Defining financial reforms in the 19th-century capitalist world-economy: The Ottoman case (1838–1914)

The theoretical basis of externally induced financial reforms: an introduction

This article investigates how British influence over financial reforms abroad paved the way for capitalist dominance in the heavily indebted Ottoman Empire of the 19th century. Moreover, it also shows how an inequitable globalization process, shaped by a liberal-capitalist framework of rules, reduced sovereignty in peripheral and semi-peripheral countries to the benefit of the major market-controlled countries, especially Britain. The focus is twofold: first, a theoretical and empirical analysis of the introduction of externally induced capitalist-style reforms in the Ottoman Empire; and, second, the strategies, but also the aims and objectives, pursued by Britain in taking advantage of those capitalist-oriented Ottoman financial reforms. I analyse how the Empire, part of the ‘outside’ world dominated by Britain, was forced to adopt and to adapt itself to British-style and European capitalist rules, especially in the field of public finance, banking and the monetary sector. With its leading role in the worldwide political and economic order, Britain, directly and indirectly, forced underdeveloped countries to implement measures that would have been unacceptable in the advanced capitalist states themselves (Corrigan 1980: 21). Thus, externally induced financial reforms enabled the international propagation of the hegemonic power’s economic model with the aim of keeping capital returns high and so strengthening its position within the capitalistic world-economy.

The Ottoman Empire’s growing need for technical assistance, finance capital and know-how was the Trojan horse that Britain, but also France, used to enter local affairs and impose, through a request for specified financial reforms, the Empire’s integration into the international market in a semi-peripheral position with respect to the core capitalist countries.

The British promoted specific reforms in order to force the Ottoman Empire (and many others foreign economies) to adapt to the capitalist market’s modus operandi, a process accelerated by the foreign borrowing policy that the Empire pursued starting in 1854. The increase of foreign debt decreased Ottoman capability in managing in self-manner way its public finance. The financial instability spawned by this policy paved the way for growing British demands for free-trade and market-oriented financial reforms. Thus, public debt was instrumental in fostering Ottoman incorporation into the capitalistic world-economy. British interference influenced significant changes not only in Ottoman Empire’s economy, which was far removed from both the mercantilist and capitalist economic systems, but also in its legislation. Britain’s aim was to stimulate ‘internal’ reforms capable of creating a favourable legislative framework for a functioning capitalism-style regime. ¹

Beneath the mask of ‘necessary modernization’, most of the specific economic reforms requested in underdeveloped countries (often in exchange of market access, credit facilities and investment inflow) were pivotal to the consequent economic dominance of a hegemonic capitalist state. The implementation of reforms by a local, European-educated elite was an internally driven process rather than the result of wider external influence. While the idea of modernization sprang partly from a growing internal necessity driven by the emergent bureaucratic elite to avoid what looked like impending terminal decline, it is also true that the European-oriented local financial elite were inspired mainly by the British and French capitalist model (Sweezy 1989: 339). Social and class links and affinities between British and Ottoman financial elite – but also French – enable them to create a transnational alliance on the base of capital profit-seeking. The existence of a coalition between Ottoman financial elites (often non-Muslim, but still full-fledged Ottomans) and their European counterparts is evidenced by a host of informal commercial and financial joint ventures. The glue between them was the paramount goal of making profits (Masters 1999: 50). Of course, the local elites that I refer to were those operating in the international market in the fields of commerce and finance. They were concentrated in coastal areas and were part of the Ottoman bourgeois-aristocracy: wealthy merchants, bankers, and so on (Eldem 2014: 174; Emrence 2008: 291; Heper 1980: 85; Mestyan 2020: 213, 216). Connections among local and international elites were also based on profession and business activities. Emerging middle-class experts equipped with specialized knowledge of trade, banking, finance and so forth also formed part of these elite circles (Manjapra 2020: 188).

Thus, common class interests of the British and local financial class formed the basis for the introduction of reforms capable of adapting an underdeveloped economy to the rules of a developed one. In fact, capitalism prospers above the market economy – in a sphere known as the anti-market. The anti-market is a transnational place where there is a high degree of capitalistic monopoly and concentration (Arrighi 2001; Wallerstein 1991: 356). It is a place where financial and merchant elites exploit the market economy by means of capital controls and the necessary intermediation between the seller and the buyer. In the words of Fernand Braudel (1977; 1992), ‘only the dealer knew the market conditions at both ends of the chain and hence the profit to be expected’ (p. 53). Financial reforms ended up being more functional to the economic interests of the financial class than to those of the middle and lower classes. However, they act with different timing in regard to different social and class aims. For instance, a social class alliance among financial and mercantile elites in the anti-market arose first through the signing of the free-trade agreement. The anti-market exploits and drains the resources present in the underlying market economy. This occurs gradually. The free-trade agreement of 1838, the banking reform of 1844 and the creation of the Imperial Ottoman Bank (IOB) in 1863 were important steps in the development of this interconnection. However, only after the sovereign default of 1875 and the establishment of the Council of Administration of the Ottoman Public Debt (OPDA) did the link between the anti-market and the market economy strengthened. Bankruptcy posed new political dilemmas for the Empire’s future and stability, and these dilemmas also involved matters of foreign policy such as the power balance between the great powers. In return for credit-inflows, financial credibility and market access, which kept the Empire solvent and politically integrated, the Ottoman Empire was persuaded to accept a further and stringent integration into the capitalistic world-economy through the implementation of the financial reforms.

Drawing on a world-systems theory approach, this article is based also on Braudel’s theoretical approach of economic life, or the market, and capitalism (anti-market) (Wallerstein 1991: 355, 357). It focuses on the financial reforms connected with the anti-market system and does not aim to analyse the entire Ottoman reform programme. ² The Empire’s nature in 19th century poses some legitimate questions about differential regional integration within the world-economy. This article, however, traces the principal institutional changes that affected the central government and not each province. North African states followed a different path of integration into the world-system, albeit in a semi-peripheral position. ³

Financial reforms in the face of world-system, unequal exchange and hegemony

The Ottoman market became a semi-peripheral component of the anti-market system. Reforms introduced in the fields of currency, public debt, banking and private property were a part of the monopolization of the terms of exchange and the way of making profits within the world-economy. The Empire became incorporated into a unified and homogeneous economic unit known as the world-system (Chase-Dunn & Grimes 1995: 388). However, Braudel, Wallerstein and Arrighi analysed the world-system, and the role of finance within it, in a separate way. Immanuel Wallerstein defines the world-system as an integrated area of activities and institutions that obey and act according to certain systemic rules. The glue of this system is not national boundaries but the axial division of labour (Wallerstein 2004: 17). Goods are the link between states, and the forms of commodity production define the rank of the state: core, semi-periphery or periphery. ‘Division of labor reproduces the world as a social whole. A world-economy was defined as a world-system not encompassed by a single political entity’. Thus, once a political entity conquers the world-economy, it becomes a world-empire or a world-system (Arrighi 1998: 115). By contrast, Braudel defines capitalism not as a mode of production rooted in the division of labour but as the top level of the world of trade, the anti-market (Arrighi 1998: 115, 125). Giovanni Arrighi is closer to Braudel’s theory in defining the cycles of hegemony among states and identifies finance as a top layer.

In order to define hegemony, I have to recur to Antonio Gramsci’s writings. In the modern age, the Italian thinker developed a clear definition of hegemony. ⁴ The hegemonic ‘social class’ assumes the political and economic power in two stages: first, the ascendant hegemonic group claims the right to be part of the state administration and to revise and reform it according to its own economic agenda; and second, this group achieves an awareness of its own corporative interests and becomes the fulcrum of the interests of all subordinate groups. ⁵ At this point, the group reaches the political dominion and exercises its hegemony. During this phase, the economic and the political course followed by the hegemonic group – in this case the capitalistic forces, such as upper bourgeoisie and financial and merchant elites – becomes that of the sovereign state. Consequently, foreign policymakers sustain and perpetuate abroad the hegemonic course pursued by the hegemonic group domestically (Gunitsky 2017: 8, 9). The hegemonic state can exercise its role by promoting economic and financial imperialism. Several scholars, such as Robert W. Cox and William I. Robinson, have theorized the latter inter-state evolution of Gramsci’s assumptions (Cox 1983; Robinson 2005). Thus, I use Gramsci’s original theory of hegemony by extending it to inter-state relationships in the field of foreign policy, political economy, and international law (Buckel & Fischer-Lescano 2009).

Samir Amin, instead, is the champion of ‘unequal exchange’. Within the world-economy, the core capitalist countries impose an uneven international specialization for their own benefit (Baumgartner et al. 1976; Elson 1977: 126). The peripheral states are unable to invert this ‘unequal exchange’ (Amin 1976: 288):

The effects of this unequal exchange, and of the mode of extraction which sustained it, directly limited the capacity for local response to and benefit from subsequent exchange opportunities created by industrial development and technological advances in the world system. (Bunker 1984: 1028)

Amin’s theory may also be applied to the financial sector, between those who hold credit and those who need it. Outflows of loan interest payments are a sort of ‘wealth drainage’ towards core states, strengthening their position as leaders in the world-economy. Since the last quarter of the 19th century, finance had begun to impose its laws in the productive sphere, shaping the world-economy according to the needs of capital accumulation (Koddenbrock et al. 2020).

In view of the above, where can one situate externally induced financial reforms? Indeed, such reforms were a tool to integrate semi-peripheral countries into the world-economy system dominated by the hegemonic state and social class of the time. Thus, they mainly affected economic institutions that had a direct impact on the functioning of the world-economy. Adopting the rules in force within the international market would align semi-peripheral and peripheral economies with that of the hegemonic power. This integration had a twofold aim: it forced the Empire to accept the rules and norms of the anti-market, increasing the financial profits of the capitalist elites therein; and second, it confined the semi-peripheral country in a subsidiary manufacturing position (so-called, braudelian ‘economic life’) by fostering unequal exchange through the signing of a free-trade agreement. The Empire exported only raw material or semi-finished goods, while importing high added-value products from abroad. Therefore, following the framework of the hegemonic cycles theorized by Braudel and Arrighi and the social ascendancy of the hegemonic group defined by Gramsci, externally induced financial reforms, especially in the field of currency, public finance, banking and property legislation, were pivotal to integrate semi-peripheral states in the world-economy. These were adapted not only to the trade-based division of labour in a lower-ranking position as theorized by Wallerstein but mainly to a position that facilitated financial capital accumulation within the anti-market. From an empirical standpoint, Late Ottoman incorporation into the capitalist world-economy is an appropriate case study (Wallerstein 1979).

In the 19th century, foreign-induced financial reforms generally came in the wake of free-trade treaties. Implementing such treaties required inward- and outward-looking institutional changes. According to Friedrich List, the theory of free trade and the agreement it required proposed by classical British economists (who indirectly inspired many of the reforms requested in Ottoman lands) comprised the political economy of the strongest actor (List 1856). Generally, free-trade treaties led to trade deficits in peripheral countries, which, began to borrow abroad to cover those deficits. Borrowing in foreign markets and in foreign currencies increased their dependence on international creditors. Debt, in and of itself, drains wealth from the debtor to the creditor, for example, through interest payments. According to John A. Hobson (1902), the main creditor countries received taxes from abroad in the form of interest payments, dividends and remittances as a consequence of their investments. Moreover, Karl Marx had previously warned of the danger of debt when it exceeds the state’s ability to pay off what it owes to its creditors (Davanzati & Patalano 2017); (Marx 1972 [1869]: 52, 1969 [1895]: 2, 43).

The question of foreign debt is intrinsically linked to externally induced financial reforms. Classical economists such as Adam Smith and David Ricardo repeatedly condemned the accumulation of a large uncontrolled public debt (Churchman 2001; Nicholson 2001). Both recognized how public debt reduces a country’s wealth and consequently its sovereignty vis-à-vis creditors. Private creditors and foreign policymakers take advantage of this dependence on foreign credit to demand financial reforms that reinforce this addictive relationship. This action aims, first, at keeping the debtor within the capitalist international market in a subordinate position and, second, at preserving a high level of capital accumulation in the creditor country. The more the debtor needs foreign credits, the more the creditor can make its willingness to lend dependent on some quid pro quo. In so doing, the creditor may leverage the debtor’s borrowing need – in foreign currency or gold – in exchange for economic and financial reforms suited to maintaining this interdependent relationship (Tilly 1990). In practice, European capitalistic forces, in association with local elites, used borrowing requirements to ask local government to implement reforms that encourage dependency. Often such requests were made when the need for foreign assistance was so great that the prospective borrower could not refuse them. Evidence shows that these requests were best put forward within diplomatic circles. As I highlight later, it is no coincidence that the second tranche of the reform programme known as Tanzimat was signed after the start of international borrowing in 1854.

British capitalists feared the prospect of diminishing returns on capital. David Ricardo underlined the necessity of increasing foreign trade dependence in order to counter the fall in profit margins (Semmel 1970: 10). Likewise, Thomas Malthus stated that

it was not the absolute amount of capital that was at issue [. . .] but the relative difficulty of finding profitable employment for it. [. . .] The continued increase of capital, in a limited territory, must unavoidably terminate in a fall of profits. (Semmel 1970: 74)

Britain was the primary champion of this reform process. Financial reforms invoked by the hegemonic state are crucial to reproducing its hegemonic power at home and then worldwide. ⁶ As will be described below, the timing of British hegemony coincided with the introduction of the main financial reforms in the Ottoman Empire oriented to free trade and economic liberalization (Graphic 1).

OPEN IN VIEWER

Graphic 1.

Ottoman main financial transformation and reform under the British hegemonic period in the 19th century (Arrighi 2009).

Situating the Ottoman Empire in the capitalist world-economy

In analysing the Ottoman case, one cannot neglect the global perspective (Barkey 2008). In fact, the disruptive globalized capitalist-industrial revolution, propelled throughout the world by British commercial expansionism from the 1780s, became a determinant of social, political and economic change in the Mediterranean countries. The 1838 free-trade agreement with Britain ushered in a phase of liberal economic policy in the Ottoman Empire (Kasaba 1988: 54). Despite the increasing pressure brought to bear on Constantinople to rapidly open its economy to the world market, the Empire was largely able to preserve its financial sovereignty, at least until the 1838 free-trade agreement, and avoided putting itself in the hands of Western and westernizing reformers and modernizers. What emerged was a hybrid model that combined elements of religious, political and economic conservatism (typical of the Ottoman ancien régime), and elements linked to the new class of innovative bureaucrats, which had different interests than financial elite. Bureaucrats were interested in a wider modernizing reforms program aimed at strengthening the Ottoman State and society, on the contrary, financial élite were interested in supporting a program that would introduce capitalist-style reforms (Davison 1999; 171, 363, 434).

The bureaucrats promoted reforms during the Tanzimat era (1839–1876) that shifted the ‘empire towards a more modern bureaucratic form, away from the patrimonial mix, and in tune with the models of modernity that were out in the international arena’ (Barkey 2016: 124; Toprak 1992).

The Ottoman reform model was fashioned at the top, by a new bureaucratic and ruling class aware of the Empire’s weakness in the face of aggressive Austrian and Russian expansionism southward. The force of centralization was indispensable for the Empire to gain a new political role in the game of checks and balances among the Great Powers (Barkey 1994: 21). The 1838 free-trade agreement allowed the Empire to integrate into the international economy and carve out its slice of the international division of labour. ⁷ The acceptance of exclusive economic clauses to the advantage of the Great Britain (such as the standstill in customs duties and the abolition of an internal monopoly) exposed Constantinople to the highly competitive international market, which swept away the traditional domestic manufacturing sector, incorporating the Empire into the capitalist market’s productive periphery (Faroqhi 2009a, 2009b: 90; Quataert 2002: 6). The agreement gave to Great Britain a valuable outlet for its ever-increasing output of manufactures. Furthermore, it ‘[. . .] gave England a most favourable trade balance in the two decades prior to the outbreak of the Crimean War’ (Bailey 1940: 450). Lord Palmerston signed an agreement that benefitted British industries and trade in accordance with British commercial policy (Alison 1856: 532533). Ultimately, integration into the capitalist world-economy created new opportunities for the development of small-scale industrial capitalism, especially in the Balkan textile sector (Lapavitsas & Cakiroglu 2019). Local capitalism, however, remained very weak and geographically confined to the European provinces of the Empire.

Why was the free-trade agreement so dangerous to Ottoman stability in the long run? Because it increased economic dependence on foreign goods, hampering the industrialization process. It impeded the founding of modern manufacturing and kept productivity low, nipping in the bud any industrial activity which might have competed with the output of European capitalistic states (Ergil & Rhodes 1975: 50). According to Marx, trade between a capital-intensive and a labour-intensive regime will transfer value added to the former through the workings of the market (Harvey 2017: 156). Amin’s theory of unequal development fits well with the condition of the Empire after the signing of the 1838 free-trade agreement.

The agreement satisfied British capitalists’ need for new markets and stable, low raw material prices (Cottrell 1975: 509). The consequent economic relationship between the periphery and Britain generated depressive effects in the long run. The forced integration of two different and, in some respects, opposite economic models had been examined in the 18th century by Oswald and Tucker in the ‘rich country-poor country’ debate (Hong 1983: 271). Both had concluded that the monetary inflow, arising from a trade surplus, would not cause a competitive disadvantage for the richer nations, but, rather, would push down the prices of industrial goods as a consequence of the technological development made possible by greater credit availability (Schumacher 2016). The economic, financial and commercial gap between the Ottoman Empire and the North Atlantic European economies kept widening during the 19th century (except for sporadic episodes provoked by increases in the prices of raw materials or decreases in prices of manufactured goods in the international market), and as the gap increased, so did the Empire’s economic dependence.

Also, the progressive integration within the capitalist world market imposed profound changes in the administrative structure of the state (Karpat 1972; Weiker 1968). Adoption of the free-trade regime necessitated massive intervention by the state to reshape its own economic structure in accordance with global market rules. Centralization served the interests of liberal economic ideology: the state must have the power to control every aspect of its economic structure and its institutions. The foundation of government ministries based on European models was functional to creating a modern bureaucratic state that would respond to the capitalist modus operandi. For instance, the Ministry of Finance and the Ministry of Commerce were founded between 1838 and 1839, the same year of the signing of the free-trade agreement with Britain (Agoston & Masters 2009: 12). Theoretically, liberal states had to be free to act unilaterally to respond properly to market demands largely dominated by the hegemonic power and the associated school of economic thought (Yıldırım 1998: 118).

The 1844 monetary reform also played a decisive role. A rigid monetary policy would create some deflationary problems in peripheral provinces, especially those with low productivity. The adoption of a monetary system tied partly to gold, what Şevket Pamuk (2008) has called the ‘limping gold standard’, provided some advantages, especially to businesses selling their goods in the international market. It benefitted those financial and merchant elites which were situated in the anti-market. On the other hand, it risked damaging economically depressed and less competitive productive zones. The currency per se was no longer an instrument pertinent solely to the domestic market but was also pivotal to the proper run of the international exchange system (Arghiri 1972: 47). Bimetallism (the gold and silver standard) enhanced the Empire’s capacity to mitigate the effects of a strong currency in a country that was unprepared to use it in all its economic activities. ⁸ A strong currency would have meant an exponential increase in deflationary risk, with serious social and economic consequences (deflation, for instance, works to the advantage of the creditor instead of debtor).

The capacity of silver to fluctuate in price gave the Empire a useful protective ‘cushion’ against the sudden cyclical downturns typical of capitalist economies. Thus, the Empire did not abandon silver, because of silver’s utility in productive activities and in keeping the domestic money market liquid (Burdekin & Keskinel 2013; Frangakis-Syrett 2007: 6163). It was as if the Empire had a semi-capacity to print its own currency in a self-serving manner. The use of bimetallism and then a ‘limping’ gold standard also revealed different social class interests in the Ottoman economy. Financial and merchant elites situated in the anti-market used gold extensively for international transactions, whereas those situated in the market economy, small and middle bourgeoisie, peasant owners, landlords and so forth, preferred the use of ‘inflated’ silver. Adhering to a gold system (especially after the adoption of the gold standard in 1880) helped the Empire further integrate itself into the framework of the global market mainly by fostering internal and external trade. ⁹

The Empire negotiated its first international loan in 1854 during the Crimean War. From the end of the 18th century up to that year, the Ottoman Empire had constantly looked for reliable funding that did not require international borrowing (Çiçek 2010: 184).

Growing Ottoman indebtedness allowed international creditors to ratchet up their demands for the Empire to open up the local economy and to mortgage public revenues. In practice, each loan created a link with the European market. In order to service the debt, the Ottomans had to introduce an economic system favourable to that of the creditor states advocating economic openness. Foreign investors used debt exposure to increase their potential financial capital stock. Thus, debt itself was one of the key means of exerting pressure for economic openness. Moreover, the period of time under discussion coincided with the openness of European capitalistic world-economy between 1846 and 1873, with the milestone Cobden-Chevalier trade agreement of 1860 (Tena-Junguito et al. 2012). Bankers, speculators and financiers did not fail to encourage Ottoman borrowing, given the high commissions and interest rates they requested. This was the case, for instance, of the French financier Théodore Berger, a member of the Paris Committee of the IOB, who was well aware that the Ottoman debt overhang would force the Empire to mortgage its richest revenue streams in order to be able to keep borrowing and support the public finances. ¹⁰ Deficit-spending on a large scale was bound to be unsustainable for the Empire, given its mismanagement of tax collection (Quataert 1994: 61).

Several attempts to reform the fiscal system in the countryside, such as introducing a public and private procurement system for tax collection or hiring local financiers, failed to build a practicable alternative to international borrowing (Shaw 1975: 156; Shaw 1968). Conversely, implementing new reforms entailed high costs for the Ottoman treasury (Hayashi & Aydin 2004: 18). The perseverance of some traditional systems of taxation does not mean the Ottomans had a backward-looking worldview and that they missed a modernization programme. They developed their own fiscal system, suited to the different features of each province (Özbek 2018: 244). However, they failed to procure the necessary resources to avoid recourse to debt in order to cover their deficits. Unlike local bankers, large European financial institutions were able to offer the desired long-term loans at an overall lower interest rate (Islamoglu-Inan 1987: 168). Notwithstanding some measures aimed at enlarging the monetary base (such as the use of government securities as paper money and the 1844 monetary reform act), until 1863 the absence of a central bank to manage the issuing of notes made this solution to the Empire’s monetary problems unfeasible. Ottoman integration into the international market required a stable monetary system (as much as possible one with a fixed exchange rate), which was essential to the stability of international trade (Pamuk 2000: 17, 206). ¹¹

The mantra of ‘restoration of creditworthiness’ was often viewed as a Trojan horse to further mortgage the Empire’s resources. If an international loan was too expensive for local finances, the only alternative might be ‘bringing the national property into circulation [a sort of securitization ante litteram]; it would have added to the wealth of the country’. ¹² This might enable international financiers to get their hands directly on the Ottoman state’s assets, such as the waqf (a sort of inalienable endowing property) (Augusti 2018; Kuran 2010: 213).

Traditionally, the Empire had abused payment systems since the early modern period, first of all by debasing silver coinage, then through an ill-considered issue of coins (Tezcan 2009: 460). The ensuing inflation reflected the Empire’s determination to directly control its own economic and monetary policy. Afterwards, the Empire wanted to keep controlling its monetary policy even when the local currency was replaced by an international one obtained via foreign loans. The Sultan’s direct intervention in economic affairs, a practice that contradicted classical British political and economic thought, suffered a setback with the growth of international borrowing. Rising international borrowing often meant declining national sovereignty (Krasner 1999: 130). The Ottoman state could not impose its policy on the rules of the capitalistic international market. The ongoing necessity to gain access to stable funds and lines of credit made the Empire dependant on foreign markets and international banking intermediation. The latter, not surprisingly, used a wide margin of discretion in drawing up burdensome loan contracts (Feis 1930: 263). The financial power of British and French lending banks and financiers was such that the Ottoman government could not affect, disrupt or modify the nature of loan contracts that were negotiated in the main stock exchanges, principally in Paris and London. The inflow of foreign currency deprived the Ottoman Empire of most of its control over monetary policy and, in general, weakened the Ottoman political decision-making process.

With the negotiation of the first international loans in 1854, Ottoman sovereignty gradually shifted towards the financial centres of London and Paris. Opening up to the world market with trade agreements and the implementation of economic reforms (especially reforms in the public financial sector) subjugated the Empire to the decisions of those who controlled the capitalist world-economy. The progressive deterioration of the Empire’s economic sovereignty led to deep changes within its political decision-making structure. It is no coincidence that the Hatt-i humayun of 8 February 1856, the second tranche of the reform programme known as Tanzimat, was signed after the start of international borrowing. The programme underscored the pressing need for measures such as the creation of a state banking system and of state agencies to control and report public budgets and the recognition of private property for non-Muslims (Hanioğlu 2010: 20). According to The Economist: ‘Right of property will be assured to all subjects of the Porte’. ¹³

The demands for ambitious financial reforms based mainly on the British model show how debt, along with the associated moral blackmail, was used as a tool in shaping the local economy to the interests and economic modus operandi of the Britain, France and other industrially developed European countries. ¹⁴ Public debt became a sort of ‘red thread’ tying together Ottoman needs for public spending and British and French ambitions to assert political and economic influence and control.

Many financial reform measures had been supported, if not directly promoted, by British diplomats and businessmen, especially since the inception of Ottoman foreign borrowing. In fact, the administrative, regulatory and legislative reforms they called for would serve the interests of local and foreign capitalist groups and advance those of Great Power foreign policy. At the same time, Tanzimat reformist rhetoric conferred on the local elite the necessary authority to launch the process of state centralization geared not only to their own interests, but also to those Ottoman actors in the international capitalist market. According to Keyder (1987: 37), some Ottoman reformists were convinced that the Empire’s economic salvation passed through outright incorporation into the European capitalist system.

However, internal divisions among traditional elites and local notables often hampered the ‘modernization’ policy planned by the reforming ruling class. Unlike in other underdeveloped countries, an alliance between local ruling class and economic forces did not materialize in the Muslim-Mediterranean region. Those forces wielded no political power or influence. Although export-oriented merchants (most of them non-Muslim) looked favourably on capitalist-style reforms, influential landowners, local notables and religious authorities offered resistance. Financial reforms, in fact, worked more to the advantage of those elites involved in the international market.

Moreover, the overall reform process anticipated the fair and full recognition of rights for all communities living within the Empire’s boundaries. The 1876 constitution was partly a result of this ongoing reform process (Davison 1963: 358). It was meant to pave the way for bourgeois influence in the legislative branch (Sohrabi 2011: 5, 6, 189; Temperley 1933: 107). This might have led the Sultan to accede to at least some market-oriented demands in exchange for recognition of his authority. ¹⁵

The preliminary condition for successfully implementing a full-fledged capitalist economy in a peripheral country is that it would be possible to identify that territorial entity as a semi-state. This expression is well suited to sovereign authorities where a basic legislative and economic framework is already in place: they have the basic knowledge to develop and the potential to adopt foreign-induced reforms (Arrighi & Silver 1999: 109).

The Ottoman financial system was too fragile to sustain any shock such as one of the cyclical financial crises typical of a capitalist economy (Schumpeter 1954: 12, 21). Recurrent trade deficits, monetary imbalances, growing financial dependence on foreign credit as well as an uncontrolled public debt made the Empire a perfect candidate for financial disaster. Thus, the 1875 sovereign default was a predicable event, especially after the harsh famine in Anatolia (with a consequent reduction in fiscal income) and the Vienna Stock-Exchange crash of 1873 (which halted the capital inflow). European assistance allowing the Empire to equip itself with a modern banking and financial system did not succeed in avoiding the disaster caused by a mountain of debt accumulated between 1854 and 1873. The establishment of the IOB in 1863 (operated as a central bank with note-issuing privileges) and the OPDA in 1881 illustrates how financial turmoil and foreign debt allowed and facilitated the creation of extraterritorial entities that reduced the indebted country’s sovereignty; its precedents were the international financial commission (the first) created in Tunisia after its 1867 sovereign default, and the similar body established in Egypt in 1876, a year after its default (Eldem 2005; Zouari 1998). As David Todd (2018) remarks (without referring directly to financial matters),

the expansion of European extraterritoriality in the mid-nineteenth century has traditionally been interpreted as an informal variety of imperialism, enabling European powers and their nationals to obtain some of the benefits of imperial domination without having to bear the substantial costs of sovereignty.

Politically, the Ottomans were already excluded from the privileged group of truly sovereign nations (Minawi 2020: 1, 2).

Unfortunately, both of the aforementioned financial institutions, but especially the IOB, became interested in speculation and in short-term financial operations instead of working for the Empire’s welfare. ¹⁶ Both were foreign-controlled. The IOB had three committees located in Paris, London and Constantinople. It had been founded by British and French financers and was run, in practice, by a general director in Constantinople. However, extensive control was assigned to the London and Paris committees (Clay 1994: 590). Loans needed to be approved by European boards of directors even though the IOB was virtually the Ottoman state bank. The private delegates of the European bondholders (French, British, German, Austrian, Italian and Ottoman) managed the OPDA. However, the presidency of the board rotated between the French and British delegates, who exercised the most control over the board and over the Ottoman revenues assigned for the debt service (Ergil 1979: 196). OPDA management of local revenues to repay external debt abridged Ottoman sovereignty substantially.

Evidence of exogenously induced Ottoman financial reforms

Export-oriented Ottoman merchants and landowners alone were interested in shaping the local economy and their own activities according to the production demands of the international markets (Gocek 1996: 48–50, 90). Adherence to the structure of anti-market rules gave the illusion that Ottoman sovereignty was recognized, whereas it was only in the class interests of the great merchants, capitalists and bankers tied to the capitalist world-economy (Gill 1996: 75). Moreover, the possibility of gaining extraterritorial privileges (such as capitulatory rights, a permission of exercising extraterritorial jurisdiction within the Empire’s boundaries; Boogert & Fleet 2003) for wealthy bankers, merchants and capitalists damaged the Empire’s potential economic growth. It constituted a sort of brain drain among the highly skilled forces in loco. Thus, the Empire began losing human capital and importing foreign loans on mortgaged assets, especially from the second half of the 19th century onwards. The priority was to mould the Ottoman economy so as to enable Western capitalists to maintain a high profit rate and bolster their sales often in accordance with local merchant and financial elites.

European diplomats, most notably British, French and German, were too often willing to speak for the need to implement economic and financial reforms close to the interests of their respective national capitalists. According to The Times, ‘[. . .] our capitalists and men of enterprise have gone to Turkey because they see in it a country of great capabilities, where money and industry judiciously invested may bring large returns’. ¹⁷

As to the reform measures needed, according to the pro tempore British ambassador in Constantinople Mr. Goschen, ‘[f]inancial reform ought in reality to precede almost any other reforms, and it is difficult even to see how the Turkish Empire can be held together without it’. ¹⁸ The mechanism of mutually recognized and shared rules allowed foreign capital to operate abroad under the same or nearly the same framework as in the home country.

The safeguarding of Ottoman political integrity by France and Great Britain, especially after the Crimean War (1853–1856), soon turned into an economic cage. ¹⁹ Understanding the Empire’s delicate equilibrium, both powers opted to use their resulting influence to deal with the Empire from a moral stance, as if it were an ‘untutored child’ in need of a modern education. Ottoman acceptance of several international codes – for instance, with the institution of commercial tribunals in 1845 and the Ottoman Land Code of 1858 – allowed the capitalist powers to make observance of such legislation fundamental for the international market’s ‘good-working’ (Islamoglu-Inan 2000: 361; Shaw & Shaw 1977: 118). ²⁰ To the extent that the land law was an Ottoman codification of local practices (Terzibaşoğlu 2001: 43), it codified the capitalistic way of private property. The Napoleonic code influenced Ottoman legal code. The French legal code introduced the right of individuals as opposed to the right of the community expressed in the Ottoman customary law (Shlala 2018: 42). The Empire, of course, did not make a replica of the French code, but codification was an important step of the Ottoman reform movement (Rubin 2016: 829, 2018: 37). It also marked a path towards the institutionalization of capitalist social relations within Ottoman society. This framework of rules and codes allowed the capitalist world market to speak a common language: a sort of lingua franca in business circles worldwide.

This was the backdrop to the paternalistic advice that European diplomats and financiers too often gave the Sultan. Austen Henry Layard’s papers from his period of service as British ambassador to the Ottoman Empire corroborate this. The Empire would move forward the reform programme only ‘to prove to Europe the firm intention of your Majesty [the Sultan] to put into execution those reforms’. ²¹ According to Layard, private property, introduced with the Ottoman land code of 1858 (Aytekin 2009), ²² had to be restored in order to open the way for foreign investors and capitalists willing to invest in loco. The law was not applied uniformly and with the same success throughout the Empire (Terzibaşoğlu 2001: 53). The Ottoman government had to guarantee the ‘protection for life and property which is absolutely necessary to these who can by labours, their industry and their enterprise, create the riches and prosperity of a State’. ²³ Authority and financial assistance were essential to maintaining stability against all odds (Eldem 2012). This could only be achieved with European assistance and intervention: ‘Such men, having sufficient capacity and experience to deal with the difficult problems connected with Turkish finance, and to propose reforms capable of placing the revenues of the Empire in a sound condition, are to be found in Europe’. ²⁴ The Sultan had to ‘give them access to all documents and other evidence necessary to render their enquiries thorough and complete [. . .] with full powers to introduce such reforms as are necessary.’ ²⁵ But it was not enough to give them an advisory power:

[. . .] It is not sufficient to employ Europeans in subordinate posts only. If great changes, of a really fundamental character, are to be made, Europeans should be employed in high posts of trust with power to act rigorously and independently under the protection and with the cordial support of your Majesty [the Sultan]. ²⁶

Implementing financial reforms depended mainly on British, but also on French and later on German, assistance and know-how. ²⁷ The structure of modern finance required knowledge of some technological tools that was not to be found, at that time, in the Middle East. As a consequence, the very substantial imbalance between revenue and expenditure, as well as the evident gap between the aggregate value of imports and exports of goods and services, forced Constantinople not only to face recurrent trade deficits but also to undergo progressive technological colonization (Simpson 2014: 140). When the Empire agreed to sign unfavourable commercial treaties and to start borrowing abroad, it was dragged into the normative framework of the capitalist market and opened a Pandora’s box, the keys for which were greedily kept by European bankers, financiers and creditors.

The creation of several governmental agencies under British and French supervision can be viewed through the lens of the paradigm described above. As argued mainly by British diplomats, the hiring of European experts was essential for the Empire’s long-term survival. According to the British ambassador Henry Bulwer, the «[…] Turkish ignorance» on financial and economic matters is widely recognized. He stressed the need to «[…] informing the ignorant» that only Europeans could provide them with the necessary knowledge in these areas. ²⁸ The Sultan was advised ‘to employ foreigners of known character and ability in the administration of the finances of the empire and of the public accounts. Such men may be found in Paris and London’. ²⁹

The sovereign default of 1875 was a turning point in the history of Ottoman economic sovereignty. Part of the Empire’s financial reorganization was conducted under British and French advice and supervision simply to allow the Empire to refinance itself in European capital markets. The likelihood of restoring Ottoman borrowing on international markets became increasingly subordinate to the exploitation of internal resources and to the Empire’s adaptation to certain European laws and norms: ‘Supposing that justice and a reforming system of taxation could be secured in Asia Minor, [. . .] this country offers so many inducements to the trader and capitalists that commercial enterprise may be left to do the rest’. ³⁰

Step by step, the Ottoman reform process became aligned with the anti-market rules (according to Braudel’s anti-market theory) where only export-oriented merchants, landowners and local financiers might fully benefit from this opening up and adaptation to the capitalist world-economy. The market economy became functional to and dependent on anti-market interests. Although Ottoman central authority tried to resist this development (as it did under Sultan Abdul Hamid II (Pamuk 1987: 120), the Empire’s growing need for European capital and know-how ended up confining it to the periphery of the capitalist world-economy. This was especially the case when the great depression of the later 19th century forced European capitalists to look for attractive places to invest in order to avoid diminishing returns (Platt 1968).

According to data collected by Geyikdagi, foreign direct investment, especially in the railway sector, approximately quadrupled between 1888 and 1914 (Geyikdagi 2011: 74; İnalcık 1969). In fact, it would have been impossible for the Empire to integrate with the capitalist world-economy were it not for the radical adaptation to its rules and laws. British and French control of the banking sector and public finances facilitated the work of foreign investors and financiers. According to Sir Henry Bulwer, ‘the only thing that can create a really new state of things in Turkey would be a thorough reform in its financial system’. ³¹ Broadly speaking, ‘reform meant codification, systematisation, and control, even in those areas where actual reforms were not needed’ (Shaw 2000: 94).

Economic and financial reforms also became essential to prevent disintegration of the Empire, with inevitable far-reaching geopolitical and geoeconomic consequences. The reforms highlighted by the Europeans emphasized respect for private property as a landmark for restoring normal activities within the Empire, and consequently for its political and economic salvation. ³²

However, the restoration and active defence of property was not enough to save the Empire. The financial crisis of the 1860s, which pushed the Empire to the brink of defaulting on its spiralling foreign debt, caused deep alarm in Europe. The Ottoman government’s solution was to increase customs duties in order to cover bloated expenditures and to withdraw the depreciated paper-note Kaimé. ³³ However, the 1838 trade agreement ruled out increasing customs duties freely. Britain elected to help the Empire borrow instead of allowing it to increase customs tariffs; it wanted to avoid ‘reinstituting the very abuse which the Treaty of 1838 tended to destroy’. ³⁴ Free trade and the openness of the Ottoman economy to the capitalist world market had to be strictly maintained. ³⁵ To comply, the Empire had to borrow abroad and agreed to the institution of the IOB as a central and issuing bank in 1863. The way out of the financial crisis was to cede more national sovereignty in order to reassure the market of the Empire’s creditworthiness. ³⁶

On the other hand, institution of the IOB and OPDA allowed the Empire to benefit overall from low interest rates and higher issue prices (Birdal 2010: 86). Reforms in the public financial sector, especially those requested with the signing of the Muharrem decree in 1881, enhanced the use of foreign capital by giving it more secure and abundant guarantees (Blaisdell 1914: 2631; Conte & Sabatini 2014), both for the holders of Ottoman bonds and for investors in railway projects, thanks to the new kilometric guarantee (Lot Turcs) established by the OPDA. ³⁷ Furthermore, the OPDA’s power made it possible: ‘[. . .] to introduce reforms in the system’. ³⁸ Karl Polanyi (1957) understood the OPDA’s political and economic role:

The representatives of haute finance were charged with the administration of the bulk of Turkish finance. In numerous cases they engineered compromises between the Powers; in others, they prevented Turkey from creating difficulties on her own; in others again, they acted simply as the political agents of the Powers; in all, they served the money interests of the creditors, and, if at all possible, of the capitalists who tried to make profits in that country. (p. 15)

Moreover, it was accepted that the creation of these international institutions was also a preparatory step not only to meeting the bondholders’ demands, but also to coming to terms with the profit-seeking drive of foreign and domestic banks. ³⁹ It was also well-known in financial circles that such an agreement between the Empire and the creditors might pose a risk for the long-term sustainability of Ottoman finances. Such a crisis could be a new opportunity for the Empire’s creditor, allowing them to put a further lien on Ottoman revenues. This would only push the Empire ‘more and more into the hands of usurious money-lenders, lead to the rapid creation of new floating debt, and, in the end, cause the Empire again to repudiate its obligations, and again seize upon the revenues it is now for the third time hypothecating’. ⁴⁰ Thus, as creditor-assigned revenues increased steadily up to the Great War (except for the tobacco régie (Boyar 2006), ⁴¹ the Ottoman treasury encountered increasingly long-term sustainability problems. ⁴² As early as 1885, this modus operandi was clear:

While the bondholders have been receiving the revenues assigned to them, the loss of those revenues has so crippled the Turkish history, that it has been unable to meet its engagements, even though it has cut down necessary expenditure in all directions. ⁴³

In short, a sort of austerity policy ante litteram. It was very clear that

[. . .] although Turkey has managed to meet continuous borrowing, and [it has done so] by leaving unpaid debts due to her own subject. [. . .] The fact remains, however, that she has not been able to pay her way, and that her ability to meet the claims of the bondholders is for the present dependent upon her ability to raise new loans. ⁴⁴

Notwithstanding international control, from 1881, the revenues managed by the OPDA followed a rising trend (Tuncer 2015: 194). Ottoman mismanagement – a compound of unproductive expenditure, corruption and inefficient tax collection – could not but further undermine the state’s financial stability. The Empire became increasingly dependent on a political economy based on foreign loans, since the availability of relatively cheap international credit (especially during the late19th-century depression) discouraged incisive structural reforms of the public sector. Resistance to some of the proposed reforms allowed the Sultan to avoid struggling against powerful domestic notables entrenched in the system (Hourani 1968: 48–54; Quataert 1983: 83).

Foreign intervention in the Ottoman financial sector, by diminishing local economic sovereignty, reduced investors’ perceptions of risk and, accordingly, the volatility of the Ottoman bonds. Istanbul stock exchange data show that investors responded positively to foreign intervention (Autheman 2002: 22; Hanedar & Celikay 2017). The more the Empire adopted externally influenced and controlled financial institutions, the more the volatility of Ottoman bonds decreased. Financial-technological colonization was essential to keep the Empire solvent in the short and medium term and allow it to continue to borrow. In the words of E.J. Hobsbawm (1975), ‘modern technology put any government which did not possess it at the mercy of any government which did’ (p. 98). Technological progress became an important factor in the imposition of foreign economic methods and arrangements. Thus, foreign finance capital and financial know-how became increasingly directed to ensuring the proper functioning of the Ottoman economic engine in order to keep the Empire solvent. The more public debt increased, in part to enlarge European railway projects in the whole region, the more Ottoman sovereignty weakened and demands for financial reforms gained impetus.

Foreign financiers, bankers, diplomats and politicians – above all, French and British – were in the forefront of these developments (Anderson 1964: 34; Thobie 1977: 12). The political support of each government (the French and Germans much more than the British) created a favourable environment for business investment and, therefore, for the employment of excess capital from the home country. ⁴⁵ This was especially the case when the fall in profit margins following the 1873 financial crisis forced European capital to seek out new profitable investment opportunities. ⁴⁶ In any case, debt conversions and consolidations (also in nearby countries such as Egypt, Tunisia and Greece) notoriously resulted in profitable affairs chiefly for negotiating banks rather than for the majority of small and medium-sized bondholders, as banks at that time acted especially as placers of borrower’s securities. ⁴⁷

The new ‘reformed state’ created a favourable judicial, cultural and practical framework for Ottoman incorporation into the capitalist world-economy, enabling European capital to continue to earn high returns. The reforms were a kind of capitalist longa manus allowing the ‘creative destruction’ of the semi-peripheral local economy (Salzmann 2004: 29, 30). Ottoman indebtedness advanced the Great Powers’ ambitions to control the Empire politically, abetted the plundering of its resources by foreign financiers and bankers, and reinforced the Ottoman Empire’s economic subjection. ⁴⁸ Financial and economic reforms were essential for adapting the Ottoman economy to anti-market rules and norms that promoted the exploitation of internal resources mainly by foreign but also local capitalists.

Conclusion

Most of the financial reforms implemented in the Ottoman Empire, especially those that required modern technological know-how, were influenced, directly or indirectly, by European and mostly British intervention. Especially in the field of public finance and the banking system, these reforms had been functional to Ottoman incorporation into the capitalist world-economy in a semi-peripheral position. The adoption of certain rules, codes and methods, aligned the Ottoman domestic market with the international economic system, where the anti-market thrived. Unlike with many reforms promoted under the Tanzimat umbrella, the financial reforms had the explicit purpose of allowing capitalists to facilitate trade, increase profits and avoid, as much as possible, a decline in returns. Those reforms were dictated by and consonant with the dynamics of the global financial world. Likewise, access to the world market was pivotal to the domination strategy of the hegemonic power(s). Uncontrolled foreign borrowing and growing public debt increased the pressure for structural reforms within the financial system. Financial reforms became a useful tool, more often proposed with the ‘gospel’ of modernization, for closer integration with the capitalist world-economy and to the benefit of those who controlled the anti-market and had significant interests in extracting profits from local resources.

The introduction of capitalist-style reforms to point the Ottoman economy in the direction of capitalism cost a great effort in order to set a new course of economic policy. Internal obstacles to reform made by traditional forces were mainly removed only by exploiting external factors such as Wars. Each war corresponded to British, but also French, requests to implement capitalist-style institutional changes and reforms: the free-trade treaty of 1838, the monetary reform of 1844 (the same year as the British Bank Charter Act), the beginning of international borrowing in 1854, the institution of the IOB in 1863 (it developed from the Ottoman Bank founded in 1856) and the creation of the Ottoman Public Debt Administration in 1881. The associated high costs of reforming the states opened the way for runaway indebtedness. Thus, public debt became a further tool to force externally induced financial reforms, especially after sovereign defaults and the institution under duress of international financial commissions. Capitalist-oriented reforms increased credit and know-how dependency on the core of the capitalist world. This subordinate relationship could not fail to deteriorate still further, making it more and more stifling from a long-term perspective. The 1838 free-trade treaty, the monetary reform of 1844 and the Ottoman Land Code of 1858 certainly advanced the European-style modernization of the Empire. On the other hand, this process hastened the Empire’s political disintegration – which occurred at the end of the Great War – and confined it to the semi-periphery of the capitalist international market.

An inter-state extension of Gramsci’s idea of hegemony shows that capitalistic forces, once they have gained control over the nation-state, tried to extend it abroad in order to reproduce its social order and thus enlarge their power globally. Thus, the hegemonic state uses the strength of its army, navy and culture to impose the reproduction of its social class structure abroad. These capitalistic forces find an alliance with those financial elites in the semi-peripheral countries such as the Ottoman Empire. Capitalist financial reforms may also be seen as tools to extend and enforce class domination. The long-term aims of these reforms are the institutionalization and the exploitation in omne tempus of the market economy by the anti-market. Effectively, this is done through the promulgation of codes, norms and rules in public finance, banking and the monetary sector that have a great impact on the functioning of the entire market economy. Capitalistic forces confined in the anti-market demanded modernization for the sake of profits, whereas political Ottoman reformers did so for the sake of the Empire’s own survival and social order. This was the difference. Externally induced financial reforms enabled the international propagation of the hegemonic power’s economic model with the aim of keeping capital returns high and thus buttressing its position within the capitalistic world-economy.