The Philippine Currency Board Arrangement, 1945-48: a case of deflationary bias?

This article provides an historical case study of the hypothesis that a currency board imparts a deflationary bias to a growing economy. The hypothesis is based on the argument that, while economic growth increases the demand for money, the expansion of the money supply in a currency board system is constrained by the balance of payments. After examining the origins, development and criticisms of the deflationary bias hypothesis, the article investigates the experience of the Philippines during its economic recovery from the devastation of the Second World War. The evidence suggests that, under the currency board arrangement then in place, deflationary pressure emerged in the manner predicted by the hypothesis.