CHAPTER 2:

Central Banking: Development and Growth

 Central Banking: Development and
Growth
• In the beginning, there were no central banks. Depositing and
lending activities were simple and limited. These were usually done
in the temples like those in Babylon.
• In a growing economy, the supply of money is the most important
element. It is the entire banking system that can create a multiple
expansion of money supply through its deposit- lending operations.
• To maintain economic stability, there is therefore a need to regulate
properly money supply. Such big responsibility falls on the
government. Central banks emerged not only to maintain economic
stability, but also to help promote economic growth.
 NATURE OF CENTRAL
BANKING
 A central bank is not the same as a commercial bank, a savings bank or
any other private financial institutions. The difference lies in terms of
objectives. Basically, a central bank is not a profit maximizer. It is
organized precisely to pursue certain socioeconomic goals which concern
national interests or public welfare, such as price stability, full
employment and economic growth.
 Without a coordinator and an impartial regulator, banks alone cannot
efficiently conduct their operations. For instance, the economic viability of
the smaller banks may not last due to unfair business practices of the
bigger banks. It is also possible that the interests of the depositors may not
be ensured. It can also happen that loan applicants or beneficiaries may be
exploited.
 Obviously, there is a need for government laws, policies, and
regulations to guide the activities of the banking industry
towards the attainment of the goals of the government, like
monetary stability and economic growth.
 Management of the money supply is a vital factor in the whole
economy. Money is certainly needed for investment, such as
putting up a factory, a piggery project or a business enterprise.
Clearly, more investments means more employment,
production, and income. On the other hand, if money supply is
mismanaged, it results to inflation.
 Central Bank Defined
 Under the Philippine law, a central bank is defined as the central
monetary authority which provides policy direction in the areas
of money, credits, and banking.

2 main function of Central Bank

1. It acts as a lender of last resort
2. Controller of money supply
 Origin of Central Banks.
 Central bank have developed in two ways.
1. One is through a slow process of evolution.
Ex. Bank of England.
2. The other way is the creation of central banks by governments.

Oldest Central Banks

1. Bank of England
 It was organized in 1694 as a joint stock company. It extended financial assistance to the
distressed government of William III.
 In later years,the bank of England enjoyed a partial Monopoly of note issue and only its
notes were declared by the government to be the legal tender.
 It was only in 1946 that the Bank of England was nationalized by the British parliament.Said
bank has been considered the oldest real central bank.
2. The Riksbank of Sweden
 It was established in 1656 as a private bank.However,it was reorganized in 1668 as a state
bank. It gradually developed into a central bank using the Bank of England as a model.

3. The Bank of France

 It was created in 1800 mainly from private capital and the rest from government funds. The
founder of said bank was Napoleon Bonaparte. It was the government's banker and it had the
sole right of note issue.

4. Other Central Banks

 The Bank of the Netherlands was founded in 1814 with private capital.However,the
government appointed the president and secretary of the managing board while the
stockholders elected the other members of the managing board and the board of directors.
 National Bank of Austria,it was established in 1817 to restore monetary stability in the country.
 The Bank of Norway was established in 1817 with private capital.
 Riskbank of Sweden – top officials were appointed by the King and others were elected by the
members of legislature.
 Creation of New Central
Banks
During the first decade of 1990 all of the countries in North
America, South America, and Central America had no central
bank.
In the case of the United State, it has established its central
bank only in1913 during the time of President Wilson.
This was followed by South Africa which created its South
African Reserve Bank in 1921.
Here is a list of some of more familiar places with the
corresponding dates of the creation of their central
banks:
 Central Bank of China 1928
 National Bank of Iran 1928
 Bank of Canada 1935
 Reserve Bank of India 1935
 Bank of Thailand
1942
 State Bank of Pakistan
1948
 National Bank of Cuba
1950
 Bank of Korea
1950
 Union Bank of Burma
1952
 The Central Bank and The
Economy
 There is no question that a central bank is a very important and powerful
institution in any economy. Its operations have tremendous effects on the
economy: investment, employment, production, and income. Thus in the
presentation and discussion of central banking, it is only proper and
relevant that it should be related to the activities of the national economy.
 Economics – refers to the proper allocations and efficient use of scarce
resources to satisfy human wants. It is a common knowledge that
resources like wealth and income are not only scarce in poor countries, but
also not properly allocated.
 A central bank can direct flow of money and credit into the various sectors
of the economy. it can also improve the social and economic conditions of
the poor by making credit facilities accessible to them.
 Bangko Central ng Pilipinas
 The Bangko Sentral ng Pilipinas (BSP) is the central monetary authority.
It has a policy-making body which provides direction in the fields of
money, credits and banking.
 THE BANGKO SENTRAL are important in order to be able to control
within desirable limits the supply of money circulating in the economy.
As stated earlier, money can destroy or improve the economy
depending on how it is being used.
 THE BANGKO SENTRAL is primarily responsible for proper monetary
management in order to ensure better and equitable economic
conditions.
 A Brief History of the BSP
 Miguel Cuaderno, the first governor of the Central Bank, who developed the
concept of a central bank in 1933.
 For thirteen years he conducted an extensive research on the structures and
operation of various central banks in many countries. However, it was only in
1946 that a formal preparation for the organization of a central bank started
upon instruction of President Manuel Roxas.
 A joint Philippine-American Finance Commision was created to study the
Philippine currency and banking system which recommended the reform of the
monetary system, the formation of central bank and the regulation of money
and credit supply.
 As the greatest participation in the creation of a central bank, Cuaderno chose
the charter of the Central Bank of Guatemala as the model for our Central Bank
in view of the similar social and economic conditions prevailing in said country
with our own .
 August 1947 - A Central Bank Council was formed to
review the report of the Commission and to prepare the
necessary legislation for its implementation.
 The following year - President Roxas submitted to
Congress a bill "establishing the Central Bank of the
Philippines”. This bill was to become Republic Act (RA)
No. 265 also known as the Central Bank Act.
 June 15, 1948 - The Charter of the Central Bank was
signed into law by President Elpidio Quirino.
 January 3, 1949 - The Philippine Central Bank was
inaugurated and formally opened with Miguel Cuaderno
as its first Governor.
 American Period (1900-1941) - Bank supervision
was introduced. This period was also
characterized by the establishment of more
banks. The Insular Treasurer was authorized to
supervise and examine banks and banking
activities.
 February 1929 - The Bureau of Banking took over
the supervision of banks.
 Objectives and Responsibilities of the
CBP
 The central bank of any country has a very vital role in the national economy. Our
own central bank was established in 1949 in order to make the monetary and
banking systems provide to the rehabilitation and development of our economy.
 The Primary task of the old Central Bank of the Philippines is to administer the
monetary, banking and credit system of country.
 In 1949, when the Central Bank opened, there were antly 11 head offices and 75
branches of commercial banks in operation. During the 1950), 7 commercial
banks were established and 44 branches were created. At the end of 1959, there
were 187 commercial banking offices in operation. The 1960s have been lonown
as the decade of banks proliferation. Additional 24 commercial bands with
branches were established.
 The Central Bank launched a program to bring back foreign
currency holdings of residents abroad, and authorized the creation
of special foreign currency deposit (FCDUs) of local commercial
banku Said FCDUSs became the forerutiner of Offshore banking
units (OBUSs) which emerged in mid-1977 primarily to service the
increasing need of the country for foreign currencies for economic
development.
 This is provided in the 1973 Constitution but implemented only in
1981 through PD No. 1801. Under thin law, the Central Bank can
regulate activities of non-bank financial institutions.
ORIGINAL OBJECTIVES
The three general objectives of the old Central Bank, as contained in the
original Central Bank Act, indicated its duties and responsibilities,
particularly in relation to the promotion of economic development, and the
maintenance of internal and external monetary stability.

 These broad policy objectives were:

1. Maintenance of monetary stability in the Philippines;
2. Preservation of the international value of the peso and its convertibility
into other freely convertible currencies; and
3. Promotion of a raising level of production, employment, and real income
in the Philippines.
MONETARY STABILITY
 Means Price Stability.
 If there are wide fluctuations in price levels, there is no price
stability or monetary stability.
 For instance during inflation, that is when prices are very
high, the value of the peso is very low. Because the same
amount of peso can buy lesser number of goods and
services.
 Could we exchange our money with
the other freely convertible currencies
of other countries?
If not, it would be a great problem in our trade relations with other
countries.
Why?
As it is, we first buy dollars to be able to buy goods abroad. They
do not recognize our peso - even those sidewalk vendors inside
the Subic Naval Base.
 In connection with the objective of promoting a rising level of
production, employment, and real income, the Central Bank can
attain this through its lending operations and its powers to
control the money supply.
 For instance, the Central Bank can encourage productive
investments in certain priority areas like farm production, labor-
intensive industries, and other socially-oriented projects.
Real Income
 On the other hand, refers to the number of goods our income
can buy.
 In short, it is the purchasing power of our income. Another
term for this is real wages.

The Central Bank can also improve our real income by

decreasing the prices of goods and services. This can be done
in two ways:
a. By maintaining the proper balance between the amount of
money supply and the volume of production; and
b. By increasing production
 Amended Objectives
 A joint IMF-CBP Banking Survey Commission was
established in 1971.
 The recommendations of the IMF-CBP team covered
the Central Bank, banking institutions, and non-bank
financial institutions.
 PD No. 72, promulgated in 1972, amended certain
sections of RA 265 (Central Bank Act). Under the
amended Central Bank Act,
The amended objectives of the Central Bank are:

1. To maintain internal and external monetary stability

in the Philippines, and to preserve the international
value of the peso and the convertibility of the peso
into other freely convertible currencies; and
2. To foster monetary, credit, and exchange conditions
conducive to a balanced and sustainable growth of
the economy.
 CENTRAL BANK AUTHORITY EXPANDED

 Since the creation of the original Central Bank of the Philippines, the
financial system has grown in size, complexity, and sophistication.
As a result of various legislative measures that created new types of
banking institutions, the banking system became more complicated
and fragmented.
 The Bangko Sentral can now regulate even the non-bank financial
institutions like investment houses, finance companies, fund
managers, lending investors and pawnshops
 Certain provisions of the Central Bank Act were again changed to improve
the financial system with the issuance of PD No.1771, dated January 14,
1981. The significant features of this decree are:
1. Increasee in the capitalization of the Central bank from P10 million to P10
billion;
2. Grantingg the Monetary Board the power to authorized special
examination of affiliates and subsidiaries with quasi-banking function;
3. Authorizingg department heads and examiners of examining
departments to administer oaths to any official or employee of any
institution subject to their examination, and to compel the presentation of
books, documents, papers, or records; and
4. Empowering the Monetary Board to allow examination of deposits
during bank examination to determine bank fraud and serious
irregularity.
 GOVERNORS OF THE CENRAL BANK

Miguel Cuaderno, Sr. (1949-1960)

- Was the 17th Finance Secretary of the
Philippines under Manuel Roxas and the first
Governor of the Centrak Bank of the
Philippines from 1949-1960.

Andres V. Castillo (1961-1967)

- The second Governor of the Central Bank of
the Philippines from 1961-1967.
Alfonso Calalang (1968-1970)
- Was the third Governor of the Central
Bank of the Philippines, serving from
January 1, 1968 to January 9, 1970.

Gregorio S. Licaroz (1970-1981)

- Was the fourth Governor of the Central
Bank of the Philippines from 1970-
1981.
 Jaime C. Laya (1981-1984)
- Jaime del Carmen Laya, better known as Jimmy Laya is a
Filipino banker, accountant, and cultural administrator who
served as the first Secretary of the Department of Budget
and Management of the Republic of the Philippines, serving
from 1978-1981.
- He was also the fifth Governor of the Central bank of the
Philippines from 1981-1984.

Jose Fernandez, Jr. (1984-1990)

- Was the sixth Governor of the Central Bank of the Philippines. Under
his term, he served two Philippine presidents and was the governor of
the turbulent event, the People Power Revolution of 1986.
Jose L. Cuisia, Jr. (1990-1993)
- Was the seventh Governor of the Central bank of the
Philippines, serving from 1990-1993 and formerly
the Ambassador of the Republic of the Philippines
on United States of America.

Gabriel C. Singson (1993-present)

- Was lawyer and banker, who served as the first
Governor of the Bangko Sentral ng pilipinas (BSP)
from 1993-1999.
- He was the first Governor of the BSP after former
President Fidel V. Ramos signed the Republic Act
7653, otherwise known as New Central Bank Act,
into law in 1993.