the company. There was also the possible indirect loss

to the Islands to be considered.

"After mature deliberation and extended negotiations, an agreement for purchase of the stock of the company was entered into December 18, 1915, and authorized by an act of the Philippine Legislature February 4, 1916. This agreement provides, in substance, that the Government shall acquire all the capital stock of the company for $4,000,000, 51% payable in cash on the date of sale, and the balance within eighteen months with interest at 5%. It further provides that, with the consent of Congress, since obtained in the new Organic Act for the Islands approved August 29, 1916, the maturity of the outstanding guaranteed bonds of the company may be extended for twenty years or until May 1, 1959, and provision is made for a sinking fund for their retirement to be met from any funds of the company available for such purpose, supplemented so far as necessary by appropriations of the Government.

"The indebtedness of the Railroad Company to the construction company is to be paid in bonds of the Railroad Company, the latter being also required to retire certain outstanding 6% and 7% bonds by the issuance of 5% bonds of equal face value secured by first mortgage on the Northern Lines, and a second mortgage on the Southern Lines, the latter subject only to the mortgage securing the 4% guaranteed bonds and the lien of the Government for the payment of interest guaranteed thereunder."

The Insular Government also guarantees the interest upon the bonds of the Philippine Railway, which serves the islands of Cebú, Panay and Negros.

For details as to the bonded debt guaranteed and statements in regard to the mileage of the railroads reference should be made to paragraphs on a subsequent page.

CURRENCY

Prior to the American occupation silver was the basis of the currency of the Philippine Islands. Although at one time gold and silver were both in circulation, the gold had disappeared from use, having become overvalued as compared with silver.

According to a report made in 1898 by Edward W. Harden, Special Commissioner for the United States, when the American army assumed the supervision of the Philippine affairs the money in circulation consisted of the Mexican dollar of a date previous to 1877 and silver coined for use in the Islands by the Spanish Government. The Banco Español Filipino had outstanding circulating notes based on silver amounting, approximately, to $2,500,000. It is difficult to tell just how great an amount in silver coins was in circulation. Mr. Harden roughly estimated the amount to have been about $30,000,000. In addition to this he stated that there were subsidiary coins circulating valued at about $10,000,000. Altogether coins and notes in circulation aggregated $40,000,000 to $45,000,000 silver, equivalent to $20,000,000 to $22,500,000 gold.

This circulation was not sufficient for the needs of business at the time of year when the sugar and hemp crops were being moved.

As the importation of Mexican dollars dated after 1877 was forbidden by the Spanish Government the silver coins at times became very scarce and commanded a premium. This premium not uncommonly was as much as 10 or 12%. This led to the smuggling in from China of Mexican coins of a later date than 1877, at a considerable profit to those engaged in the operation.

At the time of the American occupation payments by the United States Government were at first made in gold. The gold coins of course quickly disappeared and

the fluctuations in the exchange rates gave rise to great dissatisfaction. To remedy the currency situation the Philippine Commission proposed that a new coinage be introduced with the peso as the unit. This was the name by which the Mexican dollar and the Spanish dollar above referred to were known.

Under the authority of the act of Congress dated July 1, 1902, as amended by the act of March 2, 1903, the unit of value in the Philippine Islands was established as the gold peso consisting of 12.9 grains of gold, nine-tenths fine; the circulating medium to be the silver peso, weighing 416 grams, nine-tenths fine. This coin was purposely made somewhat lighter than the Mexican silver dollar in order to prevent its rising above the value of the gold peso, i. e. 50 cents in American gold.

On account of an unexpected appreciation in the value of silver, however, this very thing occurred and it was therefore found necessary in 1906 to reduce the amount of silver in the peso to 308.64 grains, .800 fine.

This was permitted by an act of Congress approved June 23, 1906.

Provision is made in the acts of July 1, 1902, and March 2, 1903, for keeping the silver peso on a parity with the gold peso. United States gold coins are declared to be a legal tender at the rate of one dollar for two pesos.

Provision is made for subsidiary silver coins of 50, 20 and 10 centavos and for minor coins of 5 centavos, 1 centavo and one-half centavo.

The intention was to establish a stable, non-fluctuating currency which should not run counter to the customs of the people or radically alter the unit of exchange which had influenced values for many years.

GOLD STANDARD FUND

To insure stability a Gold Standard Fund was created by the Philippine Commission under authority given in the act of Congress approved March 2, 1903, referred to above. The act of the Philippine Commission is dated October 10, 1903. This act creates a bureau of the Insular Treasury to be known as the Division of Currency.

Section 7 of this act provides as follows:

"For the purpose of maintaining the parity of the Philippine silver peso with the Philippine gold peso, and of keeping the currency equal in volume only to the demands of trade, the insular treasurer is authorized and directed"

First to exchange on demand for Philippine currency or United States currency drafts on the gold standard fund deposited in the United States or elsewhere to the credit of the insular treasurer. Depositaries of the funds of the Philippine Government in the United States are likewise required to sell drafts on the Philippine treasury. The charge for such drafts in either case is limited to 4% for demand drafts and 1%% for telegraphic transfers unless otherwise ordered by the Secretary of Finance and Justice.

Second-to provide for the free interchange at par of all forms of United States notes and national bank notes and the Philippine currency.

Third-to exchange upon payment of a premium equal to the cost of transportation between the United States and Manila, United States gold coin or gold bars for Philippine currency.

Fourth and fifth-to withdraw from circulation United States notes, gold coin or gold bars or national bank notes received in exchange for Philippine currency or vice versa until the demand for exchange or for additional currency requires otherwise.

The eighth section of the act provides for the interchange of subsidiary and minor coin for the standard silver pesos.

In the remaining sections of the act provision is made for the issuance of silver certificates as permitted by the act of Congress, the certificates to be covered by

silver coin.

These certificates were made receivable for customs, taxes and for all public dues.

In the report of the Chief of the Bureau of Insular Affairs for 1912 the following important statement ap

pears:

"The Philippine coinage system has continued to afford a convenient currency, its parity with gold being assured by a gold standard fund to which all seigniorage and earnings from the sale of New York exchange, as well as interest received from depositaries, are credited. During the last few years the earnings grew so large that it was deemed wise to limit the fund to 35% of the outstanding circulation, exclusive of silver certificates protected by a gold reserve. On December 8, 1911, the Philippine Legislature accordingly passed an act (No. 2083) authorizing this limitation and releasing (to June 30, 1912) from the gold standard fund a total of $1,698,513.82. The transfer of this amount to the general funds of the insular treasury was of great assistance in meeting the general needs of the Government, but particularly in the construction of public works.

"Moreover, the complete public confidence in the carefully protected Philippine coinage system has long made it evident that a reasonable proportion of the goldstandard fund could properly and usefully be used in some manner other than depositing it at interest with the various banks designated for that purpose. The legislature accordingly provided, in the same act, that not more than one-half of the fund might be loaned for not exceeding 10 years to municipalities and provinces for much needed public works at 3% per annum. There was also included a further provision that not exceeding one-half of the amount thus loanable might be loaned for a period not to exceed 30 months to the Manila Railroad Company at 5% interest to aid in expediting the