Turkey's economy in the Great War

Discussions on the final era of the Ottoman Empire, from the Young Turk Revolution of 1908 until the Treaty of Lausanne in 1923.
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Peter H
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Turkey's economy in the Great War

Post by Peter H » 18 Jun 2007 09:06

From a review by Erik Jan Zürcher

Zafer Toprak, İttihad-Terakki ve cihan harbi. Savaş ekonimisi ve Türkiye’dedevletçilik, Istanbul: Homer, 2003, xvii + 502 p

The story of the Ottoman Empire in World War I cannot be told in military terms alone, however. As in many other belligerent countries, World War I also set the scene for profound demographic, economic and social upheaval. Side by side with their ethnic policies, which ultimately resulted in the expulsion and deportation of hundreds of thousands of Greek Orthodox and in the death of a large part of theArmenian population, the Young Turks also developed a national economic policy,inspired by German economic thinking. The primary aim of this policy was to allow the Turkish/Muslim majority of the population to become masters in their own house in a situation where the more developed sectors of the economy, especially mechanized industrial production, international trade and financial services werecompletely dominated by foreign interests and local Christians.

The Balkan Wars of 1912-13 had pitted Christians against Muslims and thrown into doubt the loyalty of the Ottoman Christian communities. There had been a small circle advocating a “national” economic policy in Istanbul (notably around the German socialist/agent/arms dealer Alexander Helphand a.k.a. Parvus)but the calls for such a policy increased significantly in 1913-14. The outbreak of World War I created the conditions in which it could be put into practice, both politically and economically. The Capitulations were abolished unilaterally from 1 October 1914 by the Ottoman government. When the Ottoman Empire joined the war, the explosive growth in demand (mainly caused by the need to equip, transport and supply a mass army) and the sharp decline in supply, both internally and through the cutting of overseas supply chains (of Russian and Romanian wheat for Istanbul, for instance)created enormous problems. It led to inflation, scarcity and even hunger. But the imbalances between supply and demand also created opportunities, not only for Istanbul-based profiteers and for Anatolian wheat producers, but also for the state and for the party that had monopolized power since the coup d’état of January 1913: theCommittee of Union and Progress.

For more than twenty years now, ever since the publication of his seminal Türkiye’deMilli İktisat 1908-1918 [The National Economy in Turkey](Ankara: Yurt, 1982), the economic policies of the Young Turks during the First World War have been the main focus of the work of Zafer Toprak. Milli İktisat was republished in a much enlargedform as Milli İktisat – Milli Burjuvasi [National Economy – National Bourgeoisie](Istanbul: Tarih Vakfi, 1995)and is still the standard work of reference for this subject. The book under discussion here, İttihat ve Terakki ve Cihan Harbi. Savaş Ekonomisi ve Türkiye’de Devletçilik 1914-1918 [Union and Progress and the WorldWar. War Economy and Etatism in Turkey] is in itself an enlarged version of yet another book on the subject, Toprak’s İttihat ve Terakki ve Devletçilik [Union and Progress and Etatism] (Istanbul: Tarih Vakfi/Yurt, 1995).

In this new book Toprak focuses on the role of the state (and the party) in the management of the economy during World War I. As in other belligerent countries,the Ottoman government, too, replaced the essentially laissez faire economic policies of the pre-war era with direct intervention, in order to regulate supply and demand,prices, wages and inflation.After a very enlightening introduction on the war economy, in which the author makes effective use of comparisons with the economic policies of the major European countries in World war I, he first focuses on state intervention in the financial system.Chapter 2 deals with the attempts to unify the monetary system in the empire. The situation with regards to the money market in the early Twentieth Century Ottoman Empire was as complicated as that in any part of early modern Europe. A history ofd ebasement and monetary reform had created a situation where coins with the same nominal value were valued very differently in real terms. Differences in supply and demand also led to local variations in the value of the currency. Lack of confidence in the Ottoman meant that in a number of regions foreign currencies, such as the Maria Theresia dollar or the Russian Ruble had come to be preferred.

Reform of the monetary system therefore was high on the agenda of successive Ottoman governments all through the Nineteenth and early Twentieth Century, from the enactment of the Law on the rectification of the coinage (Tashihi Ayar) of 1844 to the Law on the Unification of coins (Tevhidi Meskukat) of 1916. Toprak gives a masterful account both of the complexities of the Ottoman monetary system and of the successive attempts to unify it. These attempts on the part of the government were undermined by its own policies, when it had recourse to inflationary policies in order to meet its immediate budgetary needs. This was especially true of the World War I period. Only about ten percent of the war expenditure (which totalled 398.5 millionTurkish Pounds according to the government’s own records) was covered by taxation.Foreign and domestic loans covered a larger part of the deficit, but forty percent of the expenditure was met by the printing of money. The result was that by the end of the war the newly issued paper money was only worth one-sixth of its face value. By that time the Unionist government had also come to the conclusion that it could only manage the monetary system if it also established exchange rate controls, which it did in 1917 through the establishment of a central commission. The unlimited exchangeability of paper money against gold bullion had already been suspended when the European war broke out in August 1914.

The Ottoman government was certainly hampered in its financial and monetary policies by the fact that the Ottoman Empire did not have a central bank of its own.As Toprak shows in a concise but clear overview of the history of the banking system,foreign banks had been active in the empire almost without local competition from the Eighteen Thirties onwards. By far the most important institution was the Franco-British Imperial Ottoman Bank, established in 1863, which functioned as a central bank until 1925 and had a monopoly on the issue of banknotes. From the establishment of the Ottoman Public Debt Administration in 1881 onwards it ran the Ottoman monetary system in close collaboration with the latter institution.

The foreign dominance of the financial system was of course a thorn in the side of the Unionists. In order to gain financial independence and to improve the position of Muslim entrepreneurs by creating easier access to credit facilities, the C.U.P. or individual figures with Unionist backing founded quite a number of “national” (millî)banking institutions. Some of these remained on paper only, some failed, but a few were spectacularly successful, notably the “Ottoman National Credit Bank” (Osmanlıİtibaıi Milli Bankası) founded in 1917. As Toprak points out, this laid the groundworkfor the “national” banking system later developed under the republic, particularly withthe founding, on Mustafa Kemal Pasha’s initiative, of the Business Bank (Is Bankasi)in 1924. What Toprak does not mention is the fact that the Kemalists forced the National Credit Banks to let itself be taken over by the Business Bank, thus providing the new institution with a flying start.

Toprak’s book is nicely produced and presented, but it suffers from very inadequate editorial work. In fact: it often reads as a collection of articles rather than as acoherent whole, with many overlaps and repetitions. Sometimes paragraphs seem to be in the wrong place altogether. One effect of the sloppy editing is that chapters dealing with closely connected subjects are not placed in a logical sequence. Financial policy is discussed in chapters 2 (money), 3 (Banking), 5 (government borrowing), 7(prices) and 9 (inflation), while questions of production and supply and demand are treated in chapters 4 and 6.

In chapter 5 the author gives a historical overview of state borrowing that after twenty years had led to the spectacular default of 1875, but the emphasis is on the loans contracted to finance the war effort in 1914-18. We have already seen that half of the expenditure was met from taxation and the printing of money. The other half was financed from borrowing, largely from the German ally. In addition the value of the Turkish Pound was propped up by an inflow of German money, gold and government paper. The total amount of German financial support was 235 millionTurkish pounds. The most interesting part of Toprak’s study of state borrowing does not concern the German loans, however, but the very first attempt of the Ottoman state to borrow from its own citizens through the issuing of government bonds.Although the amount involved was small when compared to the external borrowing,the operation, which was supported with an extensive and patriotic publicity campaign, met with quite an enthusiastic response as people proved quite ready to exchange suspect banknotes printed by the state against slightly less suspect (and interest carrying) bonds issued by that same state. The domestic loan is yet another example of the way in which the pressure cooker of World War I forced the pace of modernization in the country.

The war not only created financial difficulties, but also disrupted trade and production. The efforts on the part of the state to deal with these problems are described in chapters 4, 5 and 7. The major urban centres such as Istanbul and Izmir had been dependent on imported wheat and other foodstuffs before the war. War with Russia and an effective British blockade in the Mediterranean meant that imports ceased overnight. This of course led to scarcity. The primitive state of development of the internal transport networks of the empire meant that it was difficult to make up for the fall in imports through adequate supplies of local produce from the interior. Inaddition to this, the mobilisation of Anatolian peasants for the army, as well as the deportation of the Armenians who made up an important section of the sedentary rural population in the East, meant that the total area under cultivation declined by 60 percent in the first two years of the war. The government tried to remedy this through the widespread introduction of forced labour in the countryside in the shape of“Labour Battalions” and even “Women’s Labour Battalions” (Kadın AmeleTaburları). In economic terms this was a success, with the sown area being doubled in the second half of the war. With German help technological improvements were introduced, especially in the plain of Konya. These yielded spectacular result, yields per acre sometimes going up by three hundred percent.

Speculation and hoarding exacerbated the economic problem, with the result that consumer prices soared, quadrupling in the two final years of the war. The government and the C.U.P. tried to dampen inflation and to ease the supply situation through a range of price controls, incentives and confiscation. They also interfered directly in the market by setting up buying agencies and a central trading commission.While this went some way to ease the situation, it also led to corruption and allowed traders and producers with political connections (and thus preferential access to transport facilities such as the freight cars of the Anatolian Railway) to enrich themselves. The Unionists quite consciously wanted the trading and distributionorganisations they set up to make a profit and used these profits (made at the expenseof the urban consumer) to provide investment capital for “national”, that is to say:Ottoman-Muslim, companies that could take the place of foreign, Greek or Armenian firms.

While it is perhaps an exaggeration to say, as Toprak does, that the Ottoman Empire was caught up in a “total war”, it is certainly true that the fight against three major European industrial powers forced the Unionists to mobilize the economic resources of the country as much as they mobilized its manpower to fight on the fronts. They had to make up the institutions with which to reform and control the economy as they went along. Chapter 8 describes the different administrative organs created. Only in the summer of 1918 were these makeshift arrangements replaced with a real ministryand even then it was not a Ministry of Economic Affairs, but a Ministry of Supplies(Iase Nezareti).

The main text of Ittihad – Terakki ve Cihan Harbi is supported by extensive endnotes, a large selection of the most important original documents in modern transliteration and a reasoned bibliography. Based on twenty-five years of research by the undoubted authority in this field, this has to be the starting point for anyone interested in the economic policies of the Young Turk era.

Unlike the equally important macro-economic studies of Şevket Pamuk, Christopher Clay’s work on the Ottoman debt and Donald Quataert’s socio-economic histories,Toprak’s work is not available in English. This amazing omission means that the reader who has no Turkish still has to rely on Ahmed Emin Yalman’s 1930 study mentioned at the beginning of this review. In itself this is an extremely interesting and well-written work, but a translation into English of Zafer Toprak’s studies would certainly allow these to replace it as state of the art, much as Ed Erickson’s book has replaced that of Yalman’s contemporary Maurice Larcher.

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Post by Clarence » 19 Jun 2007 03:11

There is a brief bit of information concerning the Ottoman Empire's economy during Allied occupation in Stanford Shaw's From Empire to Republic Vol I. pp 270-278. This section also provides copious footnotes.


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