabilitation Finance Corporation.
The large -unfilled need of the Philippines is for loans for
agricultural and industrial development and for housing. To meet this
demand for credits, the Rehabilitation Finance Corporation was organized
in October 194-6 ”to provide credit facilities for the rehabilitation of
agriculture, commerce and industry, the reconstruction of property
damaged by war, and the broadening and diversification of the national
economy.8
The capital is three hundred million pesos of which fifty mil
lion pesos have been paid in from the Treasury Certificate Fund. The
Surplus Property Commission has released an additional ten million pesos
for an additional capital subscription. Also, the Rehabilitation Finance
Corporation has custodianship of about forty million pesos in government
trust funds. Inasmuch as it is the only source of mortgage money at
reasonable rates, the Rehabilitation Finance Corporation has concen
trated most of its energies to handling agricultural and residential
loans.
In order to develop Philippine industry and agriculture, it may
require the investment of about two billion pesos over the next five
years.
63
B. Agricultural Credit.
Being essentially an agricultural country, it is important that
the farmers have access to the credit the same as that obtained by big
business. Earners had no direct access to banks because their credit
needs were not bankable risks. For several centuries, fanners had been
at the mercy of money lenders. They were seriously handicapped by the
low income, lack of Torrens title to their lands and lack of tangible
assets. They were thus forced to borrow from money lenders at usurious
rates of interest, which tended to force the farmers deeper and deeper
into debt.
If the farmers are to be encouraged, they not only should be
enabled to get the most out of the areas they cultivate, but also to
obtain fairly good returns for their products. The farmers need money
to settle their debts immediately after harvest, and a farmer does not
always have the opportunity to wait for better prices for his crop which
generally comes from four to five months after harvest. Farmers generally
lack funds. Naturally, the middlemen, who, in many instances, operate
also as money lenders, take advantage of this plight of the farmers and
become buyers of crops at their own price.
Steps taken for agricultural development. Since the country was
seriously handicapped by the lack of credit facilities accessible to
farmers on reasonable terms, the Congress of the United States passed an
64
Act on March 4, 1907, authorizing the Philippine Government to establish
an agricultural bank. To encourage the investment of private capital,
the government guaranteed an income of 4 per cent per annum for a period
not to exceed twenty five years to individuals or corporations who might
be investing capital in the bank. There appearing no prospect of the
establishment of an agricultural bank on the part of private capitalists,
the government established the First Agricultural Bank of the Philippine
Government"^ with an initial capital of one million pesos. However, it
was unable to meet all the demands for loans due to lack of sufficient
loanable funds.
With the passage of Act Ho. 2612, it automatically went out of
existence and its assets and liabilities were transferred to the Philip
pine National Bank.
In 1931, the Philippine Legislature passed two Acts, 3895 and
3896, the former providing for the organization under the supervision
of the Philippine National Bank as a matter of experiment, ten agricul
tural credit associations throughout the Philippines. The latter
authorized the organization of small rural banks, the capital to be put
up by private people but the supervision to be under the Philippine
National Bank. The Philippine National Bank about the same time, feel
ing that these two efforts would not succeed, established provincial
~ * ~The Philippine Finance Review. September 1929, p. 12.
65
agencies, appointing provincial treasurers as agents of the Philippine
National Bank, to grant small loans both to farmers and small merchants
in different municipalities included in the plan. In 1935, the Common
wealth Legislature, in answer to the need for more adequate credit faci
lities for farmers created the Agricultural and Industrial Bank. Upon
the creation of the Bank, the capital being put up by the Government,
the Philippine National Bank stopped giving long term agricultural loans
but continued giving short term credit in the form of crop loans. Long
term credit was given by the Agricultural and Industrial Bank from 1933
to 1946. Under Act 85 creating the Rehabilitation Finance Corporation
in October 194-6, the Congress of the Republic by Section 9 of that Act,
transferred all the assets and liabilities of the Agricultural and
Industrial Bank to the Rehabilitation Finance Corporation.
o
Crop Loans. There are two kinds of agricultural credit: short
term and long-term. Crop loans, which are the usual form of short term
agricultural credit, finance the production of crops. Usually, they do
not run for a period longer than is required to produce and market the
crop against which they are made.
A crop loan is made upon such basis as will assure its being
liquidated out of the particular crop in the absence of some extraordi
nary circumstances. It is advanced only for the purpose of defraying
2
"Farm Credits in the Philippines", The Philippine Finance Review.
Volume III, No. 4 - , May 1930.
66
the necessary expenses in the production of the crop. Loans for purely
consumption purposes are excluded in the advance.
Farm Mortgage. Long-term, agricultural credit usually takes the
form of loans made upon the security of mortgages covering farm land.
Generally, the loan does not exceed 50 per cent of the reasonable market
value of the land, but in the Philippines, where land is abundant and
where the market for land is narrow, more weight is given to the produc
tive capacity of the borrower which measures his ability to meet the
payment of principal and interest when they come due. Long term agri
cultural credit is granted primarily for the purpose of improving the
borrower's land and increasing his ability to produce.
Agricultural Credit Cooperative Associations. In 1916, the Phi
lippine Legislature passed Act 2508, now the Rural Credit Law. This law
authorized the establishment of one agricultural cooperative association
in each municipality throughout the country.^ By 1939, there were 571 of
such associations in forty-three provinces, with a total capital of more
than four million pesos, all of which were loaned out to about one-third
of their total memberships.^
On March A; 1917, the Philippine Legislature passed Act 2818
appropriating one million pesos to be made available to agricultural
5
credit cooperative associations. This Rice and Com Fund was loaned
^Commerce Administration Order No. 15, Bureau of Commerce,
Manila, 1939.
^The Philippine Social Science Review, Volume XII, No. 2, p. 1A3.
^Philippine Finance Review, Volume II, No. 8, September 1929, p.10.
67
to the agricultural credit associations at 6 per cent and in turn, loans
were made to the members of the association at the rate of 10 per cent.
In this way, the Association gained 4 per cent on the loans.
Loans were guaranteed by such property as lands, crops, etc., or
by personal guarantees in which later case, two solvent persons answer
for each loan* The term of the loans from the Rice and Cora Fund was one
year which may be extended for another year if it could be shown that it
was impossible to repay the loan because of certain circumstances beyond
control.
However, most of these original cooperatives failed. Their failure
was due to mismanagement, lack of proper understanding of the aims and
purposes of agricultural credit associations, improper use of credit
advanced to borrowers, defective securities and inadequate supervision.
Cooperatives, however, were steadily growing. The movement gained momen
tum when the Cooperative Law was enacted in 1940. Today, there are 1,269
cooperative associations in the Philippines with a total membership of
299,983.6
C. Building and Loan Associations.
A building and loan association is defined as a corporation whose
capital stock is required or is permitted to be paid in by the stockholders
Philippine Commerce, Volume 44, No. 6, June 1948, p. 35.
"^Republic Act No. 337, Chapter VI, Section 39.
68
in regular, equal periodical payments and whose purpose is to accumulate
the savings of its stockholders, to repay to said stockholders their
accumulated savings and profits upon surrender of their shares, to encour
age industry, frugality and home building among its stockholders, and to
loan its funds and funds borrowed for the purpose, to stockholders on the
security of unencumbered real estate and with the pledge of shares of the
capital stock owned by such stockholders as collateral security.
Most of the building and loan associations operate in Manila.
The principal ones are the El Hogar Filipino, La Urbana, Manila Building
and Loan Association, La Provisora Filipina and El Ahorro Insular. The
provincial organizations are the Gebu Mutual Building and Loan Associa
tion (in Cebu Province) and La Proteccion, Inc.,(in Albay Province).
Building and loan associations are prohibited from making loans
upon property that is suitable for use only as a theater, public hall,
church, convent, school, club, hotel, garage, or other public buildings.
Associations having a capital of one hundred thousand pesos or more can
not lend to any one member an amount in excess of 10 per cent of the
total assets of the associations, nor can it lend more than 10 per cent
of the total assets of the association upon any real estate. In case
an association has assets of less than one hundred thousand pesos, it
cannot lend to any one borrower or upon any real estate an amount exceed
ing ten thousand pesos. The capital stock is divided into shares with
a par value of two hundred pesos each.
69
Certificates of stocks are issued upon the payment of a membership
fee not exceeding one peso on each share of stock issued and the first
installment of the dues. Shares not pledged as security for the payment
of a loan are called "free shares”, and shares which have been pledged,
are called ”pledged shares".
The capital stocks are paid in regular, equal periodic payments
known as dues. The dues on each share of stocks are to be paid until the
shares have been withdrawn, cancelled, or forfeited or until the share has
reached its matured value; that is, when the dues paid on each share and
the net earnings thereof equals the matured value of the share. When
the stock reaches its matured value, the holder of the matured share is
paid the matured value of the share with interest on it. If a share
pledged as security for a loan matures before the loan is repaid, the
mature value is credited to the loan. The withdrawal value of the pledged
share is not returned to the stockholders unless such value is applied in
the liquidation of the loan against which the share is pledged.
The association may borrow for temporary use but such indebtedness
is not to exceed 50 per cent of the paid-in capital stock.
Any loan made by an association must be secured by a first lien on
unencumbered real estate and by a pledge of stock of the association, the
mature value of which shall at least equal the amount loaned. In case
free shares are to be pledged for loans, the withdrawal value of such
free shares at the time the loan is made, must exceed the amount borrowed
and interest thereon for six months.
70
D. Trust Corporations*
A trust corporation is a corporation organized for the purpose of
acting as trustee or administering any trust or holding property in trust
or in deposit for the use, benefit, behalf of others.
A trust company may do a commercial banking business, but such busi
ness must be kept separate and distinct from its trust business. An
example of this kind of trust corporation is the Philippine Trust Company.
A commercial bank may also engage in the trust business, but it
shall be subject to the provisions governing trust companies as regards
its trust business.
In addition to the general, powers incident to a corporation, a
trust company has the following fiduciary powers:
(a) To act as trustee on any mortgage or bonds issued by any
municipality, corporation, or any body politic and to accept and execute
any other municipal or corporate trust not inconsistent with law.
(b) To act as guardian, receiver, trustee, or depositary of the
estate of a minor, insane person, idiot, habitual drunkard, or other
incompetent or irresponsible person.
(c) To act as executor of will or testament.
(d) To act as administrator of the estate of a deceased person
with the will annexed, or as administrator of the estate of any deceased
person when there is no will, and when in either case, there is no com
petent person entitled to accept such administration.
71
(e) To accept and execute any legal trust confided to it for the
administration of any estate and the rents, issues and profits from them.
(f) To act as fiscal agent for all kinds of corporation.
(g) To act as depository during reorganization.
00 To act as registrar of stocks and bonds.
(i) To act as transfer agent.
Aside from the fiduciary activities, a trust company may engage in
banking, maintain a title insurance, operate investment departments and
maintain safe deposit department.
d
E.r Savings and Mortgage Banks.
A saving and mortgage bank is defined as "any corporation organized
primarily for the purpose of accumulating the small savings of depositors
and investing them, together with its capital, in bonds or in loans secured
by bonds, real estate mortgages, and other form of security, as hereinafter
provided."
Savings banks receive deposits which are time deposits. Most of
its funds are invested in longer-term commitments, thereby, savings banks
are not required to keep as large a reserve as a commercial banks.
Savings banks are required to have a combined capital a ceount of
not less than 15 per cent of its total assets, after deducting cash on
Republic Act No. 377, Section 29.
72
hand, amount due from banks, and evidences of indebtedness of the
Republic of the Philippines and of the Central Bank.
Investment of Savings and Mortgage Banks. As a rule, savings
banks engage in long-term, investments and protect themselves by reserving
the right to require thirty to sixty days’ notice for the withdrawal of
9
deposits. Savings banks are allowed to make loans and investments on
10
the following.
(a) Loans with the security of their own savings deposit obliga
tions or of mortgage and chattel mortgage bonds which they have issued,
or with the security of savings deposit obligations of other banks doing
business in the Philippines.
(b) Medium-term loans of the following types:
(1) Loans for the encouragement of livestock breeding,
with maturities up to three years. The loan must be
secured by an amount not more than fifty percent of the
commercial value of the animals at the time the loan is
made, but additional loans up to 50 per cent may be made
as the value of the stock increase.
(2) Equipment loans, with maturities up to five years, for
the acquisition of equipment used in,the production and
handling of agricultural and industrial products.
^Roy Garis, "Principles.Of Money. Credit and Banking. (New York:
The MacMillan Company, 1934-), p. 937.
10Republic Aot No. 377, Section 31.
73
(c) Mortgage loans, with maturities up to ten years for the
improvement of productive properties or the acquisition of machinery
or other fixed installment*
(d) Real estate mortgage loans with maturities of not more than
twenty years, for the following purpose only:
(1) For the construction, expansion, and improvement of
rural and urban properties*
(2) For the refinancing of similar loans and mortgages, and
(3) For such other purposes as may be authorized by the
Monetary Board.
(e) High grade bonds*
(f) Commercial papers*
(g) ,Collateral trust bonds or notes;
(h) Loans secured by the pledge to the Corporations of gold
and silver bullion.
(i) Loans against the pledge of jewelry, precious stones and
articles of similar nature.
In the Philippines, there are only two types of savings bank.
They are the postal savings and the savings department of commercial
banks.
CHAPTER XII
DEFECTS OF THE PHILIPPINE BANKING SYSTEM
Prior to the passage of Act No. 265 establishing a central bank,
and Act No. 377, revising the banking laws, there were many defects in
the Philippine banking system. These still exist but are being remedied
by Act No. 265 and Act No. 377. The defects include the following:
A. Banking laws are liberal in the sense that branches of foreign
banks in the Philippines are permitted to receive deposits,while in the
United States, unless the banking laws of the several states permit branch-
banking, they are not allowed to receive deposits. Foreign banks receive
deposits from the people more than those received by the local banks. In
case the government wants to sell treasury bills, the foreign banks can
not be forced to buy these bills. When there is no safe outlet for these
deposits received by the foreign banks in the Philippines, a very large
portion of these deposits can be sent abroad where they can earn more so
that the country is not benefited. Insurance companies, like fire, pro
perty, marine and life insurance are benefited in that they receive
premiums from the insured. There are in the Philippines about ninety one
insurance companies and very few of these are owned by Filipinos. Since
there is no short term bond market, these insurance companies send these
premiums abroad and invest the money in their respective countries.
B. At present, a foreign bank can engage in business in the
Philippines merely on the bank statement of the home office without
75
assigning capital stock investments in the Philippines; whereas a private
local bank must have an authorized capital of two hundred thousand pesos,
half of which must be subscribed and half of the subscribed capital stock
must be paid.
C. Only the books and affairs of the local foreign banks are sub
ject to examination. Although foreign banks might be in a good financial
position, their home office might be on the verge of bankruptcy, which
would also involve the local branch. The affairs and books of the domes
tic banks are opened at all times for inspection.
As foreign banks are not required to maintain a definite amount of
capital in the Philippines, the depositors of such banks are deprived of
protection in case of bankruptcy, since the bank does not have the amount
of capital to absorb the losses.
Sections 103 and 118 of Act 3&10 provide that "if the total deposits
of such commercial banking corporation amount to more than ten times the
unimpaired capital and surplus, additional capital shall be paid in so
that as nearly as possible, the bank shall have one peso of unimpaired
capital and surplus for each ten pesos of deposits." There being no
fixed capital and surplus among locally incorporated branches of foreign
bank, - it is difficult to see how this part of the law can be effective.*-
*Miguel Cuademo, "Banking Problems", Philippine Forum. Volume
I, 1935, p. 54*
76
D. Foreign banks can avoid taxation whereas domestic banks can
not. Domestic banks are required to pay a tax on their capital stock,
surplus and deposits. Foreign banks avoid taxation as their capital
stock is under the control of the home office.
Local banks are made to bear a heavy tax burden. They have to pay
a tax of l/24th of 1 per cent per month on the amount of capital employed,
a tax of l/lSth of 1 per cent on the average deposit, and a tax of 1 per
cent per annum on circulation. In addition, they pay an income tax and
a real estate tax on properties owned. The taxon capital and deposits
alone represents a tax on the net income of the banks ranging from 11.73
2
per cent to 35*4- per cent per annum. Banks are required to maintain a
cash reserve of 18 per cent of their demand deposits, and banks, as a
rule, maintain more than that as a measure of safety. It can be readily
seen how burdensome is the l/l8th of 1 per cent tax on this idle deposit
to local domestic banks.
E. Domestic banks are not allowed to have overdrafts and interest
cannot be charged on them, but foreign banks can carry an unlimited amount
of overdrafts. If foreign banks are made to conduct their business in the
same manner as domestic banks, they would not be allowed to carry over
drafts and instead of overdrafts, this amount would be deposited in their
accounts. Under the present arrangement, they escape taxation on the
total amount of overdrafts.
2
Miguel Cuademo, Philippine Forum, Volume I, 193S, p. 54•
77
F. Local banks maintain a capital deposit ratio of 1:10 whereas
branches of the foreign banks do not maintain this ratio as they have
no capital assigned to its business here. This is a decided disadvantage
to local banks. In order to maintain this ratio, local banks have to
increase their capital ■when there is an increase in deposits.
G. The Philippines needs capital to meet the unfilled credit
needs of agriculture, industry and housing. One of the jobs of banks is
to encourage the growth of bank deposits, but -this growth is barred by
the requirement that unimpaired capital and surplus of a commercial bank
must be at all times equal to 10 per cent of its deposit liabilities,
regardless of its liquidity or the character of its assets. Domestic
banks are further limited by the law in making loans to any one borrower
equal to 15 per cent of their capital and surplus.^ Thus, they are handi
capped in financing Filipino enterprises. While foreign banks are subjected
to the same limitation, it is possible for them to make any loan in excess
of the limitation for the account of the home office.
Section 2 of Act 3520 states that the total amount contracted with
a branch of an incorporated foreign bank for money borrowed should not
exceed 5 per cent of its average deposits payable in the Philippines dur
ing the previous year plus 15 per cent of the net amount due by the branch
■ a
Act No. 3610, Section 119.
78
to its head office and other branches. The same section nevertheless
provides that nothing in the said Act 3520 shall be interpreted in the
sense of restricting in any manner the loans granted by the branch of
a foreign bank for the account of the home office. This last proviso
defeats the application of the limitation on the amount of loans that
can be granted by branches of foreign banks.
The banking system is inadequate to meet the credit needs of the
country.
The -war has caused heavy physical losses, destruction of homes,
and disruption of commerce, agriculture and industry. There is a great
need of credit for the reconstruction and rehabilitation of agriculture,
commerce and industry "which cannot be met by the banks as they are res
tricted in their loaning policies. There is a.lack of capital. For the
purpose of safety and liquidity, it is impossible for banks to grant
capital loans to any industrial ventures as such loans "will involve a
time for repayment covering a number of years.
A more liberal mortgage loaning policy was necessary. The law had
to be amended to enable banks and other financial institutions to make
more liberal mortgage loans. Commercial banks had been limited by law
to five-year maturities on mortgage loans, while savings banks had been
limited to ten-year maturities on loans periodically amortized, and to
five-year maturities on loans not amortized. Building and loan associa
tions had been limited to amortized loans up to ten years. The Rehabili
tation Finance Corporation was limited to amortized residential loans up
79
to ten years and agricultural loans up to thirty years. All these finan
cial institutions, except the building and loan associations had to limit
their loans to sixty per cent of the value of the collateral. Building
and loan associations could loan up to 70 per cent of the pledged security.^"
Rediscounting facilities must be established for mortgage loans
in order that consideration of liquidity and availability of funds would
no longer operate as factors limiting the granting of such credit needs.
The Joint-Philippine American Commission, which made an analysis
of post-war economic problems, recommended specifically that:
(a) Loans should be limited in amount to ten thousand pesos to
any one borrower. This limit will spread the risk.
(b) The rate of interest on these loans should not exceed six
per cent to provide adequate income to cover handling cost and some
return on money loaned.
(c) Residential loans should be directly related to building
standards fixed in advance by the Rehabilitation Finance Corporation in
cooperation with the National Housing Commission.
(d) The amounts of the loans should bear a definite relationship
to the borrower’s average income and its stability, and there should be
an adequate credit survey of applicants.
^Report of the Joint Philippine-American Finance Commission, p.60.
80
(e) Loans should be made on the basis of a specific credit
instrument designed to permit prompt foreclosure and to enable the
mortgage to take possession of the mortgaged property within a reason
ably short period after the borrower has given clear evidence that he
cannot or will not pay.
(f) Mortgage terms should be liberalized as to maturity and the
amount handled in relation to the value of the security.
The Philippines is an agricultural country and most of the demands
for agricultural credit comes from the provinces where there is limited
banking facilities. The provincial banking should be strengthened. At
present, provincial and municipal treasurers, who have little or no
banking experience, act as agents and sub-agents of the Philippines
National Bank- in the provinces. In order to develop additional business,
these branches must be adequately staffed with trained bank personnel.
The formation of building and loan associations, rural banks and rural
credit associations must be encouraged.^
Tenants and farmers do not have access to the same credit obtained
by big business. To make credit facilities accessible to farmers, small
loans to farmers must be based upon individual farm production plans
worked out jointly by the borrower and agricultural advisers, to be fol
lowed by supervision and advice to insure the proper utilization of the
£
credit extended and the adoption of suitable farming methods. These
principles, as administered by the Farm Security Administration in the
^Privately-owned rural banks and corporatively-owned rural credit
associations are institutions empowered to make agricultural loans.
^Manila Times, July 19, 194-7, p. 3*
81
United States, work out well in helping the farmers.
Under our banking law, banks are required to maintain a legal
reserve of 18 per cent for demand deposits and 5 per cent for savings
deposits. Banks, however, had been forced to keep a reserve in excess
of the legal requirement as there has been no bank of last resort they
could go to in case there was a danger of a run. The organization of
the Central Bank will enable banks to maintain only the legal reserve
required.
There is a lack of facilities for domestic borrowing. At present,
there is no active market for government securities. The national debt
is very small considered on a per capita basis or in relation to the
taxing capacity of the government. Domestic borrowing is a sound method
of raising governmental funds and is also effective in counteracting
inflation. The full development of a government bond market should be
one of the primary objections of the government, inasmuch as such a mar
ket is needed not only for the immediate purpose of raising funds for
necessary and productive expenditures, but also for the longer run objec
tives of establishing government credit, -thereby creating domestic finan
cial resources which can be drawn upon in any emergency. The existence
of a bond market will enable the government by expansion and contractions
of the debts, to alleviate the adverse effects of fluctuations, in the
7
business cycle.
^Manila. Times, July 19, 194-7, p. 2.
82
There is a lack of banking facilities within the reach of the masses.
With the exception of certain cities like Baguio, Cebu, Lucena, Legaspi,
Iloilo, Bacolod and Davao, the other places have no banking facilities to
speak of. It is true that the Philippine National Bank has constituted
agencies in which all provincial treasurers and municipal treasurers had
been designated agents and sub-agents respectively, but the services ren
dered by these men are far from satisfactory as they have no knowledge of
banking. As a result of these conditions, the small farmers and small
merchants in the provinces are not accorded adequate banking facilities.
It is to the interest of our country that banking facilities be established.
With banking facilities, the total banking deposits of the nation will be
greatly increased and with more deposits, more credit can be granted by
banks. Aside from this, small farmers and merchants will not have to
travel far and spend more just to borrow money.
The present monetary system is an unsuitable permanent system, for
the Philippines. The 100 per cent reserve requirement means that the
money supply changes automatically with changes in the balance of payments
and prevents any moderation of the inflationary or deflationary effects of
these changes. It requires that dollars be held even against the hard
core of circulating peso currency which, if there should be serious defla
tionary deficits in the balance of payments, would always be needed to
conduct domestic business. The permanent freezing of this portion is
83
unnecessary and uneconomical. The requirement also forces the Govern
ment to borrow additional dollars abroad to serve as cover for pesos
needed for legitimate rehabilitation purposes at a time when its dollar
reserves are substantially larger than necessary to maintain the free
convertibility of the pesos at two to one.
Manila Times, July 19, 194-7, pp. 2-3*
CHAPTER XIII
THE GENERAL BANKING ACT
On June 24., 1948 > the First Congress of the Philippine Congress
passed Republic Act No. 337 entitled "An Act Regulating Banks and Bank
ing Institutions and for other Purposes"} in short, "The General Banking
Act". This bill is designed to improve existing banking laws.
A. Establishment of Domestic Banks.
Before the article of incorporation of a bank is registered with
the Securities and Exchange Commission, the bank must first secure a
certificate of authority issued by the Monetary Board. Before the
Monetary Board gives its approval, the bank must show that the follow
ing conditions are satisfied;
(a) That all the requirements of existing banking laws and
regulations have been complied with}
(b) That public interest and economic conditions justify the
authorization}
(c) That the capital, the financing, organization, direction,
administration, and the integrity and responsibility of the bank offi
cials reasonably assure the safety of public interests.
No banks are allowed to issue no par value stock. At least 60 per
cent of the capital stock must be owned by Filipino citizens. At least two-
thirds of the members of the Board of Directors shall be Filipino citizens.
85
B. Licensing of Foreign Banks.
Foreign banks must first ..secure a license with the Security and
Exchange Commission in order to engage in the banking business in the
Philippines. Before foreign banks can get a license, they must first
satisfy the conditions required for domestic banks.
The Monetary Board has the right to revoke the license of any
foreign bank if the said Board finds that the foreign bank is in imminent
danger of insolvency or that its continuance in business will involve
probable loss to those transacting business with it.
In all matters not specifically covered by special provisions,
applicable only to foreign banks, any foreign bank doing business in the
Philippines shall be bound by the rules and regulations governing domes
tic banks except such regulations as provide for the creation, organiza
tion or dissolution of corporations or as fixed relation, liabilities,
responsibilities of members or affairs of corporations, to each other
or to the corporation.
Residents and citizens of the Philippines, who are creditors of
a foreign bank, are given preferential rights to the assets of such banks.
Branches and agencies of foreign lands. In order to provide effec
tive protections of the interests of depositors and other creditors of
Philippine branches of foreign banks, section 69 provides that the head
office of such branches must fully guarantee the prompt payment of all
liabilities of its Philippine branches. If the guarantee of the head
86
office is inadequate, the Monetary Board has the power to require the
head office to assign to its Philippine Branch an amount of capital suf
ficient to meet the minimum requirement. This provision tends to lessen
the advantage of a foreign bank over a domestic one, as now foreign banks
can be required to have a definite amount of capital.
C. Commercial Banking Corporations.
The new law provides that the majority of the stockholders of any
bank which may be established to be Filipino citizens. It also stipulates
that the majority of the Board of Directors of the said Bank must be
Filipinos.
Section 12 reads as follows:
At least sixty per cent (60$) of the capital stock of any
banking institution which may be established after the appro
val of this Act shall be owned by citizens of the Philippines.
Section 13 reads as follows:
At least 2/3 of the members of the Board of Directors of
any bank or banking institution which may be established
after the approval of this Act shall be citizens of the
Philippines.
Commercial banks, before the passage of this Act, have been limited
to five years1 terms on mortgage loans as the main emphasis has been on
liquidity. The Philippines is an agricultural country and in order to
handle agricultural and residential loans, the law was amended to enable
banks to make more liberal mortgage loans.
87
Section 20 stipulates:
Ho loan on the security of real estate shall have a maturity
in excess of fifteen years but the aggregate of such loans on
real estate security shall not exceed 10 per cent of the total
savings deposits of the bank.
With regard to the deposit liabilities of commercial banks, they
are subject to the reserve requirements prescribed by the Monetary Board.
Banking institutions are also provided under Section 73 and Sec
tion 74-> from engaging in the insurance business either as insurer or
insurer's agents, in order to avoid possible difficulties in connection
with such activities.
D. Branch Banking.
Commercial banks having a paid-up capital of one million pesos
are allowed to establish branches at any city or municipality in the
Philippines.
Section 128 reads as follows:
Any such commercial banking corporation having a paid-up
capital of not less than one million pesos may establish, .
with the prior approval of the Bank Commissioner, a branch
or' branches in any city or municipality in the Philippines,
and the corporation shall be responsible for all business
conducted in its branches to the same extent and in the
same manner as though such business had all been conducted
in the principal institution. In the case of the establish
ment of a branch or branches, the business shall be treated
as an entity.
This amendment is designed to encourage the establishment of branch
banks in the provinces where banking facilities are inadequate, to meet
the economic needs of the community. The present banking structure
88
produces an unbalanced economic development, more emphasis on the com
mercial and industrial side and less weight on the agricultural side.
E. Final Provisions.
The Act transfers to the Central Bank al-1 authority vested in
the Bank Commissioner and the Bureau of Barking with respect to the
establishment, operation or liquidation of banking and credit institu-
1
tions, and branches or agencies thereof.
The authority vested to the Secretary of Finance with respect to
the establishment, operation or liquidation of banking institution is
transferred to the Monetary Board.
2
Ibid. Section 89
PART III
THE PHILIPPINE CENTRA^ BAM
CHAPTER XIV
THE CENTRAL BANK
A. Steps Taken Leading to the Establishment of the Central Bank.
In January 194-7, the Joint Philippine American Commission, con
sisting of three Americans sent by the United States Government and three
Filipino officials, made a study of the financial and budgetary problems
of the Philippine Government and made recommendations thereon with refer
ence to taxes, budget, public debt, currency and banking reform, exchange
and trade problems, reconstruction and development. As a result of the
study, the Commission recommended the establishment of a managed monetary
system in which the monetary authority would rest in a central bank, thus
entailing the abandonment of the automatic 100 per cent reserve currency
system and allowing the central bank to regulate the money supply to meet
the needs of the economy. It proposed that the Central Bank be given the
authority to moderate the inflationary effects of a temporary surplus
or to reduce the deflationary effects of temporary deficits in the bal
ance of payments by either increasing or decreasing the reserve require
ments. It proposed that the Central Bank would facilitate the compiling
of comprehensive data on the inward and outward flow of funds and thereby
be in a position to control capital flights if the need should arise. It
pointed out that a central bank could help strengthen the credit of the
government and reduce the need for foreign borrowing by making the
90
establishment of a domestic market for short and long-term government
securities possible and that it could be the lender of last resort in
time of emergency. The Commission stated that a Central Bank could
make it possible for banks to make more loans for the rehabilitation of
agriculture, commerce and industry and to provide for the reconstruction
of buildings, factories and homes by economizing bank reserves and mak
ing it safer for banks to undertake longer-term financing.^*
The Manila Times pointed out that the introduction of a central
bank represents a fundamental change in the monetary system. It means a
shift from an almost completely automatic gold exchange standard system
to a modern managed currency system, which can to some degree, insulate
the domestic economy against temporary diseauilibria in the balance of
payments.2
The Commission agreed that the Gentral Bank should be governed by
3
the following principles:
(l) The primary responsibilities of the bank should be to promote
monetary exchange and credit conditions, to strive for a coordination of
local and monetary policy, to seek to maintain the stability and conver
tibility of the peso in conformity with all international agreements to
which the Philippine Government is a party, and to exercise general
supervision over the banking system;
Report and Recommendation of the Joint-Philippine American Finance
Commission, June 7, 1947, pp. 47-4&, Bureau of Printing, Manila, 1947.
^Manila Times, July 19, 1947, p. 3•
^Report and Recommendations of the Joint-Philippine American Finance
Commission, June 7, 1947.
91
(2) The bank should be a vhoily-owned Government corporation;
(3) The bank should be a "banker's bank" and deal with the
people and the public only through its open market operations;
( 4 -) All banks in the Philippines, foreign and domestic, should
be required to hold their legal reserve against deposits in the form of
deposits with the central bank;
(5) The Bank should become the sole issuing authority for all
notes and coins in circulation and that outstanding treasury certificates
and coins be replaced in circulation by central bank notes and coins;
(6) The bank should asume the liability for all Treasury Certi
ficates outstanding on the date of opening and that the Government
deposit with it foreign exchange and other assets equivalent to the
liability assumed.
(7) That the bank's power to make direct accommodations to the
Government should be strictly limited. Direct Government borrowing from
the bank should be on a short-term seasonal basis.
(8) That the bank reserves in international money should be
related to the demand for such money rather than to the volume of its
note and deposit liabilities. The bank should be required by law to
take measures to contract credit and prevent further losses of gold and
foreign exchange whenever its net balances of such assets should fall
below a certain percentage of its annual average requirements for them.
It was suggested that the net balance be determined by subtracting
from gross balances varying percentages of the foreign exchange obliga
tions of the bank, such percentages to vary inversely with the length
92
of the periods within which the obligations fall due. Because of the
existing unusually strong Philippine foreign exchange requirement, it
stated that the reserve should be set conservatively high so as to
maintain confidence beyond any reasonable doubt. The Commission believed
that a conservative ration would be 50 per cent;
(9) The banks should be given adequate powers to control credit
both quantitatively and qualitatively, by providing for discretionary
rediscounting of acceptable papers at selective rates, flexible reserve
requirements for the deposit liabilities of commercial banks, and power
to conduct open market - operations;
(10) The bank should act as fiscal agent of the Government;
(11) The bank should undertake to stabilize government credit by
promoting a broad market for government securities and preventing wide or
unwarranted fluctuations in their prices through market support, if
necessary; and
(12) The bank should have power to require that all transactions
of banks in gold and foreign exchange be reported to it or to impose con
trol on foreign exchange, if necessary.
The Commission emphasized the fact that certain safeguards and
danger signals can be provided such as the limitation on direct accommo
dation to the Government and the 50 per cent ratio of reserves to foreign
exchange requirements, but that the success of the bank will depend upon
the men to whom it is entrusted. As Hartley Withers had said "good
banking is produced not by good laws, but by good bankers.”
93
As a result of the report and recommendations of the Joint
Philippine-American Commission, the Congress of the Philippine Republic
passed Act No. 265 entitled "An Act establishing the central bank of the
Philippines, defining its powers in the administration of the monetary
and banking system, amending the pertinent provisions of the administra
tive Code with respect to the currency and the Bureau of Banking, and
for other purposes."
President Quirino signed this Bill creating a Central Bank and
reorganizing the monetary system of the country on June 15, 194$. The
Central Bank has the following objectives:
(a) Maintenance of monetary stability?
(b) Preservation of the international value of the peso and the
convertibility of the peso into other freely convertible currencies? and
(c) Promotion of a rising level of production, employment and
real income in the Philippines.
B. The Monetary Board.
1. Its organization. The bank is headed by a Monetary Board
consisting of four appointed members and three ex-officio members. The
Board consists of the following:
(1) Secretary of Finance, Chairman, ex-officio....
(2) President of the Philippine National Bank, ex-officio.
(3) Chairman of the Board of Governors of the Rehabilitation
Finance Corporation, ex-officio.
94
(4-) Governor of the Central Bank (six years).
(5) A member (two years).
(6) A member (four years).
(7) A member (six years).
The four appointed members hold office for a term of six years,
but the terms of the first appointees are as follows: one for six years,
one for two years, one for four years, and one for six years. The inten
tion is to give continuity to the Board. The four appointed members are
appointed by the President of the Republic. The Governor and the other
three appointive members must be of recognized competence in the field of
banking and the other three appointive members must be of good moral cha
racter and of unquestionable integrity and responsibility, and of recog
nized competence in the field of banking, finance, commerce, agriculture
or industry. None of the appointed members are chosen on a regional or
/
functional basis as is provided in many central bank laws. None are to
be the spokesman of a special group.
The Secretary of Finance presides at the meetings of the Board,
but has no special powers in the determination of policy or in the admin
istration of the Bank. He is placed on the Board to promote an effective
coordination of monetary and fiscal policy. In order to avoid conflict
between the Board and the Government, all the members are subject to
governmental appointment and the Secretary of Finance participates in
5
the formulation of central bank policy.
^Federal Reserve Bulletin, The Philippine Central Bank Act,
August 1948, p. 940*
5Ibid., p. 941-
95
The Governor in the chief executive of the Bank. He has the power
to formulate the policy of the Bank for the approval of the Monetary
v Board, direct and supervise the operation and internal administration of
the Bank, and he is the principal representative of the Monetary Board
and of the Bank. In the event of war or other emergencies in which there
is insufficient time to call a meeting of the Monetary Board, the Gover
nor, with the concurrence of the Secretary of Finance, or in his absence,
with the concurrence of any two other members of the Monetary Board, may
decide any matter or take any action within the authority of the Board
itself. The Governor is required to devote all his time to the Bank and
can not accept any other employment except that of academic positions and
of public commissions relating to banking or general economic policies
concerning the national interest. The Governor, with the approval of
the Board, can appoint a ranking deputy governor who will assist him in
the performance of his duties.
In the absence of the Secretary of Finance at meetings of the
Boa d, the governor shall preside as chairman. In the absence of both,
the deputy-govemor shall preside. Both the ranking deputy-governor and
the chief of the Department of Economic Research attend meetings of the
Boad with the right to be heard but not to vote.
With the exception of the ex-officio members and their respective
alternatives, no msaber of the Monetary Board is to hold any public
position or office, either by election or by appointment, except academic
positions, and be an officer or director of any banking institution.
96
Whenever a vacancy in the Monetary Board occurs, other than by
expiration of term, a successor is appointed by the President of the
Philippines to complete the unexpired period of the term of the member
concerned.
The Board formulates rules and regulations necessary for the dis
charge of its responsibilities and the direction and administration of
the central bank, determines its expenses, fixes renumerations, and
removes all officers and employees of the Bank, with the.'exception of
the Governor.
C
A Department of Economic Research has been established for the
guidance of the Monetary Board in the formulation and implementation of
its policies.
The Department of Supervision and Examination has been created
for the supervision and periodic examination of all banking institutions.
Grove and Exter noted that the assigning of the function of bank^
examination and supervision to the Central Bank represents a departure
from the practice of many countries in which the examination of banks is
placed in the Treasury or in some government agency.
The principle behind such separation has generally been
that the central bank shall be subject to the same sort of
scrutiny and examination as commercial banks, and that,
accordingly, a separate agency shall be given responsibility
Grove and Exter are economists in the Eederal Reserve Board*s
Division of Research and Statistics, who helped in the formulation of
this Act.
97
for examining all banks, including the central bank. In
practice, the application of this principle has frequently
led to conflict between the central bank and the superin
tendent of banks over their respective roles in regulating
the activities of commercial and savings banks and over the
central bank's right of access to date obtained by the super
intendent. As a result of such conflict and ... as a
result of the general trend toward greater central bank con
trol over the credit and exchange operations of the banking
system, there has been a growing recognition that the charac
ter and scope of commercial and savings bank examination
should be distinct from those of central bank examination.
The Philippine legislation is in keeping with this trend.
Inspection of the Central Bank itself is to be made by a
special auditor appointed by the Auditor General of the Phi
lippine Government.7
C. Bank Supervision.
Banks are to be examined at least once a year or at such other times
as deemed expedient by the Superintendent. The expense of examination is
provided for in section 28 as follows:
The institutions which are subject to examinations by
the Superintendent shall reimburse the Central Bank for
the cost of maintaining the Department of Supervision and
Examination and, for this purpose, shall pay to the Cen
tral Bank, within the first thirty days of each year, an
annual fee in an amount to be determined by the Monetary
Board in the manner provided in the next paragraph of this
section.
The fee to be paid by each institution shall be an amount
equal to a prescribed percentage of its average total assets
during the preceding year, as shown on its end of month bal
ance sheets, after deducting its cash on hand and amounts due
from banks, including the Central Bank and banks abroad:
7
Grove and Exter, "The Philippine Central Bank Act", Federal
Reserve Bulletin. August 194-3, p. 94-1*
98
Provided however. that said percentage may not exceed one
twentieth of one per cent (l/20 of 1 per cent). If the
total of the maximum fees authorized under this paragraph
should be insufficient to defray the entire costs of the
department, the difference shall be borne by the Central
Bank.
Section 32 stipulates:
Any owner, agent, manager or other officer in charge
of any banking institution within the purview of this Act
who, being thereunto required in writing by the Monetary
Board or by the Superintendent, shall wilfully refuse to
fill}. the required report or permit any lawful examination
into the affairs of such institution shall be punished by
a fine of not more than ten thousand pesos or by imprison
ment for not more than year, or by both, in the discretion
of the court.
D. Guiding Principles for Central Bank* s Action.
The guiding principles are divided into two parts: the first is
concerned with the maintenance of domestic monetary stability and the
second, the maintenance of the international stability of the peso.
Domestic monetary stabilization. The central bank’s responsibility
with respect to domestic monetary stabilization is provided for by section
64. which states that the central bank "shall endeavor to control any expan
sion or contraction in the money supply, or any rise or fall in prices,
which in the opinion of the Board, is prejudicial to the attainment or
maintenance of a high level of production, employment and real income.
The Monetary Board shall have due regards for their effects on the avail
ability and cost of money to particular sectors of the economy as well as
to the economy as a whole and their effects on the relationship of domes
tic prices and costs to world prices and costs.”
99
■When abnormal movements occur within the money supply or price
level, the Monetary Board shall take the following actions:
(a) Take such remedial measures as are appropriate and within
the powers granted to the Monetary Board and the Central Bank under the
provisions of this Act; and
(b) Submit to the President of the Philippines and the Congress,
and make public, a detailed report which shall include, as a minimu, a
description and analysis of:
(1) The cause of the rise or fall of the money supply or
of pricesj
(2) The extent to which the changes in the money supply
or in prices have been reflected in changes in the level of domestic
output, employment, wages and economic activity in general, and in the
nature and significance of any such changes; and
(3) The measures which the Monetary Board has taken and the other
monetary fiscal or administrative measures which it recommends be adopted.
The Monetary Board is to submit a report ’ ’ whenever the money supply
increases or decreases by more than fifteen per cent (15 per cent) or the
cost of living increases by more than ten per cent ( 10%)", and it is to
state whether such changes will be a threat to the economic stability of
the Philippines.
International Monetary Stabilization. The law states that it
shall be the objective of the Central Bank to maintain the par value of
the peso and its free conversion into other currencies. To safeguard
100
the international stability and convertibility, an adequate international
reserve is to be maintained to meet demands for foreign currencies. The
prospective receipts and payments of foreign exchange are to be the basis
for the reserve being set up. Attention is to be given to the volume and
maturity of foreign exchange, the assets and liabilities of the Central
Bank, the other banks and all other persons and entities in the Philip
pines. The international reserve may include gold, foreign currencies,
and foreign government securities with maturities not exceeding five years.
The Monetary Board Mshall endeavor to hold the foreign exchange resources
of the Central Bank in freely convertible currencies; moreover, the Board
shall give particular consideration to the prospects of continued strength
and convertibility of the currencies in which the reserve is maintained,
as well as to the anticipated demands for such currencies.
When the international stability of the peso is threatened, the
Monetary Board shall:
(a) Take such remedial measures as are appropriate and within
the powers granted to the Monetary Board and the Central Bank under the
provisions of this Act; and
(b) Submit to the President of the Philippines a detailed report
which shall include, as a minimum, a description and analysis of:
(1) The nature and causes of the existing or imminent
decline;
(2) The remedial measures already taken or to be taken
by the Monetary Board;
101
(3) The further monetary, fiscal or administrative
measures proposed; and
(4) The character and extent of the cooperation
required from other Government agencies for the
successful execution of the policies of the
Monetary Board.
If the above measures fail to check the danger of depletion of
international reserves, the Monetary Board is authorized to propose addi
tional actions deemed necessary to restore equilibrium.
E. Instruments of Central Bank Action.
The instruments of Central Bank action available are the operation
in gold and foreign exchange, lending to banks and the Government, open
market operations, control of bank reserve requirements, and the selective
regulation of bank credit operation. These powers are flexible.
Operation in gold and foreign exchange. The Central Bank may buy
and sell gold in any form. The Monetary Board may at any time require
that any gold held by any person or any entity be delivered to the Central
Bank or to any bank or other agents contracted or engaged by the Central
Bank for the purpose. The Central Bank may buy and sell foreign notes
and coins, and documents and instruments used for the international trans
fer of funds. The Bank may engage in future exchange operations with the
following entities only:
of S o uth er* California UBSWI
102
(a) Philippine banks;
(b) The government, its political subdivisions and
instrumentalities;
(c) International financial institutions; and
(d) Foreign governments and their instrumentalities.
To maintain the convertibility of the peso, the Central Bank is
required to buy any quantity of foreign exchange offered, and sell any
quantity of foreign exchange demanded, provided that the foreign curren
cies offered or demanded are freely convertible into gold or United States
dollars. Notwithstanding the above provisions, in order to protect the
international reserve of the Central Bank during an exchange crisis and to
give the Monetary Board and the Government time in which to take construc
tive measures to combat such a crisis, the Monetary Board, with the con
currence of at least five of its members, and with the approval of the
President of the Philippines, may temporarily suspend or restrict sales
of exchange by the Central Bank and may subject all transactions in gold
and foreign exchange to license by the Central Bank.
At present, the Philippines has a favorable balance of trade and a
high level of international reserve, thus it is unlikely that this authority
will be used in the near future. The financial position is sound.
The Philippine trade is at present conducted in dollars and there
is no immediate problem of inconvertibility.
103
As long as the maintenance of a high level of exports is not
dependent upon the acceptance of currencies 'which are not freely con
vertible into gold or United States dollars, it is to the interest of
the Philippines that the Bank not accumulate such currencies. Neverthe
less, the day may come when the Central Bank must choose between accumulat
ing inconvertible currencies and suffering a curtailment of export; and
the bank may decide on the former in view of the difficulty that would be
g
involved in shifting factors of production.
Due to these facts, section 75 states that:
The Central Bank shall avoid the acquisition and holding
of currencies which are not freely convertible, and may
acquire such currencies in an amount exceeding the minimum
balance necessary to cover current demands for said curren
cies only when, and to the extent that, such acquisition is
considered by the Monetary Board to be in the national inter
est. The Monetary Board shall determine the procedures which
shall apply to the acquisition and disposition by the Central
Bank of Foreign Exchange which is not freely utilizable in
the international market.
The Board determines the rate at which it will buy and sell spot
exchange, but the rate is not to be more than one half of one per cent from
the legal parties established, unless in any given case, a greater divergence
from the legal parity exists in foreign markets. It also determines the
rates for other types of foreign exchange transactions, but the margins
between the legal parties and the rate established must not exceed the
rate for spot exchange transactions by more than the additional costs or
g
Federal Reserve Bulletin, August 194-8, p. 945.
104
expenses involved in each type of transactions. The Gentral Bank may
grant loans to and receive loans from foreign entities and may also act
as agent for such entities. The Monetary Board determines the m-inimum
and maximum rates at which the banks will buy and sell spot exchange
but the established rates for each currency shall not differ from the
respective legal parity by more than one per cent, unless in any given
case, a greater divergence from parity exists in foreign markets. The
rates to be used by the banks are to be based on their spot exchange
rates and must not differ from such rates by margins greater than those
considered reasonable by the Monetary Board, provided that the Board may
at any time, specifically fix such margin.
In order that the Central Bank may at all times have foreign
exchange resources sufficient to enable it to maintain the international
stability and convertibility of the peso, or in order to promote the domes
tic investment of bank resources, the Monetary Board may require the bank
to sell to the Central Bank all or part of their surplus holdings of
foreign exchange. This power is permissive, not obligatory. Such trans
fers may be required for all foreign currencies or for only certain of
such currencies. Surplus holdings of any foreign currency is defined as
the amount by which a bank's assets in the currency exceed the sum of
the working balance required to accommodate normal short-run fluctuations
between the bank's sales and purchases of said currency and the total
liabilities of the bank in the currency. In calculating surplus holdings,
105
a bank may, at the discretion of the Monetary Board, subtract from its
net assets in that currency an amount equal to any net liabilities of the
bank in other currencies into which said currency is truly convertible.
The profits and losses arising from any revaluation of the Central
Bank's international assets or liabilities in gold or foreign currencies
as a result of changes in the gold values of the peso, or of changes in
the parities or exchange rates of foreign currencies with respect to the
Philippine peso are to be affected by any amounts vhieh, as a consequence
of such revaluations, are owed by the Philippines to the International
Monetary Fund and the International Bank for Reconstruction and Develop
ment, or are owed by these institutions to the Philippines. The Central
Bank will sterilize any remaining profit by entering it in a special
blocked account in order to remove its potential influence on decisions
to modify the value of the peso.
Any revaluation profits realized or losses suffered by the banks
on their net assets or liabilities in gold or freely convertible foreign
currencies, as a result of changes in the par value of the peso, in the
legal parities between the Philippine peso and such foreign currencies, or
in the Central Bank's exchange rates for such currencies, are to be for
the account of the Central Bank. The purpose of these provisions is to
remove the speculative elements of revaluation profits and losses from
the normal exchange operations of the barking system.
106
Loans to Banking Institutions. The guiding principle regarding
the credit policy of the Central Bank is that the rediscounts, discounts,
loans and advances which the Central Bank is authorized to extend to
banking institutions are to be used to regulate the volume, cost avail
ability and character of bank credit and to provide the banking system
with liquid funds in times of needs.
In periods of inflation, or as long as inflationary dangers
exist, the Central Bank s in. 11 refrain from extending credit to
banks and at such times, shall grant credit only in exceptional
cases where special circumstances justify a deviation from the
principle stated herein.
Conversely,whenever the national monetary policy requires
an expansion of the money supply, the Central Bank shall make
full use of the credit operations authorized under the present
article,of this Act.
The guiding principle is intended to orientate and restrict excessive
or untimely credit expansion. The Central Bank may normally carry on opera
tions in commercial credits, production credits and advances. The Central
Bank may grant loans with maturities not more than 180 days against papers
resulting from commercial transactions and up to 270 days against papers
resulting from transactions related to the production or processing of
agricultural, animal, mineral or industrial products. The Central Bank
may grant advances up to 180 days against gold coins or bullion, securi
ties representing obligations of domestic credit institutions, utilized
portion of advances in current account covered by regular overdraft
agreements, negotiable treasury bills, certificates of indebtedness, notes
and other negotiable treasury bills, certificates of indebtedness, notes
and other negotiable obligations of the Government maturing within three
107
years from the date of the advance, and negotiable bonds of the Govern
ment and its entities provided that the maturities shall not be more
than ten years from the date of the advance. Under certain circumstances
in which it is advisable to facilitate the lending operations of mortgage
institutions, the Central Bank may grant loans with maturities of not more
than one year to said institutions provided that such action will not
aggravate or contribute to inflationary tendencies existing in the eco
nomy. In case a deflationary situation exists, the Central Bank may
extend the maximum maturities of new credit operations to period not
exceeding one year.
The speed with which a central bank can contract the money
supply depends upon the liquidity of its portfolio and the maturities of
the loans. In the Philippines, industrialization is impeded by lack of
capital, mechanization and transporting facilities. To meet the needs of
credit, the bank must adapt itself to the character of the environment.
9
Thus, the loans must have longer maturities than is practised elsewhere.'
The Act recognizes that the normal maturity requirement
should be liberalized in periods of emergency. It also recognizes that
adherence to normal eligibility rules at such time might block the dis
charge of the Central Bank's responsibility as lender of last resort and
10
thereby Section 90 provides that:
^Federal Reserve Bulletin, August 194-8, p. 947.
10Ibid.. p. 947.
108
In period of emergency, or of imminent danger financial
panic which directly threatened monetary and banking stabi
lity, the Central Bank may grant banking institutions extra
ordinary advances secured by any assets which are defined as
acceptable security by a concurrent vote of at least five
members of the Monetary Board. "While such advances are out
standing, the debtor institution may not expand the total
volume of its loans or investments without the prior authori
zation of the Monetary Board.
The Monetary Board fixes the interest and rediscount rates to be
charged by the Central Bank on its credit operations in accordance with
the character and term of the operation after due consideration is given
to the credit needs of the market, the composition of the Central Bank's
portfolio and the general requirements of the National monetary policy.
Credit Operations with the Government. The Central Bank may grant
direct advances to the government and its political subdivisions to finance
authorized expenditures provided that such advances are to be repaid at the
end of the first quarter following the end of the fiscal year of the govern
ment or political subdivision, and are not to exceed fifteen per cent of
the average annual income of the borrower for the last three preceding
years.
11
Open Market Operation. In order to make the open market opera
tion effective as an instrument for the Central Bank1s action, it is
necessary to develop a market for government securities. To realize this
objective, the Bank is given charge of the marketing of all government
•^Federal Reserve Bulletin, August 1948, p. 947.
109
obligations and is to administer a "Securities Stabilization Fund".
This Fund is used to promote private investment in government obligations
by increasing their liquidity and stabilizing their value. The open mar
ket operation for the account of the Central Bank is for the purpose of
achieving the objective of the National Monetary policy, and is limited
to the authorized operations in sections 97 and 9S of this Act.
Section 97 states:
In order to achieve the objective of the national monetary
policy, the Central Bank may, in accordance with the principles
stated in section 96 of this Act, and with such rules and regu
lations as may be prescribed by the Monetary Board, buy and
sell in the openmarket for its own account:
(a) Evidences of indebtedness issued directly by the Government
of the Philippines or by its political subidivisions, and
(b) Evidences of indebtedness issued by Government instrumen
talities and fully guaranteed by the Government. The
evidences of indebtedness acquired under the provisions
of this section must be fully negotiable and regularly
served.
Section 93 provides for the issuance and negotiation of Central
Bank obligations and reads as follows:
In order to provide the Central Bank with effective instru
ments for open market operations, the Bank may, subject to such
rules and regulations as the Monetary Board may prescribe, and
in accordance with the principles stated in section 96 of this
Act, issue, place, buy and sell freely negotiable instruments
of indebtedness. Said evidences of indebtedness may be issued
directly against the international reserve of the Bank or against
the security which it has acquired under the provisions of
Section 97 of this Act, or may be issued without relation to
specific types of assets of the Bank.
The Monetary Board shall determine the interest rates, matu
rities and other characteristics of said obligations of the
Bank, and may, if it deems it advisable, denominate the obli
gations in gold of foreign currencies.
1 5 - 0
«
Subject to the principles stated in section 96 of this Act,
the evidences of indebtedness of the Central Bank to which this
section refers may be acquired by the Bank before their maturity,
either through purchases in the open market or through redemp
tions at par and by lot if the bank has reserved the right to
make such redemptions. The evidences of indebtedness acquired
or redeemed by the Central Bank shall be immediately retired and
cancelled.
In periods of inflation, or as long as inflationary dangers exist,
the Central Bank must refrain from open market purchases and at such times,
must endeavor to reduce its security holdings. Whenever the national mone
tary policy requires an expansion of the money supply, the Central Bank
may purchase its own evidences of indebtedness prior to their date of
maturity.
The Central Bank is to act as the government agent in the issuance
of government securities, but it is not to subscribe to the issuance of
the said securities, and is not to guarantee their placement. The
methods of placing government securities may be through direct sales to
financial institutions and the public, through outright sale to syndicates,
brokers or dealers for purpose of resale or through brokers or banks con
tracted to place the securities with the public for the acco nt of the
Central Bank. The Central Bank is not to be a member of any stock exchange
or syndicate, but it can intervene for the purpose of regulating their
operations in the placing of government securities. The servicing and
redemption of the public debt shall also be effected through the Central
Bank.
Ill
Its operations shall consist of purchases and sales, in the open
market of securities fully guaranteed by the government. The resources
of the Fund is to be used in preventing or moderating sharp fluctuations
in the quotations of government obligations-. The resources of the Fund
shall come from the two million pesos (jfe, 000, 000) appropriated from the
assets of the Exchange Standard Fund and that part of the annual net pro
fits of the Central Bank allocated to the Fund.
Bank Reserves. To control the volume of money created by the
credit operations of the banking system, domestic and foreign banks are
required to maintain reserves proportional to their deposit liabilities.
The reserve requirement applies to all banks uniformly and without dis
crimination regardless of the size of the city in which they are located.
The Monetary Board is authorized to prescribe the minimum reserve ratio.
Such ratio shall be from 5 per cent to 25 per eent for time and savings
deposits. Notwithstanding the upper limits requirement, the Monetary
Board is authorized, in periods of inflation, to prescribe higher
reserve rations, up to 100 per cent for any future increase in the
deposits of each bank above the amounts outstanding in the date on which
the bank is notified of the requirement. Whenever the reserve require
ments cause any bank to maintain reserve in excess of 25 per cent of its
time or savings deposits, or in excess of 50 per cent of its demand
deposits, the Central Bank is to pay interest on the excess at a rate
which will not be higher than the Bank’s lowest rediscount rate. Regard
ing the required reserves against foreign currency deposits, the Monetary
112
Board is authorized to prescribe reserve ratios, from 10 per cent to 100
per cent with respect to deposit liabilities in each foreign currency.
Whenever the reserve position of any bank is below the required minimum,
the bank shall pay a fine of l/lO of 1 per cent per day on the amount of
the deficiency.
Interbank Settlements. The Central Bank must provide the faci
lities for inter-bank clearing. The deposit reserves which the banks
have in the Central Bank are the basis for the clearing of checks and
the settlement of inter-bank balances.
Selective Regulation of Bank Operations. To insure that the
supply, availability and cost of money are in accord with the needs of
the economy and bank credit is not granted for speculative purposes pre
judicial to the national interest, the Central Bank is given several
instruments of quantitative control. The Monetary Board is to fix the
maximum ratio of interest on deposits and other obligations. In order
to restrict the granting of bank credit for purposes contrary to the
public general welfare, the Monetary Board can prescribe minimum cash
margins for the opening of letters of credit. It may issue regulations
with respect to the maximum maturities of the loans and the kind and
amount of security to be required against the various types of credit
operations of the banks, in order to safeguard the liquidity and sol
vency of the banking system. The Board may place an upper limit on the
amount of loans and investments which the banks may hold, or place a
limit on the rate of increase of such assets within specified periods of
113
time. In no case must the Monetary Board establish limits which are below
the value of the loans or investments of the banks on the date on which
they are notified of such restriction. To regulate the volume and distri
bution of bank credit, and to insure the maintenance of bank capital and
surplus at levels adequate to protect the depositors against risk of loss,
the Monetary Board may prescribe minimum ratios, which the capital and
surplus of the bank must bear to the volume of their assets or to specific
categories thereof.
Fiscal Agent of the Government. The Central Bank is the fiscal
agent of the government and banker of the Government? its political sub
divisions and instrumentalities. It represents the Philippine Government
in all dealings, negotiations and transactions with the International
Monetary Fund and with the International Bank for reconstructive and
development and with other foreign or international financial institutions
or agencies. It is the official depository of the Government and its poli
tical subdivisions and instrumentalities. For the purpose of more flexi
bility, the Monetary Board may designate other banks to accept government
deposits. Thus the Bank reserves can be increased and credit expansion
encouraged by simply placing government funds with the banks? and bank
t g
credit can be tightened with equal effectiveness by the withdrawal of
these funds at times when credit emergency is in order.
12
Federal Reserve Bulletin, August 194.8, p. 94. 9.
Financial Adviser of the Government» The Central Bank acts as
the financial adviser of the government in official credit operations.
The opinion of the Monetary Board is to be based on the gold and foreign
exchange resources and obligations of the country and on the effects of
the proposed operation on the balance of payments and on the volume of the
money supply. To assure effective coordination between the economic,
financial and fiscal policies of the Government and the monetary, credit
and exchange policies of the Central Bank, "the Governor of the Central
Bank shall be an ex-officio member of the National Economic Council",
which is the entity responsible for the coordination of such policies.
CHAPTER XV
FOREIGN BANKING SYSTEMS
Every civilized country now has some form of central banking
institution as an essential part of its financial machinery. No two
countries are exactly alike in their banking systems because of the differ
ences in the methods of doing business, securing and granting of credits,
and the difference in the currency systems of two countries; but a study
of their banking system will show us that the central bank has control
and supreme authority in matters of credit, currency and exchange.
Until within recent years, the banking systems of the world could
be classified into three
1. The central banking system which is typified by that of the
French system. In such a system, the central bank usually had a monopoly
of note issue and was the holder of the legal reserves of banks. It was
generally a banker's bank.
2. The independent-charter banking system of which the Canadian
system was an example. In this case, there were a number of chartered
banks which were central banks in the sense that they issued money, con
trolled the reserves and shifted capital from one part of the country to
another. Canada has had a central banking system since 1935.
3^
Parker H. ¥illis, Federal Reserve. (Doubleday: Page and Company,
1915), PP. 124--5.
li6
3. The independent competitive banking system of which the American
system was an example. Under this system, banks were free to apply for a
charter either from the Federal or the State government, as long as they
conformed to the general requirements. Thus, in the United States, there
are national banks and state banks. All national banks must now be mem
bers of the Federal Reserve System, but membership is optional for state
banks.
2
The five principal functions of a central bank are as follows:
1. To provide a sound and elastic currency.
2. To be the banker of last resort.
3* To hold and operate the gold reserve.
4- To regulate and maintain the orderly functioning of
the nation’s market.
5. To act as the depository and fiscal agent of the
government.
All the central banks established in recent years are government-
owned: Costa Rica (1937), Afghanistan (194-1), Ireland (194-2), Siam
(194-2), Paraguay (1944-) , Albania (1945) , Poland (1945), Guatemala (1946),
3
Dominican Republic (1947) and the Philippine Republic (1948).
The significant peculiarities of the newer banking systems are:
(1) The banking habit may be little developed and. there are
fewer banking facilities;
(2) There may be no satisfactory short-term money-market;
p
Edwin Kemmerer, The ABC of the Federal Reserve System (Princeton:
Princeton University Press, 1938) pp. 262-3.
^Elpidio Kriz, "Central Banks and the State Today", American
Economic Review. 1949, p. 579.
117
(3) Central banking may not yet be effectively established.
The Philippines has all three of these conditions.
To meet these peculiarities, a central bank can provide the ordi
nary banking facilities or encourage the development of an integrated
commercial banking system. These steps should, however, be considered
as alternative policies. For, while the first has as its end a system
in which the central bank has direct control over the supply of bank
money, the aim of the second alternative is the development of a system
in which the central bank has only the indirect control which control
of the cash basis gives. To encourage the development of a system of
commercial banks, the central bank must encourage the use of the redis
count policy or administer a subsidy for newly established commercial
banks.
A. American Banking System.
There are three distinct systems of banking in the United States.
6
They are:
(1) The national banking system organized under Federal law;
(2) The State banking systems, organized tinder the laws of
the State;
^■Richard Sayers, Modem Banking (London: Oxford University Press,
1938), P. 283.
5Ibid.. pp. 298-9.
^Parker H. Willis, The Federal Reserve (Doubleday, Page and
Company) 1915, p. 3.
118
(3) Non-commercial banking institutions.
One thing to be noted in the American system is its extreme decen
tralization. This is mainly due to the regional economic and financial
differences of the country, fear of Wall Street, and fear of government
control.*^
The Federal Reserve System. On December 23, 1913, the Federal
Reserve Act establishing the Federal Reserve System was signed by Presi
dent Wilson. The purposes of the Federal Reserve System are to provide
an elastic currency, to provide facilities for discounting commercial
paper, to improve the supervision of banking, to help prevent deflations
and inflations, and to help create conditions favorable to sustain high
8
employment, stable values, and a rising level of consumption.
The Federal Reserve System is made up of twelve Federal Reserve
Banks which are separately incorporated and located in important cities.
In the determination of the location of the Federal Reserve Bank, the
following points were considered:
(1) The mercantile, industrial and financial connections of
each section;
(2) The probable ability of the reserve bank to meet the
credit needs of business;
^Lester Chandler, The Economics of Money and Banking (New York:
Harper & Bros., 194-8), p. 235•
8
Parker H. Willis, Federal Reserve System (New York: Doubleday,
Page & Company, 1915), Chapter 1.
119
(3) The fair and equitable distribution of capital among the
districts created;
(4) Geographical convenience; and
9
(5) Established custom and trend of business.
The twelve Federal Reserve cities are located at Boston, New York;
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minnea
polis, Kansas City, Dallas and San Francisco.
Board of Governors. The Board of Governors is the central super
vising body which coordinates the activities of the Federal Reserve Banks.
It is composed of seven members appointed by the President of the United
States for a period of fourteen years. A member is ineligible for reap
pointment if he has served a full term of fourteen years. Not more than
one member may be appointed from the same Federal Reserve district and in
making the appointment, the President must "have due regard to a fair
representation of the financial, agricultural, industrial and commercial
interests, and geographical divisions of the country."
To carry out its policies, the Board is given many powers among
which are the following:^
( 1) To reveiw and determine the discount rate established by
the Federal Reserve Banks;
(2) To control open market operations;
q
Ray Westerfield, Money. Credit and Banking (New York: Ronald
Press Company, 1946), pp. 380-1.
^Major Foster and Raymond Rogers, Money and Banking. (New York:
Prentice Hall, Inc., 1940), pp. 328-331*
120
(3) To change reserve requirementsj
GO To approve the appointment of the president and first vice
president of each Federal Reserve bank;
(5) To determine the acceptability of ineligible paper;
( 6) To exercise general supervision over the Reserve banks;
( 7 .) To regulate security loans;
( 8) To regulate margin requirements.
Federal Advisory Council. The Federal Advisory Council is composed
of twelve members chosen by the Board of Directors of each Federal Reserve
bank. It is wholly an advisory body for the Board of Governors.
Federal Open Market Committee. This is made up of twelve members
including the Board of Governors and five representatives of the Reserve
banks. It has the full control of all open market sales and purchases by
the Reserve banks.
Federal Reserve Banks. There are twelve Federal Reserve banks
located in each one of the twelve Federal Reserve districts. Each Reserve
Bank has a board of nine directors and has its own president and officers.
All these twelve Reserve Banks are governed by the Board of Governors
which is composed of seven members appointed by the President of the
United States with the approval of the United States Senate. The directors
of each Federal Reserve Bank are divided into three elasses known as Class
A, Class B, and Class C directors. Three Class A directors are chosen to
represent the stockholding banks. The Class B directors represent industry,
commerce and agriculture in the district and must be actively engaged in
121
any of these pursuits at the time of election. The Class C directors are
appointed by the Board of Governors. One of the Class C directors, who
must be M a person of tested banking experience”, is designated as the
chairman of the Board of Directors of the Federal Reserve Bank and Federal
Reserve Agent. Another Class C director acts as Deputy Chairman. The
third Glass C director presides at meetings in the absence of both the
chairman and deputy chairman.
The Federal Reserve Banks have twenty four branches and as of June
194- 1, there were 6,887 member banks, of which 5,012 were national banks and
1,875 were state banks. The Federal Reserve Banks are not government
banks, but are privately owned by the member banks.
Reserve Requirement. As a basis for the requirement of reserve,
the country is divided into three groups; central reserve city banks,
reserve city banks and country banks. All legal reserves must be kept
in the Federal Reserve Banks.
The legal reserve requirements of member banks can be set at or
between the following levels:
Lowest level of
Reserve Requirement
Highest Level of
Reserve Requirement
On net demand deposits:
Central Reserve City Banks
13 %
26%
Reserve city banks 10 % 20%
Country banks 7 % U%
11
Lester Chandler, The Economics of Money and Banking (Hew York:
Harper and Bros., 1948), p. 241•
122
On time deposits:
All member banks 3 % 6 %
To control credit, the Federal Reserve Board either increases or
decreases the legal reserve requirement. This method of controlling cre
dit is not however always successful, particularly during the period of
inflation as other factors also influence the total money supply and
credit conditions.
That the Board has used this power of controlling credit is
shown by the following table:
12
Member Bank Reserve Requirement
(Per cent of deposits)
Met Demand Deposits_____ Time PepoPlta
All
Gentral Reserve Reserve Country Member
Period in effect: City Bank City Bank Bank Banks
June 21, 1917-August 15>1936
13
10 7 3
August 16,1936-February 28,1937 19-1/2 15
10-1/2 4-^/2
March 1,1937 - April 30, 1937
22-3/4
17-1/2
12-1/4 5-1/4
May 1, 1937 - April 15, 1938 26 20
14
6
April 16, 1938 - October 31,1941 22-3/4
17-1/2 12
5
November 1, 1941 - August 19,1942 26 20 14 6
August 20,1942-September 13,1942
24
20
U
6
September 14, 1942-October 2, 1942 22 20
14
6
October 3, 1942 - February 26,1948 20 20
14
6
February 27,1948 - June 10, 1948 22 20
14
6
June 11, 1948 - September 15, 1948
24
20
14
6
September 16,1948 - May 1, 1949 26 22 16
7-1/2
May 1, 1949 and after
24
21
15 7
The functions of the Federal Reserve Banks are: the mobilization
of reserves, providing collection facilities for both cash and non-cash
items, transfer funds by telegraphic transfers and by Federal Reserve
■^Federal Reserve Bulletin, April 1949, 0. 388.
123
Exchange drafts, ship money, establish an elastic currency, extend credits
by rediscounting and loans to member banks, take an active part in the
open market operations and act as fiscal agent of the government.
Under the American banking system, state banks may or may not
join the Federal Reserve System. Most state banks have not joined the
System due to their distrust of the administration of the Federal Reserve
System and because they secure its benefits indirectly. They object to
the dual state and federal control, to political influences, costly
reports and examination. Aside from these objections, state banks can
take advantages of the services of the system without the necessity of
13
joining it, through so-called "Backdoor relief".
Federal Reserve Banks and National Banks have perpetual charters.
The Federal Reserve Banks now have a monopoly of bank note issue.
B. The Canadian Banking System.
The Canadian Banking system is made up of ten commercial banks
which have over three thousand domestic and over one hundred sixty foreign
14
brunches. In 1871, there were twenty eight banks and the number rose
to forty one in 1866 and later was reduced, through failures and merges,
TO
Roy Garis, Principle of Money. Credit and Banking (New York:
The Macmillan Company, 1934)» pp. 782-83.
14
Pr
1946), p. 747.
14
J. Prather, Money and Banking (Chicago: Richard Irwin Company,
15
to the present ten. The minimum capital for each of the ten banks
is five hundred thousand dollars, half of which must be paid in before
the bank can open for business. The purpose of this high capitalization
is to prevent the organization of weak banks and discourage inexperienced
persons from the banking business. The Bank Act of 1871 provides only
for a ten-year period for the charter of the bank. Before 193 5 > the
17
Canadian Treasury and the chartered banks had the privilege of issuing
notes. With the opening of the Central Bank in 1935» the right of note
issue by the Chartered Banks was restricted. In addition to the ten char
tered banks, Canada has loan companies, savings banks, cooperative banks
and investment houses. To protect noteholders, Canada made provision for
a safety fund called the Bank Circulation Redemption Fund and banks
were required to deposit 5 per cent of their average yearly note circula
tion to the said Fund. When a bank failed, notes not covered by the
assets of the failed banks were paid from this fund.
In 1935, a central bank was established with its head office at
Ottawa. The Bank Act of 1934- further provided for the following:
^Roy Garis, Principles of Money. Credit and Banking (New York:
The Macmillan Company, 1934-)> P* 906.
■^Parker H. Willis and Benjamin Beckhart, Foreign Banking
Systems (New York: H. Holt and Company, 1936), pp. 298; 326.
17
Roy Garis, Principles of Money. Credit and Banking (New York:
The Macmillan Company, 1934- ) » P* 906.
125
(a) Retiring 75 per cent of bank's note circulation;
(b) Keeping a 5 per cent reserve against deposit liabilities of
banks;
(c) Limiting to not more than 5 per cent of paid-up capital the
amount of loans made to a director or his corporation without the appro
val of two-thirds of the director present at the board meeting;
(d) Fixing interest charges at 7 per cent, except that there
may be a minimam charge for small loans;
(e) Filing annual reports with the Minister of Finance;
(f) Presenting special reports to shareholders;
(g) Appointing a curator for failed banks by the government
rather than, as formerly, by the Canadian Banker's Association.
Since 1938, the Bank of Canada has had a capital of $5,000,000,
all government owned. The management of the bank is under a Board of
Directors consisting of a governor, deputy governor, and eleven direc-
18
tors. The ten chartered banks are required to deposit 5 per cent
legal reserve with the Bank of Canada. The Central Bank itself has to
maintain a.minimum reserve of 25 per cent in gold against its note and
19
deposit liabilities. The Bank of Canada will have the monopoly of
note issue after January 1, 1950. In the meantime, provisions were
made for the gradual retirement of the notes of the chartered banks.
"^J. Prather, Money and Banking (Chicago: Richard Irwin Inc.,
194-6), p. 749.
19Ibid.. p. 750. 20Ibid., pp. 749-50;
126
The Bank of Canada is authorized to engage in the following
21
credit operations:
1. To buy and sell foreign exchange, commercial papers, govern
ment securities guaranteed by the government and securities of the
United States or the United Kingdom;
2. To make advances to the banks on any of the above collaterals.
22
C. English Banking System.
The English Banking System has four divisions: The Bank of
England, the joint stock banks, the accepting houses and the discount
markets.
The Bank of England chartered in 1694- is considered as the oldest
central bank. The Bank of England is divided into two departments: the
issue department whose function is to issue notes, and the banking depart
ment which is in charge of the central banking functions. It acts as
the fiscal agent of the government. It serves primarily as a banker's
bank but unlike the Federal Reserve Banks, the Bank of England accepts
deposits and makes loans to the general public. It is now publicly
owned and controlled.
The bulk of the English banking is done by five joint stock banks,
namely, Barclay's, Lloyd's, Midland, National Provincial, and Westminister.^
01
J. Prather, Money and Banking (Chicago: Richard Irwin Inc., 194-6),
pp. 750-51.
22
Ibid.. pp. 521-26.
23
Roy Garis, Principle of Money. Credit and Banking (New York: The
Macmillan Company, Inc., 1934-)j PP* 889-900.
127
Except for the prohibition of note issue and an annual financial statement,
the joint stock banks are free from governmental regulation and yet it is
interesting to note that no bank in England has failed since 1870. Each
bank's portfolios consist of call loans, trade and bankers' acceptances,
government securities and advances to customers.
The financing of foreign trade is done mostly by accepting banks.
Aside from "accepting" for domestic firms, they also furnish the same
service to foreign business houses. They do not engage in commercial
banking.
The bill brokers serve as a buffer between the joint stock banks
and the Bank of England. They sell and purchase bills offered in the
market. There are three classes of bill brokers:
1. The running brokers;
2. The retail dealers;
3. The discount houses.
The running brokers serve as intermediaries between the buyer and
seller. They work for a commission. The retail dealers buy bills and
sell them for a profit. They transact business on borrowed funds. The
discount house buys bills and holds them until maturity. They transact
their business mostly on funds borrowed from the joint stock banks gene
rally in the form of call loans. When the banks find it necessary to
call these loans, the discount houses discount their bills with the Bank
of England. Thus, the Bank of England is the bank of last resort.
128
Similarities and differences between banks of the United States
and England are:
1. The power of the central bank over the commercial bank is
dependent on the central bank's position as an ultimate source of cash.
They can expand or contract the money supply by either selling or buying
securities.^"
2. The essential difference between them are:
(a) In the United States, commercial banks have direct
access to the central bank, as a lender of last resort,
whereas in Britain, it is indirect. A commercial bank
can replenish its cash reserves only through the dis
count marketj
(b) In England, the cash ratio of commercial banks are custo
mary only, whereas in the United States, the cash ratios
25
are determined by law.
D. French Banking System.
The French system is made up of five divisions:
(1) The Bank of Francej
(2) The great credit banksj
^•Richard S. Sayers, Modern Banking (London: Oxford University
Press, 1938), p. 128.
25
Ibid., p. 129.
129
( 3) The local and regional deposit banks$
(4) The investment banks5 and
26
(5) The private banks.
Founded in 1800 by Napoleon, the Bank of France operates both as
a commercial bank and a central bank. Though it is a private institution,
it serves as the fiscal agent of the government and depository of public
money. It has over six hundred agencies scattered throughout the coun
try. It has a monopoly of note issue. The leading feature of the Fund
system is the "undeveloped condition of deposit currency and the large
27
use of bank notes supplied exclusively by one central institution.
Prior to the World War, tie government fixed the maximum limit,
which was extended from time to time whenever the limit interfered with
the ability of the bank to make government loans. The note issue was
based entirely upon the assets and credits of the bank. There was no
legal provision requiring security or reserve against note issues. The
currency was perfectly elastic, expanding and contracting in accordance
28
with the demands of trade.
The great credit banks, made up of six joint stock banks earry
on the bulk of the country’s commercial banking. These credit banks have
2^
Bollin Thomas, Our Modern Banking and Monetary System (New York:
Prentice Hall, Inc., 1938), p. 340.
27
John Holdsworth, Money and Banking (New York: D. Appleton Century
Company, 1937), p. 315.
p<*
Ibid.. p. 315.
130
extensive blanches and agencies throughout the country and also branches
abroad. These banks make short term financial accommodation to business
houses and discount their trade bills. The banks also make unsecured
overdraft loans on the customer’s accounts.
The investment banks furnish long-time capital to new and old
enterprises. They conduct commercial banking merely as a side line.
Their principal service is that of organizing syndicates for the under
writing of securrtfes.
The private banks are mostly engaged in managing family fortunes
and the estates of wealthy clients, distributing securities, and dealing
in foreign exchange.
CHAPTER XVI
CONCLUSIONS
Summary. Among the countries emerging from the war, the Philip
pines is in a unique economic position. Like other countries, it has
suffered great destruction and devastation, heavy damages to export
industries and a general reduction of output. Unlike other countries,
however, it has abundant dollar resources, a stable currency, and an
unrestricted volume of imports. There is an unusual flow of foreign
exchange and the country is presented with an extraordinary opportunity
to accelerate its economic growth. Aware of this fact, the Philippines
is taking the proper steps for her economic development.
At present, the two economic objectives of the Philippines ares
(1) The best utilization of foreign exchange receipts, and
(2) The adoption of internal financial measures and institutional
changes for the purpose of chaneling her resources into a program of
economic development.
There are always limits to the speed with which the economic
development can be pushed. The shortage of equipment, lack of skilled
workers, and the unavailability of technical men for new industries are
the handicaps to the economic development of the Philippines.
In order to encourage the import of capital equipment, a res
triction was placed on the importation of non-essentials and luxuries.
132
To safeguard the economy of the country and remedy the defects of her
economic system and thus accelerate the development of the country, the
Philippines adopted a program for the conservation of foreign exchange
for economic development, strengthened and expanded hanking and credit
facilities, and established a central bank and a managed monetary system.
Conservation of Foreign Exchange.. The Philippines has abundant
foreign exchange reserves. Thereby her economy is in an exceptionally
favorable position compared to other countries. The Philippines is
among the five countries having the largest dollar balances in the United
States. The industrial, and agricultural requirements of the country will
require the importation of substantial quantities of capital equipment
and supplies. In the absence of appropriate control measures, expenditures
of foreign exchange on imports of non-essentials and luxury items may be
large enough to force a curtailment of the country's economic development.
To limit the expenditure of foreign exchange on non-essential goods, Con
gress passed a law on June 1, 194-3, increasing the sales tax on luxuries
and semi-luxury goods. In the long run, this measure will not reduce the
inward flow of trade but will shift the pattern of imports in the direc
tion of much greater emphasis upon capital goods. The imposition of
direct import tax will control the volume and composition of imports.
Banking and Credit Facilities. Philippine banking is faced with
the need for a sound expansion of credit to finance an expanding economy
and the need for the improvement and distribution of its banking facili
ties. The demand for credit comes not only from trade and commerce, but
133
also from the rehabilitation and development needs of industry and
agriculture. Much of the demand is for long-term capital financing beyond
the customary scope of commercial banking, and as such, vill have to be
met partly by the government. Better banking facilities are needed to
serve provincial areas not adequately served and to encourage the use of
banks by larger numbers of people everywhere. Commercial banks have been
chiefly concerned with dealings in foreign exchange and financing foreign
trade, local commerce and agricultural crops on a short-term, self-liquidat
ing loan basis. There is a great need for credit to finance agriculture,
industry and housing. To meet these needs, the Omnibus Banking Bill, or
Act No. 377, was enacted by Congress in 1948. The Act embodies a revision
of banking statutes to remedy the defects of our banking system. Certain
provisions will certainly affect practices of long standing.
tinder this Act, branches and agencies of foreign banks which may
be established in the future will not be permitted to receive deposits.
The reason for this provision is to limit the enjoyment of this privilege
in the future to domestic banks and only to branches and agencies already
established in this country. The purpose of this provision is to give
domestic banks priority in the matter of deposits and to encourage the
establishment of more Filipino-owned banks. Sixty per cent of the
capital stock of any bank which may be established must be owned and
held by Filipino citizens.
Commercial banks are empowered to grant loans up to fifteen years,
against real estate securities. Under the old law, the maximum maturity
134
of such loans was limited to five years. As a consequence of this, hanks
may be able to take a more active part in the rehabilitation of the coun
try. The aggregate of real estate loans with maturities beyond three
years is not to exceed 70 per cent of the total savings deposits of the
bank. This new basis for determining the maximum aggregate loans which
commercial banks may grant will enable banks to grant more such loans.
Under the former laws, the bank could not grant more than 25 per
cent of the capital and surplus of the bank, or one half of its total
savings deposits, to such real estate loans. This change will expand
the real estate investment of banks.
Commercial banks* investments in securities having maturities of
more than three years are limited to 20 per cent of their total deposits.
This limitation is necessary to insure liquidity.
The total capital account of every commercial bank must amount
to at least 15 per cent of risk assets. The former requirement was 10
per cent of their total deposit liabilities and this requirement at times
forced banks to refuse deposits. Under the new requirement, banks are
given greater leeway in the amount of deposits, which may be accepted by
them, and at the same time afford a truer measure of the size of capital
funds necessary to shield bank depositors from participation in bank
losses.
There is no limit to loans and advances secured by the Central
Bank notes or Philippine Government obligations, or fully guaranteed by
the government as to principal and interest. This change is intended to
135
encourage investment in government securities. The development of a
market for domestic borrowing is one of.the greatest needs of the country.
This measure is an effective means of gathering the idle savings of the
people and channel them to profitable investment outlets.
In order to make savings and mortgage banks of greater service,
they are empowered to grant new types of loans such as: medium term
loans for the encouragement of the cattle industry and other livestock
breeding; equipment loans, with maturities up to five years; mortgage
loans with maturities up to ten years, and loans against high grade bonds.
To centralize all bank reserves in the Central Bank, the deposit
reserves of savings banks are to be maintained at the central bank, too.
All liabilities of branches in the Philippines ofibreign banks
are required to be guaranteed by their head offices in order to provide
protection to Philippine depositors and other creditors of the branches.
Central Bank and a Managed Monetary System. The establishment of
a Central Bank is a salutary step toward the full economic development
and progress of the Philippines. Designed to perform the important func
tion of stabilizing the currency externally and internally, the Central
Bank also aims to give impetus to the development of our commerce and
industry, to increase production and achieve more employment for the
1
people.
^Philippine Trend. "Central Bank", February 194-9*
136
Under the former decentralized system, two factors retarded our
domestic banks: lack of capital and the necessity of carrying excessive
reserves. After World War XI, the inadequacy of banking and credit faci
lities was greatly felt by the country. Under the former system, it was
necessary to have a one hundred per cent dollar reserve requirement which
was unnecessary and uneconomical. Aside from this, there was no market
for government securities. These disadvantages became apparent when the
Government was faced with a budgetary deficit of two years ago. It was
not able to sell its securities and although the dollar reserves were
larger than necessary to maintain free convertibility of the peso at two
to one, the government had to borrow dollars to obtain pesos to finance
public expenditures. The Centra}. Bank was organized to remedy the situation.
The Central Bank Act defined the monetary system and established
the Central Bank to administer it. The principal objectives of the Cen
tral Bank are the maintenance of monetary stability and convertibility
of the peso and the promotion of growth in production, employment and
real income.
As has been noted, one of the fundamental weaknesses of the former
monetary system is that it did not respond effectively to the domestic
needs of the Philippine economy. Under the law, the Central Bank will be
a banker's bank and will act as the depositary of all banks' reserves
against deposits. Prom time to time, the minimum reserve requirement
can be adjusted by the Monetary Board. In case of deflation, the minimum
137
ratio of reserve will be lowered to enable banks to maintain the volume
of credit needed for their operation. On the other hand, to obviate any
danger of an inflationary tendency, the reserve ratio may be increased,
2
or the rediscount note may be fixed higher. The adoption of a system
of managed currency is imperative in order to achieve within a short
period tremendous economic development. Although a strong central bank
cannot completely insulate the Philippine economy against economic fluc
tuations, it may serve as a buffer against some of the most serious
effects of such fluctuations. It would serve as a tool in directing the
flow of the credit resources of the nation into agricultural investment
and useful industries. This, in turn, will encourage diversification of
the economy and make it more adaptable to changes in economic conditions.
A reform in our currency system was imperative. As it has been
noted, the conservative currency system of maintaining a 100 per cent
money reserve and the lack of a bank of last resort rendered idle a large
amount of our currency reserve and forced banks to maintain excessive cash
reserves which otherwise could have been utilized for our economic develop
ment. Banks were forced to maintain a reserve far in excess of the legal
requirement as there was no bank to which it could go for funds to reple
nish its depleted reserve in times of stress, or when there were abnormal
withdrawals of deposits.
O
This measure has not however always proved successful in period
of inflation for commercial bank can manufacture credit faster than for
the open market committee of the Federal Reserve System to take money out
of circulation.
i3d
Concluding comments. The present aim of the Philippines is to
grasp the opportunity for a rapid economic development which is opened
to her. The country has emerged from the war in good shape, having a
stable government, abundant dollar resources, stable currency and a boom
ing domestic trade. To achieve the purpose of industrialization of the
country, measures were passed, the most important of which was the organi
zation of a central bank and the passage of the General Banking Act.
The General Banking Act aims to remedy the various weaknesses of
our banking legislation. It also embodies provisions fundamental to
the successful operation of the central bank.
The Central Bank, if properly managed, can contribute much to
the economic development of the Philippines. It can assist in the
establishment of a domestic market - for both short and long-term govern
ment securities, increase the effectiveness of the banking system by
offering rediscount facilities and by coordinating bank supervision with '
an over-all financial policy based on reliable competent compilation and
interpretation of statistics and financial materials.
It is a known fact that, if an extraordinary increase in the value
of commodities should takeplace without a corresponding increase in the
volume of money, prices will rise, and vice-versa. In the management of
currency, the idea is to maintain stability. In normal times, the Cen
tral Bank can maintain stable prices through monetary action. If the
Central Bank's statistical department discovers that the banks are giving
unusually large loans for speculative prices’ on prime commodities, or
139
that the volume of money and credit is unduly large, the Central Bank has
the power to increase the banks' legal reserves, thus discouraging the
granting of loans. The Central Bank can also regulate the rate of inter
est on loans by controlling the volume of credit.
The Central Bank also controls exchange. In a country like the
Philippines, the strength of the currency depends on the ability of the
government to convert the pesos to dollars when a demand for dollars is
made. As long as the Philippine Treasury can sell a draft or telegraphic
transfer on New York, our currency is stable. But if it is otherwise,
our currency will have no value out side of the Philippines. It is
therefore necessary to have an institution to keep a close eye on our
dollar reserve.
A Central Bank can help to regulate prices. If prices go up, the
Central Bank can curb rising prices by the issue of securities, thereby
diminishing the excessive buying power of the public. In case of defla
tion, the Central Bank can do the reverse.
A Central Bark is also necessary for the conservation of our
foreign exchange. The Philippines has a large dollar balance in the
United States, and for a few more years to come, there will be a con
tinuous inflow of dollars coming from reparation payments, back pay,
veterans* pensions, indemnities, etc. However, after 1951, the United
States Government will taper off payments. There may also be a gradual
loss of the favored position of the Philippines in the United States
market. It is desirable therefore to make economic adjustments. It is
HO
necessary that the dollar balances be conserved. With the central bank,
we can have up-to-date statistics of imports and exports and show us the
exact status of our balance of trade.
As a lender of last resort, the Central Bank can diminish the vul
nerability of the banking system in time of emergency. The banks lack
deposits. Most of the business transactions arepaid in cash rather than
in checks. The people must be encouraged not to hoard their money but
to deposit it in the banks. The more deposits a bank has, the greater is
the ability of the banking system to manufacture credit.
While there are advantages in the adoption of the central bank on
the ground that it can provide for a greater elasticity of domestic cur
rency and make capital more abundant for local investments, there are
also danger s attached to it. There is the danger of inflation which may
be brought about- by the anticipated increase on monetary supply. Some
banks object on the ground that the Central Bank may curb their profits
from foreign exchange transactions. But the greatest danger is the
fact that the 200, 000,000 pesos to be taken out of the international
reserves and made available to the government may be utilized for poli
tical purposes. In the Philippines, politics and economics go hand in
hand. Politics is everybody1s business. Claude Buss, in his article
"Nationalization in the Philippines", has voiced the fears of many. He
stated: "On paper, the position of the Central Bank differs little from
that of other nations1 Central Banks. The fear in the Philippines is
141
that its administrators will let their economic judgments be warped by
politics.” From economics to politics is a step that is scarcely discern
ible in the Philippines."^
Under the present structure of the Monetary Board, the Secretary
of Finance is the chairman of the Board. It would be much better if the
Central Bank were distinctly separated from any political entity.^- Time
has shown that any matter in which politics dips its slimy hands does
not last long. Anomalies and corruptions will cause its failure. The
success of the Central Bank will depend upon the strength of the adminis
trators to resist political pressures.
Viewed as a whole, the economic outlook is good. The country is
rich in natural resources, many of which have yet to be fully tapped.
The Islands are well located as an entrepot and trading center for Asia.
The degree of education is one of the highest in the East.
^Fortune, Nationalization in the Philippines - Buss., p. 174,
February 1949.
^This has been done in the United States. The Secretary of Trea
sury is no longer a member of the Rederal Reserve Board.
142
BIBLIOGRAPHY
A. BOOKS
Agger, Eugene; Money and Banking, (Renal and Hitchcock, 194-1)
Andreade, A.: Banking in England (New York: King & Son, 1924-)
Chandler, Lester, The Economics of Money and Banking (New York: Harper
and Bros., 194-8)
Conant, Charles: A History of Modem Banks of Issue (New York and
London: Putnam and Sons, 1915)
Dowrie, George: Money and Banking (New York: Whitney and Sons, Inc,
1936)
Forbes, William: The Philippine Islands (Boston and New York:
Houghton Mifflin Company, 1928(
Foster, Major and Raymond Rogers: Money and Banking (New York:
Prentice Hall, Inc., 194-7)
Foulke, Roy A.: Practical Bank Credit (New York: Prentice Hall,
Inc., 194-0)
Garis, Roy: Principle of Money. Credit and Banking (New York: The
Macmillan Company, 1934-)
Holdsworth, John: Money and Banking (New York: D. Appleton Century
Company, 1937)
Holladay, James: The Canadian Banking System (Boston and New York:
Bankers Publishing Company, 1938)
James F.; The Economics of Money. Credit and Banking (New York:
Ronald Press, Inc., 194-0)
143
Kemmerer, Edwin: The ABC of the Federal Reserve System (Princeton,
N. J.: Princeton University Press, 1938)
_____________ , Modem Currency Reform (New York: MacMillan Company,
1916)
Kent, Raymond: Money and Banking (New York: Limihart and Company,
Inc., 1947)
Langhlin, Lawrence: Principles of Money. Credit and Prices (Chicago,
Illinois: University of Chicago Press, 1931)
Luthringer, George: The Gold. Exchange Standard of the Philippines
(Princeton, N.J.: Princeton University Press, 1934)
Magee, James: Introduction to Money and Credit (New York: Crofts
and Company, 1927)
Mackenzie* Kenneth; Banking System of Great Britain. France. Germany
and the United States (London: MacMillan and Company, Ltd., 1947)
Minty, Le Marchant: English Banking Methods (London and New York:
Pitmans and Sons, Ltd.
* r
Prather, Charles: Money and Banking (Chicago, Illinois: Richard
Irwin, Inc., 1946)
Sayers, Richard: Modem Banking (London: Oxford University Press, 1938)
Scott, William: Money and Banking (Hall and Company, 1910)
Thomas, Rollin: Our Modem Banking and Monetary System (New York:
Prentice Hall, Inc., 1938)
Westerfield, Ray: Banking Principles and Practice (New York: Ronald
Press Company, 1946)
Willis, Parker H: Federal Reserve System (New York: Doubleday,
Page and Company, 1915)
__________: The Theory and Practice of Central Banking (New
York and London: Harper and Bros., 1936)
Willis, Parker H., and Benjamin Beckhart: Foreign Banking Systems
(New York: H. Hall and Company, 1936)
Willis, Parker H. , and John M. Chapman: Banking Situation (New York:
Columbia University Press, 1934)
B. DOCUMENTS
Commission on International Exchange, Report on the Introduction of the
Gold Exchange Standard into China and other Silver-using Coun
tries, published as H. Documents 144, 58th Congress, 2nd Session.
Conant, C. A. "Special Report to the Secretary of War, on Coinage and
Banking in the Philippine Islands, Washington, 1901.
Great Britain: Department of Overseas Trade, Report on the Economic
Conditions in the Philippines, 1925-1938. (London: H. M.
Stationery Office, 1939)•
Kemmerer, W., First Annual Report of the Chief of the Division of Cur
rency of the Philippine Islands (Manila: Bureau of Printing, 1905)
Official Gazette, Volume XV
Congressional Record:
55th Congress, 3rd session
56th Congress, 1st and second sessions
145
57th Congress, 1st and 2nd sessions
59th Congress, 1st and 2nd sessions
67th Congress, 1st and 2nd sessions
70th Congress, 1st session
73rd Congress, 1st and second sessions
REPORTS:
*
Philippine Commission, 1900-1916
Bureau of Insular Affairs, 1902-1935.
Secretary of War, 1900-1935.
House Reports:
No. 15520, 57th Congress, 2nd Session
No. 3023 and 3824 on the Coinage Law of 1903, 57th
Congress, 2nd session
No. 1209, 73rd Congress, p. 11806
Philippine Islands:
Administrative Code of 1916
Manila Bureau of Printing
Bureau of Banking, Annual Report of the Commissioner of
Banking, 1932 (Manila: Bureau of Printing)
Reports and Recommendations of the Joint-Philippine American Finance
Commission (Manila: Bureau of Printing, June 7, 1947)
Republic Documents:
H. No. 1704, 1st Congress, 3rd session
H. No. 1929, 1st Congress, 2nd special session
146
United States Senate Documents:
No. 62, On the Treaty of Paris, 55th Congress, 3rd session
No. 331, Hearing before the Senate Committee on the Philippines
in relation to affairs on the Philippines, 57th Congress,
1st session.
C. PERIODICALS, NEWSPAPERS, MAGAZINES
Evening News, July 19, 1947
Manila Times, Midweek Review, December 29, 1948
Manila Times, July 19, 1947
Cuaderao, Miguel: “Banking Problems", Philippine Forum, Volume I, 1935-
, “Financing a Business", Philippine Finance Review.
Volume 2, No. 1, 1929.
, “Financing Philippine Industry", Philippine Finance
Review. Volume 3j No. 3, 1930.
. "Our Real Economic Problem" (Philippine Finance
Review. Volume 2, No. S.
. "Why a Central Bank", Commerce. Volume 43, No. 4j 1948.
, "Farm Credits in the Philippines", Volume 3, No. 4> Mayl930
Garis, Roy: "Fort Knox Gold Not Worthless", The Commercial and Financial
Chronicle. 1948.
Groves and Exter: "The Philippine Central Bank Act", Federal Reserve
Bulletin. August 1948.
Isip, Elpidio 0.: "The Central Bank", Commerce. Volume 42, No. 21947.
Kriz, Elpidio: "Central Banks and the State Today”, American
Economic Review, 194-9
Kemmerer, Edwin: "The Establishment of the Go}.d Exchange Standard in
the Philippines”, Quarterly Journal of Economics. Volume XIX, 1905*
Mabbun, P. N.: "The Place of Farmer's Cooperative on our National
Economy", Philippine Social Science Review, Volume 12, No. 2, 194-0
Roxas, Manuel: "The Need for a National Economic Policy", Philippine
Finance Review. Volume 3, No. 2, 1930
Schwulst, Earle: "Commercial Banking in the Philippines", Philippine
Finance Review. Volume 3, No. 3, 1930
J ______ : "Banks in the Philippines", Philippine Finance Review.
Volume2, No. 1, 1929
Stimson, Henry: "Why I Signed the Four Bank Bills", Philippine Finance
Review. Volume 12, No. 3, 1929.
Tomas, Nicanor: "Limitation on Local Bank Loans", Philippine Finance
Review. Volume 3, No. 2, 1930.
Tolentino, Arturo: "Commentaries and Jurisprudence on the Commercial
Laws of the Philippines", Volume II, 194-7, pp. 920-927.
Willis, Parker H: "The Philippine National Bank", Journal of Political
Economy. Volume 25, 1917.
The Federal Reserve System, Its Purposes and Functions: Board of
Governors of the Federal Reserve System, 194-7.
Philippines Chamber of Commerce, "The Omnibus Banking Act", Volume 4-3,
Philippine Finance Review. "Resources of Building and Loan Associations,
Volume 3, No. 9 , 1930.
_____________________ , "Cooperative Marketing Loans", Volume 3>
No. 8, 1930.
______________ , "Proposed Amendment to Banking Law, Explained
Amendment, Volume 2, No, 8, 1929 •
Philippine Trend. "A Central Bank”, 1 9 4 - 8 .
tfn h w e W y of S o u th e rn C alifo rn ia UfcirgF?

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Creator Magno, Milagros Romulo (author)

Core Title The current money and banking system of the Philippines

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag business administration, banking,economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Garis, Roy L. (committee chair), Leonard, Joy L. (committee member), Phelps, Clyde William (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-436460

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Rights Magno, Milagros Romulo

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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