What Gives the Philippine Peso Value and How Does it Differ from the Dollar?
It's always been a misconception that our money, the ones you have in your wallet right now, is given value because it is backed by gold reserves of the central bank. No, it is not. It is fiat currency. The same question was raised the other night during our meeting with some Bitcoin enthusiasts (see Bitcoin in the Philippines).
Even I, as much as I know our money is fiat, don't know exactly how our methods or policies differ from the infamous Federal Reserve that prints the US dollars. And so I consulted some libertarian friends as they would be more knowledgeable about the topic and here are some of their clarifications:
"Our BSP is a state owned entity, not a private bank like in the US. I've seen some anti-Fed guys in the US calling for state control of the Fed. We have that here. I don't see how it makes things better." - Acts of the New Commonwealth
"Last night, there was the question whether Philippine currency was actually backed. Definitely not, as evident in the ff:
1. If our money was gold-backed, our exchange rate would be much higher in relation to all other currencies.
2. BSP engages in open-market operations same as the States. ... From my understanding, the BSP can extend indefinitely those loans which have certain maturity rates, simply by loaning over and over again.
3. Fractional reserve banking. The reserve requirement is about 18% at present I believe.
4. Prices wouldn't continue going up. They'd only rise as far as savings go down. With money supply unchanged, any price increase in one sector means a corresponding decrease elsewhere." - Colorfulrag
"It's not backed by gold since BSP banknotes are not anymore treated as money substitutes (that you can exchange for gold at the BSP) but as money itself. It all goes back to the Nixon's severing the link between money and gold in 1971. World has been under a system of fiat currency ever since, hence all the cyclical shocks in world economies in the past 30 some years." -Laissez Faire Filipino
See Also: Can Individuals Survive Without a Central Bank?