The Crisis of the Philippine National Bank and Its Political Consequences: 1919-1922

Abstract

This paper first discusses the nature of the crisis faced by the Philippine National Bank that was directly related to the collapse of the currency reserve fund during 1919-1922, then the political consequences of the financial crisis in the Philippine Legislature under American colonial rule during the early 1920s is discussed.The Philippine National Bank was established in 1916 as the multi-purpose semi-governmental bank to provide loans for the agricultural export industry, extending business as a commercial bank, and issuing bank notes while depositing government funds. In 1917 the National Bank opened its New York agency, and soon larger parts of Philippine currency reserves, such as the Gold Standard Fund and the Silver Certificate Reserve (these two were combined into the Currency Reserve Fund in 1918) were deposited in the New York agency. The currency reserves were Philippine government funds that the National Bank could not utilize for its own purpose. However, strangely enough, most of the currency reserves were transferred to the Manila office of the National Bank by the end of 1918 through the following method. Making use of currency reserves as its own capital, the bank issued bank notes to provide a large amount of loans for export businesses. As a result, the Philippine economy incurred hyper-inflation and exhausted currency reserves.Why did this happen? The US government sent the Wood-Forbes Mission to investigate Philippine political and financial conditions in 1921. Its purpose was to examine the Filipino people's ability to govern themselves in not only political and legislative, but also financial and economic affairs. The most serious financial and economic matters were the near bankruptcy of the Philippine National Bank and the collapse of the currency reserve system. The Mission concluded that the incompetence of bank officials was the cause of the deep financial and economic crisis that had hit the Philippines. This observation was widely accepted in the Philippines, and one of main issues for Filipino political leaders became who should take responsibility for the crisis: Sergio Osmeña or Manuel L. Quezon, the most powerful leaders in Philippine politics, both from the Nacionalista Party. In this situation, it was Quezon who opened fire against Osmeña. At the end of 1921, Quezon, taking advantage of his No. 2 position in Philippine politics, started criticizing the sole leadership of Osmeña, emphasizing Osmeña's responsibility for the financial crisis. The Nacionalistas were split into two: the Nacionalista Colectivistas led by Quezon and the Nacionalista Unipersonalistas led by Osmeña. It was Quezon who won the struggle. When the two Nacionalista parties were merged into one Nacionalista Consolidado party, Quezon became president, with Osmeña as vice-president.To conclude, the rivalry between Quezon and Osmeña was an outcome of the political impact of the Wood-Forbes Mission report on the Philippine society, but not a direct outcome of the financial and economic crisis in the Philippine government. The mismanagement of the Philippine National Bank and the collapse of the currency reserve system were caused by the combined elements of the weak structure of the American colonial government in the Philippines, where American officials, both in Manila and Washington, DC, were also deeply involved.