Although the title of Yoshiko Nagano's book suggests a wider scope, viz., the entire American colonial period in the Philippines, the actual focus is narrower, namely the Philippine financial crisis in 1919–1922, with its historical causes, the preparatory phase, the crisis years and the aftermath. This focus allows the author to present a fresh interpretation of the events during this period. The historical literature on the Philippines depicts this crisis as the “corruption scandal of the Philippine National Bank.” However, the author points out that the focus on corruption is a colonial narrative masking the mismanagement of the colony's monetary system by the responsible American officials, and more in general a lack of administrative control during the first two decades of the American administration in the archipelago. She points a critical and accusing finger at the colonial master of the Philippines. The author has based this study on extensive research in the American archives and published studies. She has unearthed a wealth of material on the connections between American and Philippine officials and the Philippine elite during the period.
In her analysis of the deeper causes and the run-up to the crisis the author has to dissect two large pieces of the puzzle, viz., the monetary system of the Philippines and the operations of a new Philippine bank, the Philippine National Bank (PNB). The monetary system was a variety of the gold standard system, but without gold coins in circulation and even without gold in the national treasury. The system was called the Gold Exchange Standard. The monetary unit was the theoretical gold peso, with a gold content one-half that of the American dollar. The actual currency was to consist of silver peso coins (a token coin) and paper currency. The system had to mimic the pure gold standard, with its automatic adjustment mechanisms. If a country under the gold standard experienced a negative balance of trade, gold had to be exported (paid) to other countries, thereby causing a reduction of the currency with the amount of coins exported. Under the Gold Exchange System a Gold Standard Fund was established for the purpose of maintaining the parity of the silver peso in circulation with the gold standard peso. The Fund consisted of dollars and securities and was managed under the supervision of the Bureau of the Treasury. The Gold Fund consisted of two parts, one located in the United States, the other in the Philippines. The Bureau sold drafts on the American part of the Gold Fund to persons or corporations in the Philippines who needed dollars. These buyers paid silver pesos to the Treasury and this money had to be withdrawn from circulation and was therefore deposited in the Philippine part of the Gold Fund. There was also a Silver Fund, with a supply of silver dollars ready for those who wanted to exchange their paper money for silver coins. However, this fund was less needed after a couple of years, as Filipinos had become used to paper money.
The second part of the narrative is the story of the Philippine National Bank (PNB), established in 1916, with the purpose of providing credit to the Philippine business world. An earlier bank, the Agricultural Bank, also analyzed by Dr. Nagano, established in 1908, but not very successful in its operations, was merged with the PNB. The PNB was authorized to lend up to 50 percent of its capital and surplus to entrepreneurs. Loans were not supposed to exceed 60 percent of the actual value of farm lands.
The American officials in the Philippines and the Philippine Legislature modified the modus operandi of both the monetary system and the PNB in the course of the ensuing years. The two parts of the Gold Standard Fund were deposited in the American and Philippine branches of the PNB, with the consent of the American supervisors and the Philippine Legislature. Furthermore the officials allowed the PNB to transfer funds from the US to the Philippines. The PNB did this by selling drafts on the New York agency of the bank. These funds were then used to finance loans to businesses in the island, both American and Philippine entrepreneurs and corporations. The operations depleted the American part of the Gold Standard Fund.
The officials, both of the state and the PNB, made another serious mistake. Under the original set-up of the Gold Exchange Standard, the pesos which were paid in the Philippines for the purchase of the drafts on New York should have been deposited in the Philippine part of the Gold Standard Fund, in order to be withdrawn from circulation. The PNB, apparently with the consent of the officials, did not follow this protocol. It should be noted that the author does not adequately explain this aspect of the whole mismanagement of the monetary system.
During the financial crisis that hit the country from 1919 until 1922, the value of the peso vis-à-vis the dollar declined, by several percentage points (in 1921, up to 8 percent). At the same time the tremendous increase in pesos in actual circulation caused high inflation. It should be mentioned that the colonial government and the PNB were both responsible for the decline of the dollar value of the peso. According to the law, drafts on the New York part of the Gold Standard Fund should have been sold at the regular rate of two pesos for one dollar. Instead, the officials responsible charged a premium on the sale of these drafts in order to discourage residents in the Philippines from drawing on the New York fund, which had been severely depleted by the illegal operations of the PNB.
There is another aspect of this credit inflation which would have deserved some attention from the author. The PNB was, as the author repeatedly points out, a modern bank. From the late nineteenth century onward modern banks had discovered the practice of “manufacturing money,” by giving loans and thereby creating deposits, replacing the old habit of 100 percent reserve by the fractionary reserve principle. Contemporary observers were noticing this practice. The question then is: to what extent did the PNB follow this “modern” habit of banking? This practice changed the whole notion of money in the early twentieth century, as money was no longer only metal coins and paper money in circulation, but also bookkeeping money in deposits. It would have been interesting to investigate to what extent contemporary practitioners in the Philippines were aware of this “innovation,” and purposely abusing it.
The author presents a rich amount of data on the loan business of both the Agricultural Bank and the PNB, with details about the background of the persons and corporations receiving the loans and the size of the loans. She points out that both the Agricultural Bank and the PNB granted loans primarily to the larger landowners, especially the elite in the sugar-producing provinces, rather than to small farmers in the rice-producing provinces. The author surmises that this practice of granting loans to the elite reflected the policy of the US colonial administration to woo the local elites for US rule, after the difficult period of Philippine nationalism and resistance in the first few years of the American domination. In addition there was a high degree of cooperation between the top of the PNB (particularly PNB president Venancio Concepcion) and the sugar elite, in other words corruption. A minor inaccuracy should be noted: the author mentions Concepcion's arrest three times (which in itself is a bit repetitive) with different dates: on p. 138 with the date 24 June 1921, on pp. 167 and 168 with the date 23 June 1921.
The banks had a problem with collateral for the loans, as only part of the land had property titles that were acceptable for the banks. The Spaniards had a rudimentary system of land registration. The Americans introduced the Torrens title system, but registration was slow. The PNB therefore gave two types of loans: as mortgages with the land title as collateral, and as crop loans, with the standing crop as collateral for the loan. The author expresses her amazement that a modern bank such as the PNB still used crop loans, which she considers as traditional. Nineteenth-century merchant houses had used crop loans for the purchase of export crops. However, it is not entirely correct that crop loans were a typical feature of traditional settings. In Indonesia under Dutch colonial rule (Netherlands Indies) crop loans were use on a large scale by modern foreign-owned plantations in their dealings with Dutch banks. The crop loan or consignment contract (Dutch: “oogstverband”) was based on a Dutch law of 1886, the Harvest Security Scheme, and was perfectly legal and enforceable. It is not clear from Dr. Nagano's presentation whether a similar legal framework existed in the Philippines. She mentions (on p. 103) that the Philippine Legislature had approved a special Act, permitting the PNB to provide traditional crop loans to lenders. It is not clear whether this Act provided sufficient guarantee for the repayment of the loans. But apparently it did not matter much, whether the loans were mortgages or crop loans, as neither category was paid back by the lenders.
The author formulates an interesting and challenging hypothesis in her Conclusion. She argues that the American colonial state in the Philippines still had a fragile character before World War I, and that it was only during the 1920s, in the aftermath of the financial crisis, that the colonial regime took firm root. The financial crisis could take place precisely because the state was weak. During the 1920s the Americans reconstructed the administrative and financial pillars of the colony, particularly the system of control and accounting. It is an interesting and innovative hypothesis. Her analysis of the financial crisis offers most of the arguments to confirm the first part of her hypothesis, i.e., the initial weakness of the American colonial state. I have some doubts about the second part. From the late 1920s onwards the Americans attempted to disentangle themselves from direct control of the colonial administration, which became much more explicit after the initiation of the Commonwealth in 1935. Under Quezon as president of the Commonwealth, the Philippines became more of a Philippine state, though with a strong political patronage system and widespread corruption. It would be interesting if the author were to pursue her studies with a focus on the colonial state in the 1930s in order to test the second part of her hypothesis.
Yoshiko Nagano's book, based on extensive research and a thorough investigation of the operations of both the American colonial government and the PNB in the 1910s and early 1920s, is a welcome addition to the economic history of the Philippines. With the detailed discussion of the beneficiaries of the loans, the study goes beyond the older literature on the subject.
