The Ottoman Empire needed new sources to finance the war, because it was evident that the budgetary revenues were far from being enough for this purpose and the state treasury was virtually empty. The budget of the fiscal year 1914-15 was 34 million Ottoman Liras, of which only 20 million Liras was disposable, with the rest being channelled to the Ottoman Public Debt Administration (TR: Düyun-u Umumiye). The Ministry of War had a budget of 6 million Liras, the Gendarmerie was allocated 2 million Liras and the Ministry of Navy was given 1.3 million Liras. These amounts were insufficient to feed an army of 800 thousand men and engage in a multi-front war. Additionally the war was expected to cause a further reduction in revenues.

Before the entry to the war, the government first tried to obtain financial assistance from Germany, which was already aware of the fact that it would have to provide substantial financial assistance if the Turks were to launch a serious war effort.

In October 1914, the German government agreed to provide 5 million Liras (1 Ottoman Lira = approx. 20 German Marks) at an interest rate of 6 percent, if the Sublime Porte honoured its alliance obligations without delay. According to the memoirs of Cavid Bey, the Minister of Finance, Germany was supposed to release 250 thousand Liras of this loan ten days after the agreement was signed, 750 thousand Liras ten days after Turkey’s declaration of war against Britain and Russia and the rest as monthly instalments of 400 thousand Liras. Ali Akyıldız points to the differences of opinion between Enver Paşa and Cavid Bey regarding this issue. Enver Paşa wanted to declare a moratorium on Ottoman Public Debt Administration’s share in the budget, whereas Cavid Bey thought that debts should be paid back by all means in order to preserve the credibility of the government. The debate ended with Cavid Bey’s resignation on 2 November 1914; however he remained in control of the Ministry of Finance, with Talat Paşa, who was appointed as interim minister only played a decorative role. Cavid would later re-enter the cabinet in 1917.

The loan agreement with Germany was signed on 10 November with favourable repayment terms. It also included a pledge from the German Embassy in Istanbul that in case of need a further loan with analogous terms would be granted by Germany. The only problem about this loan was the physical transfer of gold through the Balkans and especially through Romania, which was known to be sympathetic to the Entente. Trains carrying the first few instalments managed to reach Istanbul without any incidents, however in March 1915, Berlin had to suspend shipments due to the escalating tension in the region. The remaining instalments of the loan would be later scraped together from Deutsche Bank and other sources in Istanbul.

Insufficient Tax Collection

The outbreak of the war had eliminated the possibility of foreign borrowing, which was the basic method of financing the budget deficits of the Empire ever since the Crimean War. One possible way of financing the war was increasing the taxes. In the fiscal year of 1913-14, tax revenues, which amounted to 29.4 million Liras (at current prices), equalled approximately 12 percent of the gross domestic product, with two-thirds of the tax being collected from the agricultural sector.

A major effort to increase revenues was made in the sphere of consumption taxes, a field of revenue entirely forbidden by the Capitulations, commercial privileges given earlier to the great powers of Europe, until the beginning of the war. Taxes on consumption goods were first planned in 1915 and in the fiscal year of 1916-1917 they produced around 200 thousand Liras in revenues. Sugar, petroleum, matches, coffee, tea, cigarette paper and playing cards were included in the new taxes and in 1918 their estimates were 700 thousand Liras for cigarette paper, 200 thousand Liras for matches and 60 thousand Liras for playing cards. For alcoholic beverages a new system was devised in 1918 based on a demand of ⅛ Lira for every percent of alcohol in a drink. As a result, revenues from alcoholic beverages jumped from 97 thousand Liras in 1915 to 583 thousand Liras in 1918. [Sources for all tax revenues: Emin (1930)]

Income taxes were increased several times during the war; four times only in 1917. A tax upon war earning passed the Parliament in 1918, however it was given no application during the war. As trade relations with the outside world went to a standstill with the outbreak of the war, so did the custom receipts and therefore taxes on production became a prolific field of exploitation. The government increased direct and indirect taxes charged on businesses and pulled up the tithe demanded from agricultural producers from 10 percent to 12.5 percent.

All these efforts, however, did not bring about an increase in tax revenues. Şevket Pamuk identifies three reasons for this failure: First, the war had caused a rapid fall in industrial and agricultural output. Second, many taxes were fixed in nominal terms and rising inflation caused the nominal revenues to lag far behind the prices. The government’s attempts to adjust the nominal rates of taxes were ineffective. Thirdly, people’s tendency to evade taxes increased due to hardships and falling production, resulting in a decline of the government’s capacity to collect them.

The government also attempted to create additional sources of income by taking extraordinary measures. These included a special fee of 30 golden Liras (called in Turkish: Muafiyet-i Askeriye) that allowed both Muslim and non-Muslim citizens to buy exemption from military service. A requisitions system that enabled the military to obtain vehicles and supplies from the public and pay for them after the war is over (TR: Tekalif-i Harbiye); however many services and requisitions obtained by the government during the war remained unpaid. Ahmed Emin, who considers requisitions as an “indiscriminate, irregular and illegal war tax” because “it did not stop at articles of military necessity and included all sorts of commercial goods”, estimates the total value at 50 million Liras.

Another extraordinary measure taken to help finance the war was hardly allowing an increase in salaries of civil servants, although the value of money kept depreciating and the cost of living rose to 2,000 percent above normal, if measured in paper money. Emin wrote: “As salaries constituted nearly one-half of the budget, this procedure was certainly a vast measure of the economy for the Treasury, but it was an unbearable war burden for those who lived on such salaries.”

The government also put restrictions on capital movements during the war. After declaring a postponement of both foreign and domestic debt payments, there were limitations put on capital transfers including a ban on transactions with gold as well.

Monetary Expansion

Before Turkey entered the war, the government was building its financial plans on the assumption that 500 thousand Liras monthly would be enough to finance the war. However, soon it was realized it could not be done for less than 3 million Liras a month. Since all other methods had fallen short, the only solution left was to print more paper money. This method was encouraged by the Germans, who wanted to relieve the pressure on their own gold reserves.

According to Emin, the currency circulating in the Empire in 1914 amounted to 60 million Liras in coins and only about 1 million Liras in banknotes. Under the Constitution of the Ottoman Empire, the privilege of printing paper money was reserved exclusively to the Banque Impériale Ottomane, which was owned by French and British interests, with real headquarters based in Paris and management in Istanbul by a British citizen named Nias and a Frenchman named Steeg. In November 1914, the government approached the bank to print 15 million Liras worth of paper money against the collateral of the 5 million golden Liras obtained from Germany. It was refused by the board of the bank in Paris, simply because Turkey had entered the war against Britain and France.

Enver Paşa and Talat Paşa were upset. They wanted to take over the bank and replace the British and French directors with Ottoman citizens, an idea supported by the Germans, who provided support for figuring out a policy on the paper money issue. Leading figures of the German business community, including Otto Kaufmann, director of the Deutsche Bank office and Franz Günther, vice-president of the Anatolische Eisenbahn-Gesellschaft (Anatolian Railroad Company) got together with Ambassador Wangenheim and declared their support on this issue to the government. Additionally, a prominent banker, Eugen von Wassermann arrived in Istanbul as an advisor on the reorganisation of the Banque Impériale Ottomane.

Cavid Bey had an obstructionist approach to the intended changes in the bank. He wanted to play the game by the rules, because it was the only way to ensure the credibility of the money that was to be printed. For this reason, the plan proceeded relatively slow. It was only two months after France and Britain declared war on Turkey when Nias and Steeg were asked to leave Istanbul and replaced by Ottoman nationals. Ulrich Trumpener emphasized an important point that although the management of the bank was now run by Turks, Cavid Bey did not want to use it to print paper money, because he did not want to antagonize the French, whose “good will would be needed again once the war was over.”

Cavid Bey’s proposal was the temporary granting of money printing privileges to the Ottoman Public Debt Administration, so that the Banque Impériale Ottomane could be by-passed. Since the French delegates of the administration had already left Istanbul, the decision whether to accept this proposal was left to the remaining delegates, who were a German, an Austrian, an Italian and the Turkish delegate Hüseyin Cahit Bey.

The German delegate, Rudolph Pritsch, was not happy about this idea, because only part of the money issue was to be covered by gold. His attitude was approved by the German creditors back home and Cavid Bey had to modify his proposal to offer full gold coverage for the banknotes that would be issued by the administration.

On 23 February 1915, Cavid Bey, Hüseyin Cahit Bey and Eugen von Wassermann left for Vienna and Berlin to discuss the plan and find financial support because the 5 million golden Liras obtained from German was already spent away. To the Austrians, Cavid Bey told that a joint German-Austrian gold loan of 150 million Francs would be needed to carry on with the war. Count Stefan Burian von Rajecz, Austro-Hungarian Foreign Minister, was willing to discuss this, however he suggested that Turkey should provide some economic concessions in return. Cavid Bey was not pleased with this.

In Berlin, he was promised two thirds of the loan he asked for and in return he agreed to have the entire amount to be kept in Berlin under the seal of the Ottoman Public Debt Administration, which would be enabled to issue paper money of corresponding value, fully covered by gold. The Council of the administration unanimously approved the project on 25 March. Accordingly, banknotes with a total value of 6,583,094 Liras would be issued and holders of the banknotes were to be paid in golden Liras after the war was over.

The second loan agreement with Germany was signed on 20 April and soon printing of new money started. The First Series of banknotes, called “cash documents” (in Turkish: Evrak-ı Nakdiye) was issued in July 1915 –the actual issue took some time because it had to be accompanied with the relevant legislature- and it was fully backed by golden Liras, which brought about a satisfactory level of credibility and confidence among the public. However, as military spending was skyrocketing, the government had to resort to German assistance again, only 6 weeks after the banknotes were put into circulation. Enver Paşa wired to the German General Staff that “German gold was urgently needed so that at least part of the army’s requirements can henceforth be paid for in cash.”

Germany had already lent to the Ottoman government the equivalent of 95 million gold Marks in November 1914 and 80 million gold Marks in April 1915. Additionally, the government owed a further 150 million gold Marks to German firms in return for the weapons and supplies purchased. This time Germany was hesitating to provide a new loan, since its aim was to collect its gold stock at the Reichsbank instead of giving it away in support to her allies. They asked the Ottoman government to increase the money supply rather then providing a new loan in gold. German State Secretary Karl Theodor Helfferich explained to Cavid Bey that Germany could not allocate so much gold and therefore the issue of only partially covered banknotes should be considered. This operation would require the creation of a new Ottoman bank of issue, to which German and Austro-Hungarian banks had already shown willingness to contribute to the capital. However, the Ottoman government’s preference was to buy the Banque Impériale Ottomane and to convert it into a state bank.

Discussions about the bank and the loan went on for a long time during which the financial needs of the Turkish Army growing and the lack of money jeopardising the war effort. Faced with this grim situation, Germany agreed to release a new loan. On 9 September 1915, Helfferich informed the Ottoman Ambassador in Berlin Hakkı Bey that a new gold loan of 120 million Marks would be available by the end of the year. Soon after this announcement, the Ottoman government told the Germans that they needed yet another 40 million Marks to finance the costs of the ongoing Gallipoli campaign. This request was granted as well, despite the fact that there have been no attempt so far from the Turkish side to create a new state bank that would print partially covered paper money.  

In order to provide financial support to her ally without having her gold leave the country, Germany proposed the Ottoman government to substitute treasury bonds backed with for the gold with which previous loans had been paid. An agreement signed by German State Secretary of the Foreign Office Gottlieb von Jagow and Ambassador Hakkı Bey on 9 November 1915, Germany confirmed that it would hand over treasury bonds in the previously agreed amount of 160 million Marks to the Ottoman Public Debt Administration as a collateral for the new banknotes to be printed. The Second Series of banknotes was printed with a decree issued on 31 October 1915 with a total volume of 6 million Liras.

Zafer Toprak wrote: “These second order banknotes did not have enough volume to cause inflationary pressure and under normal circumstances such an increase in money supply would not have any effect on the general price level. However, this second order was different from the first one in the sense that it was not backed by gold but by treasury bonds. Therefore the public confidence in these banknotes was low. Due to this psychological effect, soon after the second order banknotes were issued, the difference between the values of golden Lira and banknote Lira began to widen.”

As can be seen from the figures above, the Ottoman government was not using all of the advances from the Germany as collaterals for banknotes. The difference between the total amount of the treasury bonds borrowed and the banknotes printed is the sum blocked as Marks in German banks in return for the imports from this country. This was a comfortable way for importing arms and supplies, because in a time when Germany was paying in cash for raw materials and food stuff imported from Turkey, Turkish imports from Germany were to be paid for in the future. This meant a widening balance of payments deficit for Germany and a loss of value of the German Mark against the Ottoman Lira. In response to this situation, Germany asked for 5 million Liras printed in the Fourth Series as loan. It was a wise decision for Germany to loan to Turkey in gold and to borrow back in paper money, which improved German purchasing power in the Turkish market and prevented a further slide of the Mark.   

On 17 February 1917, the Ottoman government decided to borrow a further 42.5 million Liras from Germany and use 32 million Liras of it to issue a new series of banknotes. According to the decree issued on that date, redemption payments would begin after the last instalment of the payments that would be done for the banknotes issued with the decree of 19 August 1916 and they would be completed within four years. This meant that redemption payments of banknotes issued to finance the war would be completed within 11 years after the war.

Appeal to the Public

The Fifth Series banknotes were issued on 10 April 1917, however only in 6 months this new source was also exhausted. By that time, the government was aware of the inflationary impact of printing more and more banknotes. A new idea was selling the German treasury bonds directly to the public instead of printing money, which would enable the government to finance the war without further monetary expansion.

As of mid-1917, the volume of banknotes in circulation was 85 million Liras and Cavid Bey thought that if 50 million Liras worth of German bonds could be sold to the public, the same amount of banknotes can be withdrawn from the circulation and the money supply could be pulled down to its pre-war level. However this attempt was unsuccessful. People were speculatively using their money to buy goods with the expectation of future profits. They did not buy the German bonds that offered only 4-5 percent interest. The burden of financing the war was falling on the shoulders of the common people whereas the government was helpless against the worsening of income distribution and “war profiteers” were reaping great financial benefits through speculative transactions.

After this failure, the government resorted back to printing more paper money. Later in 1917, it was decided to borrow 50 million Liras from Germany and use 32 million Liras to issue the Sixth Series banknotes. It was soon followed by another loan and the issuance of Seventh Series banknotes with a total volume of 2.5 million Liras.

As the volume of paper banknotes began to expand and their denominations began to get smaller, their exchange rates against gold backed Liras began to decline. In January 1916, there were 10.7 million Liras in circulation and the difference between the value of paper money and golden Lira was just 2 percent. In January 1917, these figures went up to 50.1 million Liras and 72 percent; in January 1918 to 130.3 million Liras and 364 percent; in October 1918 to 161 million Liras and 319 percent. The exchange rates of the paper banknotes in Istanbul rose from 120 Piasters per gold Lira in early 1916 to 400 Piasters in mid-1917 and 500 Piasters at the end of the war. Rates were even higher in provinces. According to the figures given by Pamuk, in August 1917, while 1 gold Lira exchanged for 430 Piasters of paper money in Istanbul, the rate was 450 Piasters in Bursa and Izmir, 540 Piasters in Aleppo, 555 Piasters in Beirut and 766 Piasters in Mosul.  During four years of war, the money supply quadrupled and combined with a dramatic fall in the output of goods and services a rising inflation was inevitable.

Between the issuance of Sixth and Seventh Series of banknotes, the government tried domestic borrowing once again, but this time, instead of trying to sell German bonds to the public, the approach was a more “national” one. Until then, domestic borrowing in Turkey had always the form of short term loans from Ottoman bankers. This time, with German insistence and despite the hesitation of the Ottoman government, it was aimed to borrow in long-term and directly from the public. Germany provided the gold required for capital and interest payments and with the Domestic Borrowing Law (TR: İstikraz-ı Dahili Kanunu) dated 28 January 1918, the government began to issue its own bond bearing an interest of 5 percent.

This domestic borrowing attempt was backed by an efficient propaganda campaign to encourage the people to invest their savings in these bonds. They were told that buying these bonds was a “patriotic duty” and by doing so they would not only have personal financial benefits in form of interest payments, but they would also support the national cause. This first ever attempt of the Ottoman government to borrow directly from the public proved to be successful and it relieved the pressure on the finances to some extent by creating a source of 18 million Liras.

Between the monetary reform in 1844 and the outbreak of war in 1914 the Ottoman government had minted golden coins with a total value of 69.3 million Liras. Coins worth 1 million Liras were depreciated and had to be withdrawn from circulation. Nearly 20-30 million Liras remained outside the boundaries of the Empire due to territorial losses. This meant that on the eve of the war, there were golden coins worth 40 million Liras in circulation. Additionally, there was 10.7 million Liras in silver coins. Together with the 161 million Liras of banknotes entering the market during the course of the war, the money supply rose to 211 million Liras.

During the course of the war, Turkey borrowed a total amount of 235,056,344 Liras from Germany. 148,581,400 Liras came in the form of German treasury bonds, the rest as gold, silver, German Marks or Ottoman Liras. Additionally there were also loans obtained from Austria-Hungary, though their volume was much smaller than those from Germany. With this financial support from her allies, the government issued seven orders of banknotes with a total amount of 161,018,633 Liras entering the circulation, bought arms and supplies and went on with the construction of new railroads. According to Trumpener, this obligation of covering all of the wartime issues of Ottoman banknotes with gold or treasury bonds cost the German government close to 4 billion Marks, with an additional half a billion Marks spent on the procurement and delivery of war materiel to the Turkish armed forces.

Ulrich Trumpener also points to the friction between Berlin and Istanbul caused by the implementation of the financial assistance programs: “..the Germans being convinced that their ‘generosity’ was being unduly exploited, the Turks feeling that they deserved more aid than they got.”

The total financial cost of the war for the Ottoman Empire is estimated at 400 million Liras. According to the calculations of Şevket Pamuk: “…cutting back civilian expenditure, and reducing state salaries, payment arrears, and borrowing abroad and domestically can explain how the Ottoman government met more than 50 and up to 60 percent of the financial cost of the war. The remaining 40 percent was financed by printing inconvertible paper currency after 1915 in ever growing sums.” Pamuk estimates the decline in the Ottoman gross domestic product by 1918 at 40 percent.