The peso and the central bank

Title

Language

English

Source

Life without principle

Year

1968

Rights

In Copyright - Educational Use Permitted

Fulltext

■ This statement in a speech of Senator Jose J. Roy at M. L. Quezon University attempts to ex plain the nature of the Philippine Peso as the basic unit of the Philippine currency. THE PESO AND THE CENTRAL BANK The Philippine Peso, our monetary unit established by law, is the medium of ex change whereby prices are expressed, goods and ser vices are paid for, and debts and other contracts dis charged in this country. Almost from the first time that Central Bank notes or paper money went into cir culation in our country, the validity and worth of said paper money as a medium of exchange have been as sailed on the Floor of Con gress as early as 1949 on the grotind that the new Cen tral . Bank paper notes lack gold or silver backing unlike the former treasury certifi cates or Victory paper cur rency which they have re placed. Indeed, even house wives eyed the new curren cy with doubt and suspicion as a medium of exchange. We had to explain again on the Floor of Congress, in spite of the many days of debate on the Central Bank Charter in the preceding year, the meaning of the managed currency system in stituted by the Central Bank Charter. We had to assure our people that the new cur rency notes, though lacking in metallic backing such as gold or silver, can be as sound and stable as the cur rencies of other countries throughout the world if pro perly managed by the guar dians of our monetary policy because said currency has for its backing, the wealth and resources of the nation and other internationally ac ceptable currencies of other nations constituting our in ternational reserve. But how sound has our Peso been? Has it promo ted the economic growth of our country in the way of raising employment and in creasing production and real income for our people? 6 Panorama We cannot deny that our Peso has been on trial from the beginning of its emer gence as a Central Bank note. We instituted exchange controls in the later part of 1950 until January 1962, when partial decontrol took place, and in January 1966 when total decontrol was adopted. We instituted con trol as an economic necessity because we were creating lo cal currency, very much more than we were produ cing foreign exchange or fo reign moneys acceptable in the world trade and com merce, such as, the U.S. dol lar which has been establish ed by the International Mo netary Fund as the standard monetary ’ unit of the wor’d. Our local currency, the Peso, is not a legal tender or acceptable medium of ex change outside our country, in the same way that cur rencies of other countries are not legal tender in our country. We have to pro duce the US dollar and other currencies acceptable in world trade and commerce with which to purchase or acquire the things or com modities from outside our country, such as food, me dicine, tools, and implements for production, machineries and raw materials for our industries and other vital which we do not or can not sufficiently produce in our country. We have always been be set with the perennial prob lem of dollar or foreign ex change reserve — of the need of producing more dol lars for our expanding eco nomy by increasing our ex port receipts, inviting foreign borrowing. We all know that since the last war up to the present, the balance of trade has almost always been against us; our expenditures in dollars or purchases from abroad have exceeded our earnings in dollars. During the last year while we earn ed more than 800 million U.S. dollars worth of export receipts, we spent much more than that for our im ports; and while we earned the further sum of another 850 million U.S. dollars worth from non-export items, other wise known as invisibles, we spent for the same period about 900 million dollars worth for non-import items That is why our dollar or foreign exchange reserves June 1968 7 have gone down to such precarious or critical level as to compel the Central Bank authorities to adopt re strictive measures on credit and on the flow of our local currency. This, we have to do, short of returning to ex change control. We are not alone in the world in this problem. Please remember that aftpr the last great war almost all the civilized countries of the world have turned to the managed currency system like the one we have, aban doning the gold standard system as having become ob solete, dispensing almost entirely with the metallic reserve requirement. And only recently the US has done away with its 25 gold certificate backing of her currency thus having for its full backing the wealth and resources of the United States. Gold, however, will continue to be used in the payment or settlement of in ternational obligations among nations as when, for instance, a country like France shall refuse the U.S. dollar for the reason that said country has more dollars than she needs, in which case, France can demand that she be paid in gold at the international price of P35 per ounce as fixed by the International Monetary Fund. But you may ask why can we not adopt the monetary system we had before the institutions of the managed currency system when the peso had a metallic reserve and with much more pur chasing power than the peso that we now have? It is true that the peso under the old system of cur rency when we were a de pendency of the U.S. had a one hundred per cent (100%) dollar backing which in turn had a metallic back ing. It was so because we were not a sovereign state, and the power to create cur rency is an attribute of so vereignty. America imposed upon us a colonial system of currency whereby the pe so we could issue was the equivalent of the dollar we could produce at the ex change rate of two pesos to the dollar. To illustrate: For the one hundred million dollars receipt from all our exports in one year, for in stance, the National Treasurer could only issue the peso 8 Panorama equivalent of two hundred million pesos in treasury cer tificates at the official rate of two pesos for every dol lar. Said dollar income from our export receipts shall form part of our dollar reserve in the U.S. And if we had to use for instance in the same year the whole of the one hundred million dollars to pay for our imports from the U.S., we had to retire from circulation the same two hundred million pesos worth of treasury certificates or notes to pay for said one hundred million dollars. Under such a system whereby the Peso is depen dent automatically on the U.S. dollar, we were not able to promote the growth of our economy. We suffered from ecpnomic stagnation during the more than forty years of American rule in our country; we were pinned down to an agricultural eco nomy we were forced to the status of supplier of raw materials to America, and consumer of her manufac tured goods. And the U.S. saw to it, that for every dollar invested in our coun try, she got back her profits and capital in dollar. Un der the colonial system of currency, I repeat, we could not produce our local cur rency, the peso, in excess of its equivalence in dollar; and all our peso had a 100 backing of the U.S. DOL LAR. While we had no problem of dollar reserve we were however, prevented from developing our agricul ture and other natural re sources, and especially, our industries. Upon the establishment of our Republic in 1946, we adopted our own system of currency and broke away from the dollar standard by instituting the managed cur rency system under the char ter of our economic sove reignty, the Charter of the Central Bank, R.A. 265. How do we create money or when do we issue peso notes and coins? The Char ter of the Central Bank which has the sole right and authority to issue currency provides expressly that the Central Bank may issue notes and coins only against, and in amounts not exceeding, the assets of the Bank. And what are the assets of the Central Bank against which notes and coins are issued? June 1968 There are about five bil lion pesos worth of unissued currency notes or printed paper bills in the vault of the Central Bank, and said notes are issued against our earnings in foreign curren cies, from our export receipts, and the so-called income in invisibles, such as, foreign investments, expenditures of the U.S. in its military instal lations, U.S. pensions to our veterans, expenditures of tourists and many other forms of income in invisibles. But that is not all. The Central Bank also issues fresh money or currency notes against bonds and se curities issued by our Gov ernment by authority of law. While the Central Bank is prohibited by the Central Bank Charter from subscrib ing‘to bonds issued by the Government, it can buy said bonds in the open market. Since bonds are assets in the form of promissory notes the Central Bank can issue mo ney against said bond assets. Please understand that our government in its yearly bud get is providing about two hundred million pesos for the servicing or redemption of said bonds when the pe riods of their maturities come. They are paid from money in circulation or from the income of the govern ment from taxes and reve nues. Unless they are paid out of the money in circu lation, we may be flooded with local currency resulting in harmful inflation. It may surprise you to know that the largest asset of the -Cen tral Bank against which cur rency were issued are the bonds acquired by it in the total sum of about one and one-half billion pesos. A very important function of the Central Bank in creat ing money is the issue of currency against assets or credit instruments of the banking system under its re discounting and discounting operations. Banks and other financial institutions take re course to the Central Bank for fresh money on their eli gible papers or solid gua rantees or collaterals. With out said facilities extended by the Central Bank, most of our banks will not be able to operate. Fresh mo ney may also be issued in the form of budgetary ad vances to thes government in an amount of not more than 10 Panorama 15 per cent of its expected income from revenues which, at the present time, amounts to about 300 million pesos on its revenue income of about two billion pesos but payable during the first quar ter of the year following. But most of the time the government has been delin quent in paying said obliga tion to the Central Bank. In the instances I have cited, the issue of money is made against the resources of . our government in the case of bonds and budgeta ry advances, and against the resources of our banking and financial institutions which reflect the wealth of the na tion. The managed currency system is now obtaining or has been adopted in almost all free or civilized countries of the world accounting for the general increases in prices and corresponding raises in wages and salaries The desirable degree of in flation has spurred progress all over the world, enabling nations to recover remark ably from the chaos and ma terial havoc caused by the last Great War. Massive public borrowings or bond issues have been resorted to. NOT BY RICE ALONE Abundance in rice is not enough to win and sustain the faith of the people in the government. There must also be abundance of goodwill, since rity, and honesty. — Fernando Lopez June 1968 11

pages

6-11

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