The Marriage of Debt and Economic Subjugation: on the Public Debt Administration in the Nineteenth Century Ottoman Empire
Introduction
During the “Great Transformation” in the West, the Ottoman Empire also experienced major changes in socioeconomic organization. While in Europe, this transformation was an internal development of a modern market economy through the privatization of the means of production and their adoption of a direct exchange value. In the Ottoman Empire, these transformative changes came with the unique case of gradual political dissolvement, economic subjugation and peripheralization within the capitalist world economy. Or, as Polanyi (1944) explains:
“Only when these prerequisites [tariffs and an active colonial policy] were given, could the methods of market economy now be safely introduced. Where such methods were forced upon a helpless people in absence of protective measures, as in exotic semi-colonial regions, unspeakable suffering ensued” (p. 214).
Before the Great Transformation, the presence of market patterns was compatible with whatever principle of behaviour predominated in the economy. But throughout this transformative process, notably manifested by public debt through external borrowing, the Ottoman Empire was engulfed by a new socially constructed European market society. Its institutions and dynamics were effectively commodified, contradicting pre-established social norms. This paved the way for the establishment of the Ottoman Public Debt Administration.
After an introductory theoretical background, followed by a brief account of Ottoman financial history, we will elaborate on instances of commodification and economic subjugation processes, consequential to the advent of European market society, which would contribute to the Ottoman Empire’s gradual fall. The Memorandum by Mr. Armitage-Smith respecting the Ottoman Empire and Financial Conditions of Peace will be of partial focus to us. As a primary source document, it illustrates British, and wider European, intentions and use of Haute Finance, as Polanyi defines it: the link between the political and economic organization of international life.
On Karl Polanyi, the Great Transformation and Commodification: A Theoretical Background
Karl Polanyi’s The Great Transformation (1944) put forth pioneering ideas in economic history and anthropology. In it, he argued that the rise of the modern state was inextricably linked to the rise of the market economy, producing a new socially constructed market society. This development occurred between the late 18th and early 19th centuries in Europe, particularly in Britain and France, in conjunction with the industrial revolution. The expansion of capitalist institutions combined with the rise of state power fundamentally altered pre-existing social norms through a near-total commodification of roles and factors of production into the “self-regulating” market economy’s realm of control. This commodification can be defined as the universal association of exchange values to goods, and the association of factors of production to the use of trade and profit. This is what Varoufakis (2018) calls an “unstoppable victory of exchangeable values over experimental values” (p. 30). Later, this paper attempts to show that the advent of market society in the European core through large institutional commodification created an asymmetric economic relationship with the Ottoman Empire, resulting in the latter’s economic subjugation and peripheralization.
A Humble Account of Ottoman Financial History
Before the eighteenth century, the Ottoman Empire had little need for foreign borrowing. Private and public finance institutions retained their Islamic and local social norms, mostly uninfluenced by the European core. Accordingly, before the sixteenth century, taxation was primarily based on the timar institution (Bridal, 2010). It consisted of the assignment of Sipahis, administrator state employees responsible for collecting taxes, maintaining a local army, and providing the central administration with cavalry units in times of war. However, innovative financial measures were needed with the advent of new technologies and the need to establish a new modern central army, leading to the gradual establishment of the iltizam system.
Installed in the fifteenth century during the reign of Mehmed II (1444-46, 1451-81), this system was able to provide the necessary cash flows for financing the imperial army by tax farming. The state auctioned taxation rights to the highest bidder, Multazim, who then made fixed payments to the state after keeping part of the revenue for his own use (Bridal, 2010). However, with international dynamics constantly changing, these pre-seventeenth-century systemic reforms on taxation and state revenues did not provide a long-term solution to Ottoman budget deficits. Towards the end of the seventeenth century, the Ottoman administration considered borrowing from Europe, but this did not occur due to economic difficulties after the French Revolution and resistance within Constantinople. Nonetheless, for many, the need for change became evident, laying the foundations for the Tanzimat.
The Tanzimat was a period of reorganization beginning in 1839 after the decree of Gülhane Hatt-ı Şerif. The objective was extensive reform on many fronts: rights, citizenship, conscription, organization, centralization, and taxation. Taxes would subsequently be collected by government agents known as muhassils. This system, however, faced paramount difficulties in rural areas which were essential to state revenues. The economic consequences were grave as Bureaucrats who were able to work as muhassils were scarce and largely ineffective; Furthermore, existing tax farmers opposed the 1839 policies (Bridal, 2010). These difficulties drastically decreased state income, leading to the re-establishment of the previous tax farming system. Moreover, the enacted reforms were extremely costly leading to impoverishment and increasing Ottoman vulnerability toward European intervention.
Reform processes necessitated capital accumulation, which was impossible without giving concessions to European firms. For instance, a British company was given the contract to build the first Turkish railway in 1856, from the port of Izmir to the agricultural land of Aydin (Rogan, 2009).6 Other similar industrial ventures were established in the Tanzimat era, but these initiatives implied reckless government spending, upstaging Ottoman profits, and birthing large deficits.
With regards to internal lending and private finances, until the development of banks in the middle of the nineteenth century, monetary activities were undertaken by groups of Ottoman financiers called Galata bankers (Pamuk, 2002). They were individual financiers known as sarraf, usually of Muslim, Armenian, Greek, European, or Jewish descent. Their financial services satisfied the needs of the government until the Crimean War (1854-1856), when the Sublime Porte began funding its deficits by foreign borrowings covered by the issue of bonds. This marked the beginning of a new economic structure in Ottoman society.
The Genesis of Economic Penetration: the 1838 Trade Agreement of Balta Liman
One must be careful with the employment of terms such as modernization; however, in this context of the financial relationship between the Porte’s monetary structures and that of the European core, this paper argues that European creditors practiced modern financial services. They were participants of a newly constructed market economy unfamiliar to the Ottomans, allowing them to infiltrate the Ottoman economy by means of systemic and financial asymmetry.
A prelude to this infiltration can be observed in the commercial treaties imposed on the Ottoman Empire. These came with capitulations which institutionalized economic subjugation in many ways: privileges were given to foreign capitalists under the pretense of motivating interregional trade, local populations were discriminated against, de facto foreign monopolies were protected which disastrously harmed native production, and customs tariffs imposition rights were given to European governments.
According to Adam Block, a representative of the British and Belgian bondholders in the Public Debt Administration, “these treaties deprived of the necessary means for raising efficient revenue, impeded local industrial development and impoverished local business”(Bridal, 2010). These treaties represented an obvious instance of imperialist asymmetry, specifically embodying haute finance. Although the pretense put forth was to promote trade for both parties, imports from Great Britain increased exponentially while the converse dropped, crippling Ottoman industry in a mercantilist fashion. Polanyi (1944) describes this process as follows:
“Where markets were most highly developed, as under the mercantile system, they throve under the control of a centralized administration which fostered autarchy both in the households of the peasantry and in respect to national life […]. The self-regulating market was unknown; indeed, the emergence of the idea of self-regulation was a complete reversal of the trend of development” (p. 68).
The imposition of these terms came in conjunction with the decay of the Ottoman Empire. Therefore, the door was opened during Europe’s Great Transformation to commodify not only means of production but also means of expansion and foreign control. Imperialism was, at least partially, institutionally privatized, complementing the already autarchic policies of European governments. Other similarly imperialist treaties were signed, paving the road for the establishment of the Ottoman Public Debt Administration.
The Incremental Commodification: Towards the Decree of Muharrem in 1881
Although the European powers in the mid-nineteenth century attained a level of hegemony, the Porte did not cease to weigh on international affairs. Aware of the Empire’s gradual decay, the Ottoman central government made significant attempts at reform. Modernization, however, came with capitulations and a need for revenue. Ottoman reformers were aware of the risks tied to accepting loans from Europe. For example, in 1852, Sultan Abdulmejid I sought funds from Europe but was convinced by his advisors to resist such measures. Until that time, the Ottoman government managed to meet its deficits without foreign credit through the debasement of coinage and the issue of banknotes, an activity facilitated by the Galata bankers. Nonetheless, without any alternative, the Sultan returned to European creditors in 1854 after the Crimean War’s expenses caused a treasury crisis, despite the risks it would entail (Rogan, 2009).10 This marks the beginning of the Empire’s indebtedness, directly tying the Ottoman economy to European market society. In the span of twenty years, the Ottomans contracted sixteen foreign loans totalling nearly £220 million. And after the 1860s, the Porte had difficulty in issuing new bonds due to a scarcity of acceptable securities. Attractive collaterals had been exhausted, and thus, treasury bonds were secured on the general revenues of the Empire, carrying significantly higher interest rates. The Porte needed to improve its credit and budget mechanisms.
Under the convention of 1863, British and French concessionaires established the Banque Impériale Ottomane (BIO) as a state bank for the Ottoman Empire. Despite a head office in Istanbul, its ultimate control resided in two boards of directors established in London and Paris. Substantially, the BIO was a foreign venture as all senior officers and most shareholders were European (Clay, 1994). Nonetheless, to restrict capitulatory status, it was to operate under Ottoman law. However, during negotiations, government involvement was concluded to be unnecessary for the benefit of the state. One of the privileges accorded to the BIO was the exclusive monopoly to issue notes (Bridal, 2010).12 Furthermore, the bank was to keep the accounts of the government. British-French market society established itself in Ottoman finances through the establishment of the BIO, thus, economically penetrating the Empire by imposing its new laws of the modern market economy at the expense of pre-established religious and social norms. This helped introduce the Ottoman economy firmly into Europe’s palm.
Overwhelming debts and economic subjugation went hand in hand. In 1875, the central government declared bankruptcy and famine became widespread across several provinces. Moreover, an additional war with Russia erupted in 1877, further weakening the Ottoman state, and causing territorial losses established in the 1878 Treaty of Berlin. The treaty also instituted an international financial commission representing and protecting the interests of the European powers. As a defaulting state, the Porte had difficulty borrowing from abroad. Desperately searching for new financial sources, the state turned to the local Galata bankers, but the high interest rates combined with the scarce local resources rendered this process unsustainable in the long run. The European market economy effectively succeeded in cornering the Porte.
The Necessity for Debt: The Imperial Subjugation
In 1881, the Ottomans initiated negotiations with European creditors. An agreement was reached, and the decree of Muharrem was issued, establishing the Ottoman Public Debt Administration (OPDA). It was to be headed by a seven-man council representing the main bondholder states: Britain, France, Italy, the Netherlands, Austria-Hungary, Germany, and the Ottoman Empire. As seen in the Memorandum by Armitage-Smith, the Decree was based on three principles: the reduction of the nominal capital of Ottoman debt, the assignment of specified sources of revenue for the service of the debt, and the encashment of all these sources by an authority independent from the Porte and representative of the creditors (Bourne et al., 1991).
This signified that the revenues from the salt and tobacco monopolies, silk, in certain districts, the revenue from Eastern Rumelia, the surplus of the Cyprus revenues, the fish tax, and spirits taxes were ceded to the OPDA until the debt was liquidated (Bridal, 2010). These terms of agreement constituted a monumental blow to Ottoman pride, sovereignty, and independence. Furthermore, the Porte was obliged to give the OPDA general assistance of all other institutions and assure the military protection of the administration. The OPDA was independent from the central government, the latter had no right to interfere in its operations beyond having one commissioner present at regular meetings. Although these terms greatly humiliated the Porte, it was not left with other options.
According to some historians, the previous agreements of the 1878 Treaty of Berlin constituted a more severe blow. The OPDA differed from the 1878 Treaty of Berlin by its lesser degree of foreign government involvement. As opposed to the international financial commission imposed in the 1878 treaty, the OPDA’s establishment did not officially entail protection of the European powers to their representatives in the council. The OPDA’s council members were to be appointed directly by bondholder organizations (Bridal, 2010). In that regard, despite these representatives being foreign and carrying significant influence from their home governments’ interests, the Porte considered these private bondholder interests as tied to the Ottoman economy. Also, these OPDA council members were directors of leading financial establishments from the State, who were well-known in European financial markets. One of whom was the general director of the BIO. The Porte relied on the reputation of these figures outside the Empire to secure long-term access to loans, on which they were presently dependent.
Therefore, the need for revenue came to be fundamentally associated with external borrowing, a new predicament of European market society for which the Ottoman Empire had no remedy. By the first world war, following half a century of European peripheralizing policies, the indebtedness of the Ottoman Empire comprised six kinds of obligations:
Loans regulated under the Decree of Muharrem.
Loans contracted since the date of that Decree up to the outbreak of the present war.
The Egyptian Tribute Loans.
Floating Debt.
The residue of the Russian War Indemnity.
Debt, funded and unfunded, contracted since the outbreak of war.
These debts, which had already subjugated the Ottoman Empire before 1914 as a mere semi-colonial commodity, were instrumental in crafting the post-war settlement, dividing up Ottoman provinces. As the debt holders were almost entirely subjects of foreign states, the progressive control scheme combining haute finance, economic hegemony, proved successful for the European allies (Bourne et al., 1991).
A Commodified State: Concluding Thoughts
The consequential commodification of the Ottoman Empire unsurprisingly proved to be detrimental to long-run Ottoman independence. Although the OPDA efficiently managed its industries, its function was merely an indirect privatized form of imperialism exporting the ills of a European market economy onto a decaying Ottoman Empire. The Porte was the state, but the OPDA was a “private state” within a state, directly tying Ottoman industry into European market society, and these institutionalized practices of Haute Finance manifested themselves mainly through immense debt. The Public Debt Administration exercised its own policies and promoted its own interest, which was tied to both public and private European actors.
With regards to the British proposal to settle pre-WW1 debt, the OPDA’s policies prove that there was no real initiative to settle Ottoman debt: profit and control were the only objectives. Thus, the Great Transformation’s implications for the international political system signified a peripheralization and economic subjugation of the Ottoman Empire, through its progressive over-indebtedness and financial asymmetry.
By Adam Benzaari for ISLA 355: Modern History of the Middle East
Edited by Myriam Tounekti, Ava Liang, & Matthew O'Boyle
References
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