Financing, Debt, and Financial Crises

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Financing, Debt, and Financial Crises

From the 1700s to the 1900s, the Middle Eastern economy underwent a transformation brought about through an alteration in its economic relationship with Europe and the global economy. This process of alteration began with European commercial penetration, which expanded to include financial and then political penetration. This process facilitated a pattern of dependence that stifled Middle Eastern economic growth and income.

Europe's Industrial Revolution prompted its commercial penetration of the Middle East, where Europeans desired trade expansion and exerted political pressure to limit commercial restrictions. Europe's financial penetration of the Middle East, particularly in Egypt and Turkey, began during the mid-nineteenth century when both had demonstrated their inability to finance reforms through existing revenues.

European credit institutions capable of mobilizing extensive funds as loans for foreign governments were developing simultaneously. Egypt and Turkey became dependent on foreign loans, enabling European states, banks, and companies to maneuver for larger concessions while expanding trade. During the peak of European imperialism, Egyptian and Ottoman bankruptcy became means to developing international financial regimes in both areas, restricting their financial sovereignty. Middle Eastern economic dependence on Europe was reinforced through political might and, in Egypt, direct political control.


From 1500 to 1800, the Middle East experienced growth in key economic sectors, but this growth paled in comparison to Europe's, leaving the Middle East with a relative sense of decline. Capitalist industrialization remained absent in the region while expanding rapidly in Europe. Consequently, the economic gap between the Middle East and Europe widened from the seventeenth century onward, shifting the economic balance of power in Europe's favor. During the early eighteenth century, the Middle Eastern economy was stagnant in terms of investment and income, techniques and methods of organization, and production levels. The region's resources were underutilized, and it suffered from poor transport and irrigation systems.

The trade reduction following the discovery of the Cape of Good Hope route to India, effectively eliminating the Middle East's role as a crossroads of trade between Europe and the Far East, corresponded to the decline of Venice's control of the Mediterranean and its control by Britain and France. This established a new pattern of global trade where European manufactured goods were exchanged for Middle Eastern raw materials.

Under the protection of the Capitulation Treaties, which were a series of agreements between the Ottomans and certain foreign governments granting their citizens specific exemptions from Ottoman law, and their national consuls, European merchants congregated in sections of port cities while relying on intermediaries familiar with local languages and the region's commercial nuances. For their services, intermediaries were placed under the umbrella of a European consulate, according them low customs duties applicable to Europeans.

The Middle East became a destination for increased amounts of British goods during the Napoleonic Wars (1799–1815). Britain expanded its Middle Eastern presence and strengthened its control of the Mediterranean at the expense of France, which reasserted its position during the 1840s. European economic stagnation prompted entrepreneurs to search abroad for financial investments. In addition, improved transportation systems throughout the Middle East encouraged Europeans to expand their commercial penetration.

European governments supported their own merchants' commercial interests and exerted political pressure on their behalf. European-controlled commercial tribunals were established during the 1850s. The Ottoman Commercial Code (1850), based on French customs, was a response to European pressure to comply with Anglo-French commercial practices. Britain exerted military and political pressure on the Ottoman government in 1838 to reduce its monopolies, and the British renegotiated the Anglo-Turkish Commercial Convention (1820) to include a reduction of internal tariffs.

Following the Napoleonic Wars, the Ottomans attempted to reform their military along European lines. While such efforts in Turkey were meant to counter increasing European political and military intervention, in Egypt they were simultaneously directed toward achieving independence from Ottoman authority. In both cases, these reforms were financial burdens. Attempts to increase revenue by reasserting control over the countryside met mixed results and increased administrative costs.

The Ottoman government's failure to collect sufficient revenues forced it to issue short-term bonds. During the 1830s, the military received about 70 percent of revenues, yet many officers remained unpaid. Ottoman rulers concluded that a government loan was inevitable, yet the government's inability to secure adequate revenue cast doubts on its capability to repay the loan.


The 1850s and 1860s brought a period of rapid economic expansion in Europe, where increased foreign trade corresponded with rising foreign investment. New institutions for mobilizing domestic savings developed in Europe; these were capable of drawing funds from a wider range of investors. These institutions adopted more aggressive investment policies to generate rapid returns to compete with traditional banks. The Middle East was a promising investment area due to increased trade and Ottoman efforts to create a European-style military, administration, and economy.

The development of transportation and irrigation systems proved enticing for European investors searching for new schemes following the end of the British and French railway construction boom. The most lucrative loans were government loans, which were easy to publicize and involved increasing sums of money with minimal flotation risks. Credit institutions created schemes to attract Ottoman investment and used gimmicks to convince the European investing public to purchase Oriental bonds.

Many European-controlled banks in the Middle East were instrumental in collecting revenue for Turkey and Egypt. Initially focused on Middle Eastern economic development, such banks concentrated on obtaining profits from state finance. A further stimulus was tensions between European powers eager to extend their Middle Eastern economic and political influence through financial and administrative schemes or through development projects.

Although in 1851 the Ottoman sultan rejected an agreement for a loan of 55 million French francs, it became apparent that the Ottoman financial situation was desperate. The sultan feared increased European interference, yet maintaining a modern military competent to defend Ottoman integrity was financially onerous. The government experimented unsuccessfully with short-term fiscal measures to balance its finances. With no alternative, the government pursued a policy of regular foreign borrowing.

Although the Ottomans paid high interest rates on the full amount of their loans, they never received the face value of the sum borrowed due to heavy flotation fees and discounting. The first loan, for £T3,300,000 (British pounds), was arranged in 1854 after the outbreak of the Crimean War (1853–1856). One year later, an agreement was signed for a loan from London's Rothschild bank. Britain and France, anxious for the Ottomans to continue warring against Russia, assisted in getting the Ottomans favorable terms. Over the next twenty years, the Ottomans obtained thirteen more loans from European banks, amassing a total debt of £T242,000,000 and a large floating debt comprised of short-term bonds. As Ottoman debt mounted, terms of subsequent loans became less favorable.

The Ottomans used most of the sums received from loans for debt payments, leaving little for administrative and military costs. Consequently, economic development and public works projects received hardly any government funds. Attempts to increase tax revenues were hindered by administrative irregularities concerning collection methods, as well as numerous residents, including Europeans, who qualified for tax exemptions. Furthermore, the government failed to exploit new sources of revenue. As expenditure continued to surpass income, the Ottomans relied on short-term finance methods to make regular payments, resulting in additional small loans at high interest rates and the mass issuing of bonds. Attempts to liquidate bonds with further loans were unsuccessful due to the amount issued.

The Ottoman financial administrative system was inept at dealing with the crisis. The sultan's ministers jointly approved departmental budgets without the minister of finance's approval. The sultan's private expenditure was not restricted, and an auditing and accounting department did not exist until 1880. Financial control in rural areas was limited, and reform efforts, often posed to secure European funds, were unsuccessful. Furthermore, accessibility to European loans perpetuated a relationship of financial dependability.

On October 6, 1875, the Ottoman government announced its intention to pay half of the amount necessary to service its debt in cash, paying the rest in bonds. Europeans interpreted this as a declaration of bankruptcy. The Ottomans attempted to find alternative methods of payment and abandoned nearly all cash payments in 1876.


From 1876 to 1881, the Ottoman government and its European creditors trudged toward a general financial agreement to restore financial stability and reinstate access to further loans. There was difficulty convincing creditors to agree to common terms, since each loan had been issued under different conditions. Furthermore, the Ottomans attempted to resist the further surrendering of their financial sovereignty to European powers coordinating their efforts on behalf of their nationals.

The Ottoman financial and political situation continued to deteriorate. A famine and die-off of livestock in 1873 and 1874 exacerbated matters. The empire lost vast amounts on military campaigns in the Balkans (1875–1876) and against Russia (1877–1878). The Ottoman need for soldiers for combat prompted the reduction of its military in the countryside, hindering attempts for more efficient tax collection. The Ottoman government lost some of its richest sections at the Berlin Congress of 1878, where bondholders lobbied for international support. In 1879 Britain sent warships to the Dardanelles, (a strait in Turkey), pressuring compliance with foreign demands.

The Ottoman Empire and its creditors reached an agreement in 1881. Published in the Decree of Muharram, the agreement resulted in the creation of a system of international financial control through the Ottoman Public Debt Administration (PDA), which eliminated Turkey's financial sovereignty. The PDA consisted of a council with representatives from the main groups of bondholders (British, Dutch, French, German, Austro-Hungarian, Italian, and Ottoman), although the Ottoman representative had no vote. The council's presidency rotated between members from Britain and France, which argued that they had the largest interests at stake.

The PDA received support from European embassies in Istanbul and from foreign-controlled banks. Britain and France were the powers initially interested in Turkey's financial situation, yet Germany soon took increased interest. While imperial rivalries existed among the powers, they cooperated within Turkey to protect the interests of those with shares in the Ottoman public debt and to further European economic penetration through the development of public works projects, as well as concessions for the production and export of mineral products. It was implied that Ottoman refusal to support such projects would prompt the revocation of European financial support. While this method of economic control fostered resentment, the empire's weakened political and economic condition made it impossible for it to be challenged.

The Ottomans attempted to develop the empire's economy on its own. However, inept administrators, limited financial resources, a weakened international position, and a growing technological gap between the Middle East and Europe hindered these efforts. The Ottomans realized that constructing a proper means of transportation throughout the empire was essential for economic progress. The cost of transportation by camel was expensive and restrictive, hindering trade and limiting agricultural production for export. Yet lack of finances was a constant problem, and the Ottomans were forced to rely on European funds and the PDA.

European assistance for construction of public works projects was a frequent liability to the Ottoman government. For example, the agreement for the construction of the Izmir to Aydin railway guaranteed an interest rate of 6 percent on construction costs set at 31 million francs. As the construction company encountered financial and engineering difficulties, the government agreed to increases in the sum guaranteed to 46 million francs in 1861 and to 48 million francs in 1863. The company did not amass profits until 1869, thereby involving an enormous outlay by the Ottoman government.

European railways, built primarily in the 1850s and 1860s, assisted the development of Middle Eastern export crops by improving their transportation and lowering costs. Yet the more extensive railway systems allowed European economic penetration of the interior. The value of land located by railways increased, and in 1867 Europeans pressed for a law to extend their rights to landed property so they could increase purchases and push inland.

The providing or withholding of money was used to pressure the Ottomans into accepting financial projects. Banks or credit institutions might agree to float a loan only in exchange for concessions for its nationals. At other times, a loan might not be offered unless used toward a particular development project or to purchase specific foreign imports. The PDA, banks and credit institutions, and entrepreneurs coordinated efforts to exploit the Ottoman Empire. An example of this alliance was the awarding of ancillary rights to foreign railway companies, including rights to mineral deposits located within 20 kilometers (about 12.5 miles) of either side of the railway. Another example of this alliance was the practice of granting railway companies an Ottoman guarantee for compensation for losses, provided a certain number of trains ran over a particular section of track.

Under the Decree of Muharram's terms, the PDA directly collected specified tax revenues for the payment of the external debt and its interest. The PDA expanded its functions to include duties reserved for the Ministry of Finance and the reservation of funds for the servicing of new loans, increasing Ottoman dependence on the PDA and foreign money, or for financial guarantees for public works and mineral-extraction projects.

The PDA provided security for European investments, which increased the value of shares in the public debt. The PDA also delivered regular debt payments. The Ottomans secured better terms for further loans, and the PDA assisted in underwriting the empire's credit. Yet the PDA's growing administrative staff added costs to the government, which incurred expenditures assisting the PDA in completing its functions, and the PDA's independent operations fostered resentment. The PDA nonetheless continued to expand its economic control by establishing more tax-collecting offices and extending the types of taxes it collected. Until 1903, the PDA could withhold collected revenues from the government, including amounts exceeding the fixed debt. An amendment called for division of surplus revenue between the PDA and the government at the ratio of seventy-five to twenty-five.

The imbalance between Ottoman expenditure and income continued. From 1886 to 1914, the government received nearly thirty foreign loans totaling £T170,000,000. The European powers' economic and financial cooperation was not affected by conflicting interests until shortly before World War I (1914–1918), when increased nationalism fostered the tentative division of the Ottoman Empire into spheres of economic interest.


The Egyptian ruler Muhammad Ali (1769–1849) initiated reforms in Egypt during the early 1800s, and he attempted to raise revenues through state monopolies of cash crops. Egypt briefly regained financial independence, but reliance on cotton exports proved disastrous when its declining price in the global market from 1836 to 1837 initiated a period of instability. Muhammad Ali also constructed European-style factories to realize Egypt's industrial potential. Initially producing military supplies, such factories soon produced manufactured goods, eliminating Egypt's reliance on foreign production. Egypt's limited market, lack of coal and workable iron, and lack of technological experience hindered Muhammad Ali's endeavors. Furthermore, the elimination of local industrial competition enabled European manufacturers to infiltrate the Middle Eastern market.

After Muhammad Ali, rulers attempted reforms and development programs surpassing Egypt's financial capabilities. Sa'id Pasha (1822–1863), who ruled from 1854 to 1862, sponsored numerous public works projects and attempted to develop Egypt's infrastructure through joint Egyptian-European companies. Several Europeans exploited Sa'id by befriending him and then manipulating him for personal gain. Foreign consuls, whose influence increased, extracted government indemnities for alleged losses of concessions. For example, in 1858 the bankrupt Nile Navigation Company persuaded Sa'id to purchase its investors' shares to prevent them from losing money.

The initial agreement between Ferdinand de Lesseps (1805–1894), a French diplomat and developer, and Sa'id for the construction of the Suez Canal disadvantaged the Egyptian government. The canal would eliminate revenues from the transport of mail and from passengers crossing from Alexandria to Suez. Egypt agreed to supply an annual corvée of 20,000 laborers, and the country abandoned its rights to territory along the main canal, as well as a second canal constructed to provide fresh water for workers. Egypt assumed responsibility for purchasing 64,000 of the initial issue of 400,000 (500-franc) shares. Subscriptions sold poorly when opened to the public in 1858, and Sa'id agreed to purchase most remaining subscriptions.

Upon advice from de Lesseps, Egypt issued treasury bonds and later used bonds to pay its employees. By 1859, there was over £2,000,000 of government paper in circulation. An additional £3,500,000 was issued to purchase Egypt's canal shares. In 1860 Sa'id secured a foreign private loan for 28 million francs. Under the agreement's conditions, Egypt was to stop issuing treasury bonds. However, the government continued issuing short-term paper under different guises to meet its financial obligations. Egypt's floating debt may have been as high as £1,000,000 by late 1861.

In 1863 Ismail Pasha (1830–1895) inherited a state in financial crisis. The government was required to pay 34,000,000 francs to shareholders of the bankrupt Medjidiah Company. Under the Convention of March 1863, Egypt reaffirmed its obligations to the Suez Canal Company and agreed to pay the remaining 200 francs per share, which totaled 35,000,000 francs. Ismail exacerbated matters by sponsoring ambitious public works projects and joint companies. He began borrowing from local banks, but hesitated from taking out foreign public loans, which required the sultan's formal approval. Such a situation became inevitable after the imposition of the arbitration terms negotiated by the French emperor Napoléon III (1808–1873). The arbitration terms resolved a dispute between Egypt and the Suez Canal Company, requiring Egypt to compensate the company for £84,000,000 over the return of some granted concessions.

Egypt secured its first pubic loan in September 1864 for £5,700,000. In the following years, Egypt arranged six additional loans for a total of £60,000,000. The terms for loans became increasingly onerous as Egypt's financial situation deteriorated. The government again resorted to issuing treasury bonds and other short-term paper to meet its obligations, amassing a floating debt of about £35,000,000 in 1873. In 1875 Egypt sold its canal shares to Britain for £4,000,000. In 1876 the government borrowed short-term loans at high interest rates to meet its obligations.

In April 1876 the Egyptian government announced its inability to honor the interest payments on its debt for three months. Egypt's creditors interpreted this as a declaration of bankruptcy. The government's weak international position placed it at a greater disadvantage than Turkey to negotiate a settlement with its creditors. Egypt's small size, semiautonomous status, and strategic position made it important to ambitious European powers, which saw the debt as a means to achieving political control and eagerly supported their national creditors. When Egypt challenged its creditors' terms, foreign troops occupied the country, a fate Turkey avoided until the end of World War I.


From 1876 to 1880, Egypt's creditors devised several unsuccessful plans incorporating European control to regulate Egypt's financial situation. None of these plans reduced Egypt's debt or accurately estimated what Egypt could pay in interest and amortization. Such plans accompanied the establishing of a Caisse de la Dette Publique (Public Debt Fund) with directors from Britain, France, Italy, Austria-Hungary, and later Russia to collect revenues assigned for debt repayment.

In 1876 George Goschen (1831–1907) and Edmond Joubert, representatives of British and French stockholders, devised a plan that remained operational until 1880. They divided Egypt's debt into four categories: Ismail's private loans, to be paid from his personal revenue; shares of loans due for early repayment (those of 1864, 1866, 1867); preference debt established for holders of some government bonds issued for Egypt's remaining outstanding loans (those of 1862, 1868, 1873); and all remaining debts. As a whole, Egypt's debt was fixed at £89,309,000, with an annual interest charge of £6,000,000.

A series of events, including the low level of the Nile River in 1877 and the financial strain of the Ottoman war against Russia, worried Europeans, who feared a second Egyptian bankruptcy. In 1878 Anglo-French diplomatic pressure increased European control by allowing a commission of inquiry to complete a full examination of Egypt's finances and recommend better financial management methods. The commission's preliminary report called for the royal family's private estates to serve as security for a new loan, with some income set aside for extra budgetary support. Meanwhile, the government continued its payments using unofficial bank loans.

After the report, Ismail's cabinet received a British minister of finance and a French minister of public works. Ismail, attempting to limit increased foreign control, dismissed the European ministers in April 1879. Anglo-French control was soon reimposed, and in November one British controller-general to supervise government receipts and one French controller-general to oversee expenditure were appointed with seats in the Egyptian cabinet. Both were nominated by their governments under the understanding that neither could be dismissed without British and French consent. The commission of inquiry issued a second report in 1879 recommending the reduction of Egypt's annual interest charge and an increase in revenue through tax reforms. Opposition to tax reforms resulted in a protest by large landholders and led to Ismail's overthrow.

The Law of Liquidation of 1880 created a second commission and served as the basis for the final settlement between Egypt and its creditors. Egypt's debt was fixed at £98,378,000, while the annual interest charge was lowered to 4 percent, or £4,243,000. The commission concluded that this fee was the maximum amount Egypt could afford based on Anglo-French experiences making debt payments during the initial years of occupation after the restructuring of Egypt's financial administration and revenue-collection system. The settlement called for expanding European control over Egypt's finances and stated explicitly the limits placed on Egypt's financial sovereignty. Britain regarded the law as having international treaty status, and its violation would be justification for direct foreign intervention.

Expanded European control led to an increase in the number of Europeans serving in Egypt's civil administration. In 1876 Europeans reorganized Egypt's Customs Office, Post Office, and Office of Public Accounts, placing them under the direction of Europeans receiving inflated salaries. These actions were justified through claims that such offices controlled sections of revenues reserved to service the public debt.

Egyptian resentment against Europeans mounted. The strain on Egypt to make regular payments to its creditors, along with anti-European sentiments, played a significant role in the National Movement of 1881 to 1882, led by Colonel Ahmed Urabi to restore the national integrity of Egypt by seizing control of the government to remove foreign control. Military reductions in terms of manpower and salary paved the way for Muhammad Sharif Pasha (1826–1887) and his successors to take control of Egypt and attempt to reclaim financial sovereignty.

British occupation of Egypt was regarded initially as a temporary situation for reestablishing foreign control. However, Britain repeatedly delayed its withdrawal and amended mechanisms of foreign control to strengthen British influence. Britain dissolved the "dual control" of Egypt between itself and France, replacing it in 1883 with the appointment of one British financial advisor to supervise all government financial decisions. In addition, an international conference amended the Law of Liquidation by increasing the limit for government expenditure and making a provision that revenues assigned to the Caisse de la Dette Publique exceeding the amount required to meet the annual interest and amortization payments would be split with the Egyptian government in a fifty-fifty ratio.

One last public loan was issued to fund the floating debt incurred during the first years of occupation, and also to fund works of economic development. As part of the 1904 Anglo-French entente, France agreed to remove the limit set for government expenditure and allowed the abolition of the international agencies established to control organizations whose revenues had been allocated to the Caisse de la Dette Publique. Following this agreement, Britain essentially gained control of Egypt's daily financial operations, even while subject to international obligations, such as servicing the public debt.

Once Egyptian occupation became permanent, Britain sought an economic policy enabling it to retain control at minimal cost to itself. British officials were concerned over Egypt's agricultural sector, believing an alliance with the landowning and peasant classes was essential to maintain imperial rule. British officials claimed their policies benefited Egypt economically, therefore justifying imperial control. The 1907 financial crisis and the disastrous 1909 cotton harvest countered British claims. Under British control, Egypt became dependent on a single crop and lost the ability to develop its own economy.


By 1914, Middle Eastern elites generally believed that the region's political weakness resulted from its economic weakness, which was caused by dependence on foreign financial institutions and on agriculture rather than industry. Such elites reasoned that progress would result only if the state apparatus assumed a direct interventionist role and pursued a nationalist economic policy. Such a program became difficult to implement following World War I. The Ottoman Empire was divided into separate polities and zones of influence among European powers that continued to exploit the region before gradual withdrawal around the mid-twentieth century. Nationalist Egyptian elites had to rely on large landowners and foreign executives for political support, while the Turkish regime of Kemal Atatürk (1881–1938) remained dependent on foreign capital and enterprise.

see also Empire, Ottoman.


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Financing, Debt, and Financial Crises

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