Review of “Philippine Central Banking and the Business Cycle”

After reading several chapters of Ron Paul’s Pillars of Prosperity, I decided to look for a book related to monetary policy in the Philippines. I was not disappointed. I found a blog, Colorful Rag, which directed me to such a book. The title of the book is Philippine Central Banking and the Business Cycle. It was written by Paul C. H. How in 2011.

I want to share four lessons I learned from reading the book. In the Introduction, I sense the author’s dissatisfaction with present mainstream economic education. Concerning the content proper, among 10 chapters, I just want to focus on three of them.  Chapter 7 is the heart of the book. Chapter 8 talks about business cycle in Philippine history. And chapter 10 deals with practical response.

Dissatisfaction with Mainstream Economic Education

The first thing that caught my attention in perusing the book is the author’s permission of non-attribution and alteration of his work. And then, as I proceeded reading the Introduction, I shared his sentiment expressing his dissatisfaction with existing economic education. How writes:

“And the number of fallacies as taught in universities is staggering, that one may be better off starting from scratch…How could it be that so much that is wrong, is the norm when it comes to economic education and, consequently, monetary policy? Are our most knowledgeable and highly educated professors just not smart enough? Are we merely being taken as fools to believe such fallacies as spouted by those in the academe? Or do they really not know better?” (p. 6).

The Heart of the Book

Chapter 7 is the heart of the book. It talks about “business cycle.” He offered five main interpretations of the business cycle: non-fiat monetary theory, Keynesian, Friedmanian, Schumpeterian, and Austrian.

Risking the charge of being simplistic let me share my personal understanding of the above interpretations excluding the non-fiat monetary theory.

John Maynard Keynes is the most influential economist of the modern time. Keynesian economics is derived from his name. It is also known as macro economics, the kind of economics followed by governments. At the outset, I recognize that How indicated that numerous interpretations of Keynes’ thoughts exist.

Keynesian diagnosis of economic crisis offers with it its own version of economic solution. Unemployment and economic depression result from the low perception of the consumers about business establishments. This low perception is reflected by a great drop in consumption. Under consumption is the problem and that is why the only way to revitalize the economy is to promote spending. In the Philippines, Ben Diokno gave such advice dated January 2 this year. In the US, Joseph Stiglitz and Paul Krugman gave similar advice as reported by Chidem Kurdas last July 20, 2012. These economists therefore are Keynesian and they occupy mainstream economics.

According to Keynesian perspective, the only way to reverse the downward trend in the economy is through inflating the money supply and deficit government spending. With more spending, there will be more profits for producers that will result to more investments and opening of new employments. The way to economic prosperity is by increasing demand and spending.

The ideas of Milton Friedman are classified as a fiat monetarist theory. He came from the Chicago School of Economics where President Barack Obama received his education in economics. The solution from this school of economics is a mixture of free-market and monetary policies. This school advocates both “free market” and central banking.

Unlike Keynesian analysis of the Great Depression blaming under consumption as the culprit, Friedman’s followers see that the primary cause of the crisis was the failure of the Federal Reserve to provide sufficient quantity of money for liquidity at the time of massive unemployment and dropping prices and the provision of high interest rates. The fiat monetarist theory is right in identifying the Federal Reserve as responsible for the crisis, but failed to recognize the real offense, which was inflating the money supply in the 1920s. Still, Friedmanians think of inflation as the cure instead of the cause of economic crisis.

The third major interpretation of the business cycle is associated with Joseph Schumpeter. Excessive innovations in technology are pointed out as the root cause of business busts.  The benefits of technology innovation are acknowledged in terms of bigger output. However, replacing the workforce leading to massive unemployment is considered the primary setback of such innovation.

Only the Austrian school precisely identified that the existence of business cycle is the unavoidable outcome of increasing the money supply, which is the real meaning of inflation. This increase in money supply expands credit and encourages unprofitable investments. Industries benefiting from inflation will experience economic boom, but as the new money gradually assimilated into the whole economy, businesses will experience decline.

For How, the study of business cycle is the most “fascinating” of all economic phenomena. Though I do not agree with the appropriateness of the term “fascinating” to describe this economic anomaly, I think How’s analysis is insightful:

“What is especially intriguing about the cycle is how the boom seduces individuals into believing their newly-gained prosperity is a genuine one that is to last…An increase in the stock market is taken to be a corresponding increase in the wealth and standard of living of the people…And always, the prosperity turns out to be false; but this is not so easily accepted by all, and demands for the government to do ‘something’ become pronounced,…And when the recovery finally occurs, setting the stage for yet another boom, people are of no new mind; once again, the increase in wealth is taken to be permanent…”(p.89).

Inflation in the History of Philippine Economy

Chapter 8 talks about business cycle in Philippine history. Here How pinpoints the role of GDP as misleading indicator of economic development. To him, the rise in GDP is inaccurate due to its connection to inflationary policies. With the increase in money supply, the government can now spend more and this is perceived as good for the economy. He refused to accept such indicator because “much of what passes for ‘production’ as a component of GDP figures is actually mere consumption…” (p. 130). This has a negative impact on capital accumulation and production of valuable goods.

After, giving the above general consideration, How presented his analysis of Philippine economy covering the administrations of several Presidents of the Republic. I want to cite only few relevant paragraphs that describe How’s analysis.

In speaking about the economy under Marcos administration:

 “This chart (referring to a peso-dollar exchange rate provided by BSP) makes very clear the harmful effects wrought by President Ferdinand Marcos in the early 1980s via inflation. As the peso was debased and fell in value from P7.415:$1 as of end-1979 to P14.002:$1 as of end-1983 and P19.758:$1 as of end-1984, we see the 91-day T-bill rate rise from 14.2% in 1983 to 30.5% a year later” (p. 133).

Concerning Aquino administration:

 “After the overthrow of the Marcos dictatorship, unemployment still remained at around 11%, before staying at the 8%-9% level for the rest of the 1980s. The administration of Corazon Aquino…did not show any more restraint than Marcos when it came to printing money” (p. 134).

And about Ramos administration:

“The early years of Fidel Ramos’ presidency, which began in 1992, were apparently not good one, based on the GDP and CPI (Consumers Price Index) rates at the time. Both consumption and production were down, but with the reliance of inflation, the stage was set for what was then known as a ‘tiger’ economy” (p. 138).

Overall, How concluded his analysis of Philippine monetary policy:

“The problem with the Philippine government’s current monetary policy is that it takes low CPI figures to be a signal to inflate once more. Instead of recognizing the slowed down economy for what it is – one that was caused by inflation and malinvestment – the low prices appear encouraging for the sake of expanding credit” (p. 140).

Practical Response

Chapter 10 is the “what to do” section of the book. Realistically, How accepts that monetary reform is not easy. Inflation is a widespread anomaly that requires concerted action from across the world.

The solution starts with education. Shaping public opinion is the key to monetary reform. And the appropriate sector of society where this type of education must start is among the intellectuals – journalists, university professors, and economists. There must be an intellectual revolution similar to the vision shared by George Reisman to Warren Buffett. The intellectual climate must change. Only then that formal education will change and the public will be informed.

Integral in this education is the call to return to sound money, money that is connected to commodities either gold or silver. It is the only way to refrain the expanding power of the government through increasing welfare programs, more taxes, and regulations that threatens personal liberty.

How suggested two types of banks: bailment and investment. Bailment bank is a kind of storage house where depositors store their money. In payment for the service of the bank, depositors must pay a minimal fee. Critics dismiss this proposal as primitive as if inflation is not.

The second type of bank is for investment. It has a different set of rules. Primarily, the idea through this type of banking is that investments must be financed with actual saving.


I affirm the priority of education in introducing reform in Philippine monetary system. Rediscovering the intellectual contributions of both libertarians and Austrian economists are very significant in this type of education. I just wish that Philippine politics has the kind of political leadership exemplified by Ron Paul, the US Republican Tea Party Congressman. As the intellectuals move into the direction of monetary reform and as the public is increasingly becoming aware about the connection of economic issues and political affairs, I am hopeful that we will soon find the kind of political leader that will display high level of statesmanship, knowledge, courage, and tenacity to work for change in Philippine monetary policy. Someone said: “When the people are ready, the leader will appear.” Learning Austrian economics is the way to prepare ourselves.

Personal Prayer

O Lord our God; the God of Abraham, Isaac, and Jacob; you are the Source of knowledge and wisdom; your word is the light in our path.

Reform the monetary and the banking systems. Reform our educational system. Raise educators like George Reisman. Let there be principled politicians who think not only of securing their office for the next election, but thinking of the impacts of their decision on future generations. Amen.


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