The peso and Philippine economic history

The story of the peso is inextricably linked with our economic history as a nation. It is also part of Philippine political history.

A monetary currency is adopted by the government to set up a means (and guarantee) of payment to enable normal commerce to proceed.

Spanish colonial times. During the 16th century (the age of explorations and European colonization of the world), the peso was a royal silver coin minted by the Spanish royal crown, much like the thaler (or “dollar”) within Europe.

Also known as real de a ocho (or “piece of eight”), the peso was also minted in larger quantities in colonial mints of the crown in Mexico and Peru, where bountiful mines were located that produced great wealth and power for the Spanish empire.

The peso would find great currency in the Spanish colonies (including the Philippines). Spanish colonial administration would adopt the peso as the means of payments in trade and financing of the government.

Throughout Spanish colonial period, the peso would delineate the story of Philippine trade and domestic prices. It was the currency that financed the Galleon Trade with Mexico and life within the colony up until the contemporaneous life of Jose Rizal  who was executed by the Spanish authorities shortly before the Spanish-US War of 1898.

The peso in American colonial times. One of the first decisions of the American military government when it took control of Las Islas Filipinas (the Philippine Islands) from Spain was to continue to use the peso as the local currency for transactions in the new colony unit.

The islands were a booty won from war in 1898. The US destroyed Spanish colonial rule over the islands, overcame also militarily the local struggle for independence, and took political possession. The transfer of political control through a treaty of peace and the payment of $20 million equivalent for “improvements” that Spain made as the former colonial master saved face as the loser.

In adopting the peso as the unit of currency, the US colonial government fixed its value at one-half the US dollar. Thus, one US dollar became equivalent to two Philippine pesos.

That made the Philippine peso become a currency based on fixed exchange rate with the US dollar. Hence, it was a currency operating under a “dollar exchange” standard. It was common practice among colonial powers to base local currencies after a fixed exchange with their own stronger currency.

Throughout the almost five-decades of strictly being under American colonial administration, the Philippine peso had a fixed value of two pesos per US dollar.

(This was only interrupted by four years of Japanese occupation. During this subsequent interim, the peso was also used as the currency. During that period, the peso suffered the highest loss in value as a currency as the occupying government over-printed it to acquire its needs to finance the war.)

Stable exchange rate for 40 years. During the American occupation that began in 1899, colonial economic policy relentlessly followed a fiscal and monetary policy based on the fixed dollar exchange standard.

The external value of the US dollar as a currency would change during the unstable decades of international colonial and national rivalries that led up to the first World War (1914-1919), the post-war years thereafter and then the Great Depression (1929 to 1930s).

However, the value of the peso remained the same with the US dollar. Along with the moments of great American prosperity during the following decades that marked the rise of the US as a major political and industrial world power, Philippine economic prosperity also was swept in stride, but only as that of a colony.

A growing desire for national independence, however, was brewing inexorably forward in the Philippines. In its midst, the prices of the colony’s goods and assets were moving like those of the internal prices of the US economy.

Philippine economic fortunes were intertwined with the US dollar, both in times of prosperity and during the Great Depression. Prices – both internal and external – recorded the same similar fluctuations of US prices.

Thus, Philippine prices moved like an accordion along with those of the US economy. Simultaneously, the Philippine economy would transform into a strongly developing, but colonial economy.

Protected by a stable currency of a rising economic power, and enjoying its economic patronage as well as protection and further stimulated by free trade that existed between master and colony, the Philippines was developing into a fairly strong colonial economy even as it marched toward its destiny of independence.

The 1930s and the Philippine independence movement. The confluence of economic forces helped propel major nationalistic gains in the demand for Philippine independence. American agricultural states that grew crops that competed with sugar and coconuts became allies of the Philippine independence movement.

This was realized during the incumbency of then newly elected president Franklin Delano Roosevelt, the Democrat who would champion the cause of recovery from the Great Depression that cut American prosperity in 1929, during then presidency of Herbert Hoover, a Republican.

Through the decades, the Democratic Party was more friendly to nationalistic independence of the Filipinos. The Republican Party, however, was the party of economic imperialism, which tried to keep the country within the fold of American power.

The Philippine independence law – the Tydings-McDuffie Act – accepted the grant of independence after an adjustment period of 10 years, beginning with a Commonwealth government that would serve as the experimental tutelage toward full independence of the Philippines.

Two results happened. First, the Philippines became a Commonwealth in 1936, thanks to the constitutional convention that set up the framework of a Philippine Commonwealth government that would be approved by the US president.

Second, upon the establishment of the new Philippine commonwealth government, a joint preparatory study commission composed of Philippine and US officials was set up to propose measures to reduce the Philippine economy’s dependence on the US economy. In this, measures of trade, commerce, and currency (the peso) would become critical ingredients of economic adjustment.

A common strand of these developments was that the peso was to remain in value relative to the fixed rate of exchange with the US dollar.

(To be continued.)

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