The 1919–1922 Philippine financial crisis, also referred to as the Philippine Currency and Exchange Crisis of 1919–1922, resulted as a consequence of an economic crisis which began in 1919 along with the mismanagement of the Philippine National Bank. Due to the Wood-Forbes Mission in 1921, there were questions among Filipino politicians on who should take responsibility.
Because of this, the Philippine Legislature experienced a leadership crisis resulting in the resignation of House Speaker Sergio Osmeña on December 17, 1921, and Senate President Manuel L. Quezon on January 10, 1922.
Economic reforms implemented during the administration of Governor General Leonard Wood helped the Philippine economy recover from the crisis. By 1923, the Legal Reserve Fund of the Philippine government was restored. The cabinet crisis of 1923 fundamentally broke out as a result of disagreements between Philippine government officials and the government reform agenda of the governor general.
Overview Philippine National Bank The Philippine National Bank was established in 1916 with the aim of maintaining the gold exchange standard. To support this, currency reserves were created. However, these reserves, which came from the New York branch of the bank, were later transferred to Manila and used to provide loans to agricultural companies for export. Since the Philippines was unaffected by World War I, capital formation intensified and prices increased for Philippine commodities. Eventually, the pricing bubble of these commodities burst after the war. Due to the collapse of commodity prices immediately after World War I, this caused a major loss for the companies. This diversion of funds led to the depletion of the reserves, rapid inflation, and ultimately a financial crisis for the National Bank from 1919 to 1922.
The crisis was at its height in 1921. The shift towards pre-war normalcy significantly affected the Philippines in 1921, leading to a sharp decline in the prices of key cash crops: abaca fell from ₱50 to ₱16, sugar from ₱50 to ₱9, and copra from ₱30 to ₱10. Internal revenue collections dropped from ₱52,279,177.22 in 1920 to ₱41,833,832.11 in 1921, creating a large budget deficit. The national bank struggled to provide government funds as it lent money to private borrowers, mainly in the sugar industry, leading to defaults. This triggered a severe fiscal crisis for the national government.
Wood-Forbes Mission of 1921
In December 1920, President Woodrow Wilson delivered a speech in U.S. Congress over which he stated that the Philippines has met the requirements for independence stipulated under the Jones Law of 1916. In 1921, the newly elected U.S. president Warren G. Harding was highly skeptical of Wilson. Harding, who was formerly a chairman of the US Senate Committee on the Philippines in the 66th Congress (1919–1921), knew that the Philippines was already in a deep financial crisis. After seeking advice from several experts, he sent an investigative team headed by Major General Leonard Wood, who was chosen as the first candidate as Governor General of the Philippines, and William Cameron Forbes, former governor general of the islands from 1909 to 1913, was appointed as the other member of the mission.
The U.S. Secretary of War, John W. Weeks, instructed General Leonard Wood to investigate the financial stability of the Philippine government and the impact of the Filipinization policies implemented under Governor General Francis Burton Harrison. The Bureau of Insular Affairs (BIA) in the U.S. played a crucial role in gathering information from the Philippines to assist in this investigation. Weeks emphasized the ability of the Philippine government to maintain stability without U.S. aid. The mission departed from the U.S. to the Philippines in April 1921.
Leadership crisis
Leonard Wood was inaugurated Governor General of the Philippines in October 1921. Francis Burton Harrison, former governor-general, wrote to Senate President Manuel L. Quezon that same month about their missed chance to avoid a disaster that affected their administration, linking it to the Philippine National Bank situation. He noted that American critics in the Philippines had a limited perspective. Quezon shared some blame for allowing House Speaker Sergio Osmeña's autocratic style to persist, either knowingly or tolerantly. The Philippine Senate also played a role in confirming appointments while Quezon was ill. The senate created a committee whose function was to confer with Wood regarding with appointments. Senator Rafael Palma served as acting senate president during that time.
Because of the Wood-Forbes report, the president of the Philippine National Bank, General Venancio Concepcion, was indicted for corruption. Additionally, the report also detailed that government funds held in other banks were transferred to the National Bank, except for trust funds held with the United States. The bank gained control over these funds and the Currency Reserve Fund, leading to a significant influx of foreign exchange funds. The bank then made substantial profits from exchange transactions, a portion of which was lent to speculative enterprises which caused serious doubt on the bank's transactions. The Wood-Forbes mission visited 48 Philippine provinces and 449 municipalities as part of their investigation.
The report was used by the Partido Democrata to attack the ruling Nacionalista Party and to criticize the Harrison administration.
After the Wood-Forbes report was published, Quezon made a public campaign in support for a collective leadership to ensure he was consulted on important matters, especially appointments, to prevent the Philippine National Bank's near-bankruptcy. He informed Osmeña that since the Jones Act's implementation, most legislators and cabinet members had let Osmeña control legislation and public affairs, with all major measures receiving his approval and appointments being made with his consent.
On 16 December 1921, senators and representatives held separate meetings, followed by a convention the next day where leadership issues arose without resolution. Osmeña stepped down from his speakership to gain a vote of confidence. On 18 December, representatives backed a resolution supporting Osmeña, while senators did not act. In a climactic session that same month, Osmeña demanded the legislature to recognize his preeminence in government saying that he is "the de facto leader of the ruling party in government at present." Quezon denounced this statement as power-hungry and tyrannical. Osmeña denied the allegations made against him and deflated charges stating that he would surrender his prerogative as speaker to a house committee.
There were attempts made for reconciliation such as the formation of the Council of Ten. This was to conciliate the two. However, due to its members being pro-Osmeña lawmakers, Quezon resigned to the senate presidency on January 10, 1922. Osmeña begged Quezon to withdraw his resignation but Quezon refused. Osmeña then resigned as Nacionalista Party leader due to the severity of the leadership crisis.
Response
During the financial crisis, the cooperation between the Filipino elites and American authorities fell apart. The Bureau of Insular Affairs tried to address issues with the Gold Standard Fund, while banking officials expanded lending irresponsibly, worsening the crisis and undermining the Philippine National Bank's legality.
Reforms by the Governor General Filipino politicians closely followed American politics due to its impact on Philippine independence. They expected Governor General Wood to return to the U.S. soon, believing short-term cooperation with him was beneficial. This was evident in how easily Wood's financial reform agenda passed in the Philippine Legislature. However, they disagreed with his fiscal reform and neoliberal development plans, planning to wait him out. As Wood dedicated more time to his agenda and did not return for the 1924 elections, Filipino leaders had to confront his reforms and defend their own development framework.
The topic of fiscal and developmental reforms was very controversial. Governor Wood opposed the national government's involvement in private enterprise, unlike his predecessor. He called for the sale or dismantling of government corporations from the Harrison administration, citing the financial burden they placed on public funds. By 1922, the government had spent about ₱70 million on these corporations, significantly exceeding the average annual budget before the 1921 crisis.
If Osmeña controlled the Philippine National Bank, then Senate President Manuel Quezon was seen as the main supporter of the Manila Railroad Company (MRC). Speaker Osmeña, a strong political rival of Quezon, suggested that Quezon had been using the MRC for political favors. Wood had concerns about selling these corporations quickly because he believed they were used by top Filipino politicians for political patronage. Claro M. Recto of the Partido Democrata accused the Nacionalista Party of using the bank for political gain. An American journalist claimed the bank granted loans to Nacionalista politicians. Despite the arrest of PNB president Concepcion, Speaker Osmeña was not directly tied to any wrongdoings.
Well before the publication of the Wood-Forbes report, the Philippine National Bank was already suffering from cronyism. Aside from Concepcion, an Osmeña crony, Senator Quezon also made his own allies, including mestizo businessman Ramon Fernandez and Vicente Madrigal, as bank directors. Governor General Francis Burton Harrison also appointed his brother, Archibald Harrison, as a bank director. PNB board members were further investigated by the Wood administration including Madrigal, Senator Vicente Singson Encarnacion, and Fernandez, who was Manila mayor at the time, due to their approval of speculative loans made by the bank.
In 1922, Wood proposed selling sugar central debtors, but Quezon ultimately decided against it.
Response to the Quezon-Osmeña split
Quezon and his followers challenged the one-man leadership of Osmeña describing him as an "inefficient and corrupt dictator". Debates between Osmeña and Quezon lasted until February 1922. That same month Quezon, along with his supporters from the House of Representatives and Senate, created a new party, the Partido Nacionalista Colectivista. The Nacionalista Party, as a result, was split in two: the Colectivistas led by Quezon and the Unipersonalistas led by Osmeña.
Following the Quezon-Osmeña conflict in 1921–1922, Governor-General Wood faced opposition from Quezon and his supporters. Shortly after taking office, he became the target of political attacks for seeking advice from Sergio Osmeña on appointments, which was common practice. This upset Quezon's Senate followers, who believed Wood should have consulted them instead. Wood further antagonized Quezon and his followers in the Philippine Senate.
The issue calmed when the Philippines Herald reported that Wood agreed to include legislative leaders in future discussions about appointments, reflecting the rising tensions between Quezon and Osmeña.
Criticism against Leonard Wood
In March 1922, because of the split in the Nacionalista party led to only five bills being passed during the regular legislative session. Due to financial needs, Wood called for an extra session. Osmeña requested to consider private bills from the regular session. Wood agreed, and most government measures were enacted and signed into law.