Economic History of The Ottoman Empire - Finance

Finance

Ottoman bureaucratic and military expenditure was raised by taxation, generally from the agrarian population. Pamuk notes considerable variation in monetary policy and practice in different parts of the empire. Although there was monetary regulation, enforcement was often lax and little effort was made to control the activities of merchants, moneychangers, and financiers. During the "price revolution" of the 16th century, when inflation took off, there were price increases of around 500 percent from the end of the 15th century to the close of the 17th. However, the problem of inflation did not remain and the 18th century did not witness the problem again.

The 18th century witnessed increasing expenditure for military related expenditure and the 19th century for both bureaucracy and military. McNeil describes an Ottoman stagnation through centre-periphery relations – a moderately taxed centre with periphery provinces suffering the burden of costs. Though this analysis may apply to some provinces, like Hungary, recent scholarship has found that most of the financing was through provinces closer to the centre. As the empire modernized itself in line with European powers, the role of the central state grew and diversified. In the past, it had contented itself with raising tax revenues and war making. It increasingly began to address education, health and public works, activities that used to be organised by religious leaders in the communities – this can be argued as being necessary in a rapidly changing world and was a necessary Ottoman response. At the end of the 18th century, there were around 2,000 civil officials ballooning to 35,000 in 1908. The Ottoman military increasingly adopted western military technologies and methods, increasing army personnel of 120,000 in 1837 to over 120,000 in the 1880s. Other innovations were increasingly being adopted including the telegraph, railroads and photography, utilised against old mediators who were increasingly marginalised.

Up to 1850, the Ottoman Empire was the only empire to have never contracted foreign debt and its financial situation was generally sound. As the 19th century increased the state’s financial needs, it knew it could not raise the revenues from taxation or domestic borrowings, so resorted to massive debasement and then issued paper money. It had considered European debt, which had surplus funds available for overseas investment, but avoided it aware of the associated dangers of European control. However, the Crimean war of 1853-1856 resulted in the necessity of such debt.

The Ottomans had not yet developed their own financial system in line with London and Paris. Since the beginning of the 18th century, the government was aware of the need for a reliable bank. The Galata bankers as well as the Bank of Constantinople did not have the capital or competence for such large undertakings. As such, Ottoman borrowings followed the Heckscher-Ohlin theorem.

Borrowing spanned two distinct periods, 1854-1876 (see Table 4). The first is the most important resulted in defaults in 1875. Borrowings were normally at 4 to 5 percent of the nominal value of the bond, new issues however being sold at prices well below these values netted of commissions involved in the issue, resulting in a much higher effective borrowing rate – coupled with a deteriorating financial situation, the borrowing rate rarely went below 10 percent after 1960.

European involvement began with the creation of the Public Debt Administration, after which a relatively peaceful period meant no wartime expenditures and the budget could be balanced with lower levels of external borrowing. The semi-autonomous Egyptian province also ran up huge debts in the late 19th century resulting in foreign military intervention. With security from the Debt Administration further European capital entered the empire in railroad, port and public utility projects, increasing foreign capital control of the Ottoman economy. The debt burden increased consuming a sizeable chunk of the Ottoman tax revenues – by the early 1910s deficits had begun to grow again with military expenditure growing and another default may have occurred had it not been for the outbreak of the First World War.

The exact amount of annual income the Ottoman government received, is a matter of considerable debate, due to the scantness and ambiguous nature of the primary sources. The following table contains approximate estimates.