Tuesday, July 13, 2010

Ottoman Empire [1600-1914] & The Inability to Bring State Finances Under Control

Boğaziçi University, Istanbul

Based on the successful experience of Western Europe and European off-shoots, new institutional economics has argued that long-run economic change is the cumulative consequence of innumerable short-run decisions by political and economic agents that both directly and indirectly shape performance. Economic growth is attained because the underlying framework persistently reinforced incentives for organisations to engage in productive activity. The state is seen as a major player in this context. Institutional economics and economic historians have come to recognise, however, that a society rarely arrives at or creates institutions that are wholly conducive to economic growth. 

In many cases, institutions have favoured activities that promote redistributive rather than productive activity, that restrict opportunities rather than expand them. Similarly, rather than reinforcing incentives towards productive activity, in most cases states acted as instruments for transferring resources from one group to another, or promoting their own survival at the expense of others. In short, the process of institutional change has not always been favourable to economic growth. Politics and political struggles have played an important role in these unfavourable or less successful outcomes as well.

We will argue that Ottoman society and Ottoman bureaucracy brought about institutional change in selective areas, in monetary institutions and in public finance, for example, and that such selective institutional change enabled the Ottomans to maintain their rule and the empire over a very considerable period.

For most of its six-century existence, the Ottoman Empire is best characterized as a bureaucratic and agrarian empire. The economic institutions and policies of this entity were shaped to a large degree by the priorities and interests of a central bureaucracy. We will argue that the Ottoman state and society showed considerable ability to reorganise as a way of adapting to changing circumstances in Eurasia from the seventeenth century to the nineteenth century. The central bureaucracy managed to contain the many challenges it faced with its pragmatism and habit of negotiation to co-opt and incorporate into the state the social groups that rebelled against it. These traits enabled the Ottomans to retain power and survive until the modern era, while many of their contemporaries in both Europe and Asia were unable to do so.

The pilgrimage to Mecca gave rise every year to one of the largest payments and specie flows within the Ottoman Empire. The financing of the caravans including provisioning, payments to tribal leaders en route for security and funds carried by tens of thousands of pilgrims - in some years close to 100,000 pilgrims - gave rise to large flows of gold and silver from Egypt, Syria and Anatolia to the Hijaz every year.
Even more importantly, the governments in Istanbul and Egypt and the various official, semi-official and private foundations sent large sums every year to support the Holy Cities.

In addition, the annual revenues of many small and large pious foundations in Anatolia and some of the largest foundations in Egypt were set aside for the Hijaz. Total remittances by the foundations roughly equalled the amounts sent by the governments in Istanbul and Cairo.

From Egypt, some of these net revenues were sent in kind, as cereals. Faroqhi thus estimates that a total of 300,000 to 400,000 sultanis or ducats were sent to the Hijaz every year from Istanbul, Anatolia and Egypt combined, in addition to the payments and specie flows arising from the pilgrimage caravans themselves. The funds in cash were sent in gold whenever available, because gold was the preferred specie in the Hijaz.

It has often been assumed that the prohibition of interest in Islam prevented the development of credit, or, at best, imposed rigid obstacles in its way.

Neither the Islamic prohibitions against interest and usury nor the absence of formal banking institutions prevented the expansion of credit in Ottoman society. Utilising the Islamic court records, the late Ronald Jennings showed that dense networks of lenders and borrowers flourished in and around the Anatolian cities of Kayseri, Karaman, Amasya and Trabzon during the sixteenth century.

Over a twenty-year period which his study covered, he found literally thousands of court cases involving debts. Many members of each family and many women are registered in these records as borrowing and lending to other members of the family as well as to outsiders. These records leave no doubt that the use of credit was widespread among all segments of the urban and even rural society. Most lending and borrowing was on a small scale and interest was regularly charged on credit, in accordance with both Islamic and Ottoman law, with the consent and approval of the court and the ulema. In their dealings with the court, the participants felt no need to conceal interest or resort to tricks in order to clear legal hurdles. Annual rates of interest ranged from 10 to 20 per cent.

One important provider of loans in Istanbul, the Balkans and the Anatolian urban centres were the cash vakifs, pious foundations established with the explicit purpose of lending their cash assets and using the interest income to fulfill their goals. These endowments began to be approved by the Ottoman courts in the early part of the fifteenth century and had become popular all over Anatolia and the Balkan provinces by the end of the sixteenth century. An interesting development that became more pronounced during the eighteenth century was the increasing allocation of the funds to the trustees of these endowments. The trustees then used the borrowed funds to lend at higher rates of interest to large-scale moneylenders (sarraf) at Istanbul, who pooled these funds to finance larger ventures, most importantly, long-distance trade and tax farming.

Not surprisingly, a lively debate developed during the sixteenth century within the Ottoman ulema regarding whether the cash vakif should be considered illegitimate. The cash vakifs were opposed by those who believed that only goods with permanent value such as real estate should constitute the assets of a pious foundation and that the cash vakifs contravened the Islamic prohibition of interest. The majority of the ulema, however, remained eminently pragmatic and the view that anything useful for the community is useful for Islam ultimately prevailed. During the heated debate, Ebusuud Efendi, the prominent, state-appointed religious leader (Şeyhülislam) of the period, defended the practice from a purely practical point of view, arguing that abolition of interest taking would lead to the collapse of many pious foundations, a situation that would harm the Muslim community.

Even though there did not exist an insurmountable barrier to the use of interest-bearing loans for commercial credit, this alternative was not pursued in the medieval Islamic world. Instead, numerous other commercial techniques were developed which played the same role as interest-bearing loans and thus made the use of loans unnecessary. These included a variety of business partnership forms such as mudaraba or commenda, credit arrangements, transfers of debt and letters of credit, all of which were sanctioned by religious theory. Long-distance trade was thus financed not by simple credit relations involving interest, but by a variety of Islamic business partnerships, the specifics of which depended on the nature of the risks and the resources provided by the different partners.

Ottoman merchants widely used the varieties of Islamic business partnerships practised in the Islamic world from the classical era. The most frequently used method in the financing of long-distance trade and certain other types of business ventures was the mudaraba  partnership of classical Islam, in which an investor entrusted his capital or merchandise to an agent who was to trade with it and then return the original amount. The profits were then shared between the principal and the agent according to some pre-determined scheme. Any loss of the capital resulting from the exigencies of travel or the business venture itself were borne exclusively by the principal. The liability of the agent was limited to his time and efforts.

To a lesser extent the Ottomans also used mufawada partnership of the Hanefi school of Islam in which the partners were considered equals in terms of capital, effort, returns and liabilities. In the related musharaka or inan arrangement, the partners were free to invest different amounts and agree to share the returns and liabilities in unequal but prearranged amounts.

Evidence from Islamic court records on commercial disputes and their resolution until the middle of the nineteenth century indicates that in Anatolia and Istanbul, at least, the Ottoman jurists were well informed about the teachings of medieval Muslim jurists and, in general, adhered closely to the classical Islamic principles in disputes arising from these partnerships. On the whole evidence from hundreds of business partnerships indicates that classical Islamic partnership forms not only survived but were applied, with minor exceptions, true to their original forms until the nineteenth century. 

One important instrument in the finance of long-distance trade was the sufiaja, bill of exchange or letter of credit. The basic purpose of the sufiajas was to expedite long-distance payments or transfer of funds. In the Geniza documents of medieval Egypt the sufiajas consistently appeared as involving the repayment of exactly the same type of money to the issuing banker. They were as good as money; the bearer could fully expect to redeem his sufiaja for cash immediately upon arrival at his destination. The local judges (kadis) were actively involved in the enforcement of the sufiajas in their various forms.

Another type of letter of credit was the hawala which was the assignation of a fund from a distant source of revenue by a written order. It was used in both state and private transactions to avoid the dangers and delays involved in the transportation of cash.

In the Ottoman monetary system, there existed three levels of coinage: gold, silver and copper. The silver akçe until the middle of the seventeenth century and the silver kurush (from groschen/piaster) in the eighteenth century were the basic units of account and the leading means of payment in local transactions. The silver content of these units of account changed with the occasional debasements by the government. In contrast, the standards of the gold coins usually remained identical to those of the Venetian ducat and the gold coins of most other states around the Mediterranean. In an environment of frequently recurring shortages of specie, the Ottoman administrators knew that it was essential to attract into the Ottoman lands and maintain in circulation as much coinage and bullion as possible. Their monetary practices were guided more by this concern than any other. They were also aware that the ratio between gold and silver, as well as the value of different types of coins, was subject to fluctuations. Local court records show that the kadis relied on these market rates to settle disputes between individuals. In addition, the government announced the official rates at which different coins, gold and silver, would be accepted as payment.

After the Ottomans decided to embrace bimetallism and stable coinage, only one alternative remained for the finance of budget deficits: external borrowing. Ottoman borrowing in the European financial markets after 1854 led to a default in the 1870s and partial control of state finances by European creditors. Despite experimentation with different fiscal strategies, the inability to bring state finances under control during the nineteenth century thus proved to be the major, if not fatal, weakness of the Ottomans.

Read full paper:
Financial History Revint/ i i.i (2004), pp. 7-32. © Cambridge University Press 2004 Printed in the United Kingdom DOI: 10.1017/80968565004000022

Şevket Pamuk is Adjunt Professor at the Department of Economics at Boğaziçi University, Istanbul, Turkey [B.A. in Economics and  B.S. in Engineering and Applied Science : Yale University, 1972. M.A. in Economics :  University of California at Berkeley, 1974. Ph.D. in Economics : University of California at Berkeley, 1978.]

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