Turkey’s Financial Crisis — Circa 1850

For how many centuries have Turkey’s economic crises baffled economists?

March 3, 2002

For how many centuries have Turkey's economic crises baffled economists?

By 1850, Turkey’s financial situation was precarious. It could not match European technological progress — or raise sufficient revenues to maintain the military strength needed to defend its borders.

Back in 1850, Turkey had to import arms and naval vessels. It was unable to mass-produce hand guns with rifled barrels or construct steam-propelled, iron-clad ships. Further domestic extractions through taxes, currency depreciation, or failure to pay officials threatened domestic stability.

The Ottoman Empire took its first foreign loan in 1854 after the Crimean War had begun. The loan was supported, but not guaranteed, by the British. But the British and the French governments did guarantee the interest on additional loans made, in 1855, because they were anxious to bolster the empire’s ability to resist Russia.

In exchange for the guarantee, the British and French insisted that the loan be used for war purposes. And they demanded the appointment of two commissioners to oversee the expenditure of the funds.

The empire secured about a dozen more loans before it became bankrupt in 1875 and was forced to reduce payments. By that time, over half of its revenues were committed to the debt.

External pressures, the Crimean War, and then the first Balkan wars had been unrelenting. There was no easy path to domestic reform. The choices for the rulers of the Ottoman Empire were difficult. In 1875, they could have rejected further compromises of their state’s domestic autonomy, but only at the cost of losing access to international capital markets.

In 1881, to secure additional loans, the sultan issued the so-called Decree of Muharrem. Among other provisions, it established the Council of the Public Debt, which was controlled by foreign bondholders.

For the Turks, the Decree of Muharrem was a way to avoid placing Turkish finances directly under the control of official representatives of the European powers. That was an option that had been proposed at the Congress of Berlin in 1878, although the Porte — Turkey’s governing body — did officially convey the decree to the major European powers.

The decree ceded irrevocably to the council, until the debt was liquidated, all the revenues from the salt and tobacco monopolies, the stamp and spirits tax, the fish tax, and the silk tithe in certain districts. The foreign bondholders were also to get certain potential increases from customs duties and the tax on shops.

But the list of revenue sources that could be tapped for bondholder repayment purposes went on. The Bulgaria tribute, the surplus of Cyprus revenues, and the revenue from Eastern Rumelia were also ceded to the council.

The council could — with the consent of the government — initiate measures that would improve more general economic conditions since a more prosperous Turkey would mean higher revenue collections.

The council promoted the export of salt (the tax of which it controlled) to India — and introduced new technologies for the silk and wine industries. The council also facilitated the development of railways in the Ottoman Empire. It did so by acting as a collection agent for the receipts that the government had committed to pay subsidies to foreign companies.

The members of the council — two from France, one each from Germany, Austria, Italy, and the Ottoman Empire itself and one from Britain and Holland together — were selected by either bondholders or banks or, in the case of Italy, by the Chamber of Commerce of Rome.

The council established the Administration of the Public Debt, which was staffed by Turks and had, in 1912, more employees than the Ministry of Finance. The Ottoman government had the right to send a commissioner of its own to the meetings of the Administration of the Public Debt and to examine its books, but could not interfere in its operations.

Disagreements between the government and the council were to be resolved by an arbitration panel of four with two appointed by the council and two by the government, with a fifth selected by the arbitrators if necessary. The Decree of Muharrem was not modified until 1903 — and then only modestly.

In 1905, as the empire’s situation deteriorated still further, the major European powers forced the Porte to accept a financial commission for Macedonia, whose members were appointed by the six major European powers. The Europeans based their action on provisions for reform in the Treaty of Berlin which had not been carried out.

The Porte initially refused to recognize the commission, but the European states not only sent their delegates to Macedonia, they also occupied the islands of Mytilene and Lemnos.

In 1907, the Porte and the European powers agreed that customs duties, whose magnitude was limited by treaties that the Porte had signed with the European powers, would be raised by 3 percent to cover the budgetary needs of Macedonia.

The additional revenue was to be administered by the Council of the Public Debt, which now found itself acting directly as an agent of the major powers. The council was not finally disbanded until after the First World War.

The creation of the Council of the Public Debt was the result of a contract between the Porte and its foreign bondholders and, through these bondholders, indirectly with the major powers of Europe excepting Russia.

The contract did provide the Ottoman government with continued access to foreign capital markets, but it also included an invitation that compromised domestic autonomy. The council controlled more than a quarter of the empire’s revenue and also promoted certain sectors of the economy.

In 1907, the council began to act as an official agent of foreign powers when it was designated to collect and disburse additional customs duties. European rivalries and size, however, enabled Turkey to escape the onus of direct control by foreign governments of its finances with the exception of some issues associated with Macedonia.

March 3, 2002

© 1999 by Princeton University Press.
All rights reserved. Adapted from Sovereignty: Organized Hypocrisy. Reprinted with the permission of Princeton University Press.