In comments, J.H. asks why the Phillipines didn’t adopt the U.S. dollar. After all, Hawaii and Puerto Rico did, as did Cuba, Panama, and the Dominican Republic. So why not the Philippines?
By the time the Philippine War ended in 1902, five different monies circulated in the Philippine Islands:
(1) Mexican silver pesos;
(2) Spanish silver pesos minted under the 1897 Royal Decree;
(3) Fractional currency;
(4) bank notes issued by the Banco Español Filipino; and
(5) U.S. dollars paid to American troops during the war.
The silver currencies traded at values that had little to do with their actual silver content; the Philippines were basically on a fiat money standard, with the difference that nobody was actually in charge of issuing it. Nobody liked that, so the U.S. had to decide between three different options. First, it could regularize the silver currency, basically continuing the existing system but under the control of a single mint. Second, it could introduce the U.S. dollar. (The U.S. was then on the gold standard. Dollar coins had a fixed gold value, and federally-regulated banks were required to back their note issues with gold or U.S. government bonds.) Third, it could introduce a separate Philippine gold-backed currency.
Why adopt the dollar? I give the floor to Representative Ebenezer Hill (R-Connecticut): “I want to say to every one of these representative from the Pacific coast that whenever they vote to put a new and strange system of coinage in the Philippine Islands is to build a fence between the trade of those islands and the trade of that coast.”1 Since Republicans backed the permanent retention of the Philippines, such a position was not terribly surprising.
What might be much more surprising is that most of the support for adopting the dollar came from the Democrats, who were loudly and uniformly opposed to annexation. What explains that? Well, examine the following exchange:
William Jones (D-Virginia): I would like to ask the gentleman if he does not think by extending the coinage laws of the United States to the Philippine Islands and giving them our lawful money we could get out of there if we wanted to much more easily than if we gave them a distinctive currency which we would have to redeem and pay for?
Sereno Payne (R-New York): Oh, on the other hand, I think it would look as though we meant to stay there forever. [Laughter on the Republican side.]2
What was Jones getting at? How would installing the dollar in the Philippines make it easier to leave? Well, let’s go to Representative James Williams (D-Illinois):
A moment ago the gentleman from New York twitted those of us who want to get out of the Philippines with some sort of imagined inconsistency because we were supporting the substitute bill. ... I believe with all my heart that a greater mistake was never made than ever having landed a man to stay upon the Philippine shore after the Spanish fleet was destroyed. ... But I claim that when we leave we should leave behind American money as a stimulating agency for the expansion of American trade in the future. ... I say today that if you turn the Philippine Archipelago loose as an independent nation upon the Earth, it can not by any legislation float a token coin.3
In other words, the Democrats supported introducing the dollar because they believed that it would promote economic stability, thereby making it easier for the U.S. to get out forthwith. After all, Cuba had the dollar but the United States was smoothly on the way out. (The Democrats had no problem with Puerto Rico, although they were upset that the constitution was not extended to the island.) This position was honest: as I may talk about in a future post, the Democrats also strongly supported restrictions on American investment in the islands as long as they were under American sovereignty.
So why did Republicans prefer the option of a gold-backed Philippine currency?
The first problem is the Philippines were poor. One cent in 1901 was worth 27¢ in 2010 in the United States. In 1901, the price level in the Philippines was a lot lower than the price level in the U.S. (This is a general phenomenon: prices are lower in poor countries than in rich ones.) So one American penny bought at least the equivalent of fifty cents, whereas a Filipino centavo bought half as much. Losing the smaller denomination would have been a serious problem.
Of course, Philippine poverty wasn’t the only problem: Representative Hill proposed that the U.S. reintroduce the half-cent as an easy solution. The second fear was a bout of inflation. Puerto Rico had seen that during the changeover, as merchants attempted to charge as much in the new currency as they had in the old. (In theory, that shouldn’t happen. In practice, it did, and it forced an unpleasant political response.) William Howard Taft, the governor of the Philippines, was particularly worried; the last thing he wanted was popular discontent. Puerto Rico had handled the trouble, but Puerto Rico wasn’t coming out of a vicious guerrilla war.4
Finally, the Commission government convinced itself that a new peso could be introduced faster than the dollar. The Taft government (and potential American investors) were unhappy with the exchange rate fluctuations that afflicted the archipelago. It wanted a gold peso to stabilize the situation, and it wanted it quickly. If it could not get a gold peso, then it wanted the right to mint silver ones, but it wanted something.
The Democrats were a minority in Congress. They couldn’t pass a bill adopting the dollar in the House. In the Senate, Democrats were willing to fight for investment restrictions, but they were not going to do that over the currency. So bills passed both houses.
Except different bills passed each chamber. The House of Representatives voted 89-55 in favor a gold-backed Philippine peso, whereas the Senate accepted unanimously a proposal to coin silver. No compromise was forthcoming. As a result, the Philippine Organic Act of 1902 contained no monetary proposal, save an authorization to mint small change.
After another year of monetary chaos in the Philippines, the Philippine Commission went back to Congress. On January 22, 1903, the House of Representatives changed its position and voted 147-127 to introduce the dollar into the islands. The Senate then also changed its position, and voted on February 16th to create a gold peso. This time, however, compromise was forthcoming, in the sense that the House reversed itself. On February 24th, the lower house voted 139-104 to create a gold peso at a fixed rate of 2:1 with the dollar.
The introduction turned out to be messy and unsettled. It proved difficult to get the old silver pesos out of circulation; the exchange ratewith silver varied wildly; and managing the new currency proved more difficult than expected. It is far from clear that switching to a gold peso avoided many of the problems that switching to the dollar would have entailed. But there you have it.
In short, Taft and the GOP wanted to create a fixed exchange rate with the U.S. (believing that would promote trade and investment) but without the delay and dislocation that they believed would come from introducing the dollar. They then got all the delay and most of the dislocation anyway because Congress could not decide.
That said, it is also extremely unlikely that adopting the dollar would have made much difference. For it to have had a big effect before independence, you would have to be a very strong believer in the (excellent!) work of Andrew Rose on the effect of currency unions on trade to argue that having the dollar (as opposed to a fixed rate of 2:1 under American sovereignty) would increase trade by much. (In fact, Rose would expect it to make no difference; the fixed exchange rate between the U.S. and the P.I. was already a strong currency union.) There was a big financial crisis in 1919-22, in which the management of the fixed exchange rate was involved, but it is unclear at best whether the dollar would have really made any difference. The combination of postwar dislocations and mismanagement at the Philippine National Bank would have been a major problem either way; the dollar did not protect Cuba.
As for post-independence Philippines, well, after WW2 the U.S. spent a lot of effort to de-dollarize countries that used the currency. Considering how important capital controls were for postwar Philippine governments, it is hard to see why the Philippines would have been any different. Capital controls would have still been imposed and an American commission would have helped introduce a new currency, and the only difference is that the exchange rate would have fixed under the Bell Trade Act at 1:1 instead of 2:1. Perhaps the Philippines would have resisted de-dollarization (Panama did) but that seems very unlikely.
In short, the Philippine currency embroglio probably belongs in the list of Great Debates That Turned Out Not To Matter. But it get the world some coins that it otherwise would not have had, and now you know why.
1 Congressional Record, 57th Congress, 2nd Session, p. 1073.
2 Ibid.
3 Ibid.
4 Kemmerer, Modern Currency Reforms, p. 305.
Wow! Thanks Noel.
A very interesting story. And I suppose once opinion in favour of independence for the Philippines gained traction in the United States by the 1910s there would have been little incentive to change the policy and have the Philippines adopt the US dollar anyway like what happened in Puerto Rico when the US dollar was fully introduced after the expiration of the charter of the Bank of Puerto Rico (and with it the currency issued by the bank denominated in "pesos" and "dollars"). One wonders how the Philippines would have fared if they had received a similar treatment as Cuba (independence in the early 1900s even if circumscribed constitutionally).
Posted by: J.H. | February 08, 2012 at 11:22 AM