Another fundamentally important aid to the commercial development of the islands was afforded by a radical reformation of the currency.

The islands under the sovereignty of Spain had their own distinct silver coinage in peso, media peso, peseta and media peseta pieces.

In 1878 the Spanish government, hoping to check the heavy exportation of gold currency from the Philippines, passed a law prohibiting the importation of Mexican dollars, but allowed the Mexican dollars then in the islands to continue to circulate as legal tender.

When the American troops arrived, there were in circulation the Spanish-Philippine peso and subsidiary silver coins; Spanish pesos of different mintings; Mexican pesos of different mintings; Hongkong dollars, fractional silver coins from different Chinese countries, and copper coins from nearly every country in the Orient. Although a law had been passed prohibiting the introduction of Mexican dollars into the islands, they were being constantly smuggled in. Fluctuations in the price of silver affected the value of the silver coins, and the money in common use was in reality a commodity, worth on any given day what one could get for it. These conditions affected most disastrously the business interests of the islands. Merchants were forced to allow very wide margins in commercial transactions, because they did not know what their goods would actually cost them in local currency upon arrival. The most important business of the local banks was in reality that of exchange brokers and note shavers. They hammered the exchange rate down and bought silver, then boosted the rate skyward and sold.

The American army brought in a large amount of gold, but this did not remain in circulation long, as it was exported by the different business concerns, or hoarded.

United States silver money had a limited circulation during the early days of American occupation, but it passed at less than its true value. An effort was made under the military administration to keep the ratio of exchange at two to one by the purchase from the public of all United States currency offered at that rate to the banks.

For a long time the banks refused to carry private accounts in United States currency, but when it was offered for deposit it was changed into Mexicans with a heavy charge for the transaction, and an account opened in Mexican currency to the credit of the depositor. If the depositor afterward desired to get United States currency, he gave a check for it at the then existing rate of exchange. Such conditions were intolerable, and the commission passed an act making it an offence to refuse to accept for deposit the currency of the sovereign power, but this did not remedy the fundamental difficulty. There came a heavy slump in the price of silver. The Insular government lost a very large sum because of the decrease in value of its silver coin.

Mr. Charles A. Conant had been brought from the United States to make a report on the feasibility of providing an American coinage for the islands. He recommended that the unit of value should be a peso, equivalent to fifty cents United States currency. Congress, by an act passed July 1, 1902, vested general authority over the coinage in the Philippine government, but the commission decided not to take action until more specific authority could be obtained from Congress, as the proposed reform was radical, and it was very important that the new currency should at the outset command the confidence so essential to its success.

After long discussion, Congress authorized, by an act passed March 2, 1903, a new currency system based on a theoretical peso of 12.9 grains of gold 900 fine, equivalent to one-half of a United States gold dollar. The circulating medium was to be the Philippine silver peso, which was to be legal tender for all debts, public and private, and its value was to be maintained on a parity with the theoretical gold peso. For this purpose the creation of a gold standard, or gold reserve fund, was provided for, and this fund was to be maintained and could be used for no other purpose.

Considerable difficulty was experienced in introducing the new currency into the islands. The banks at first failed to give any assistance to the government. The business men of Manila, and especially the Chinese, discounted the new Philippine peso, because it did not contain as much silver as did the Mexican dollar. They were quickly brought to time, and given to understand where they stood if they discredited the currency of the country.

The Spanish Philippine coins and the Mexican coins in circulation were collected by the treasury and exported to the San Francisco mint, where they were reminted into new coins of the weight and fineness prescribed by law.

The establishment of a gold standard fund to maintain the parity between the gold and silver dollar was quickly effected by the sale of exchange on the United States in accordance with the established law, at a cost estimated to be the same as the transportation of the gold coin itself.

The army, by direction of the secretary of war, ceased to pay in United States money, and its paymasters were given credit at the Insular Treasury, where they obtained the necessary funds in Philippine currency.

The government also authorized, in addition to the coinage of silver, the issuance of paper money in two, five, and ten peso notes. All of the coins and bills were readily interchangeable with the United States coins in common use, the dollar being worth two pesos, the half dollar one peso, the twenty-five cent piece a half peso, the ten-cent piece a peseta, the five-cent piece a media peseta and the cent two centavos.

Unfortunately the silver value of the new peso was such that when the price of silver again rose, its bullion value was greater than its money value, and in consequence coins of this denomination were hoarded and exported. It proved necessary to prohibit their exportation, and to issue new coins of less bullion value, but this was the only really serious difficulty attending a fundamental reform which put the currency on a sound basis. The original pesos were recoined and a handsome profit made on the transaction.

No one who has not lived in a country where the circulating medium is constantly fluctuating in value can fully appreciate the enormous benefit conferred on the Philippine Islands by this important reform.