In Debt: How the Ottoman Empire Became Beholden to European Capital

In 1854, the Ottoman Empire entered into loan agreements with European creditors. Over the decades that followed, the debt span out of control.

Jan 20, 2023By Ilias Luursema, MA & BA Middle Eastern Studies

galata bridge constantinople illustration ottoman empire watercolor


The Ottoman Empire was already in a precarious financial position before events in the second half of the 19th century worsened its fiscal health further.


An ineffective tax system characterized by corrupt officials and faulty record-keeping caused budget deficits. In addition, a bad monetary policy resulted in inflation becoming a major problem.


The Crimean war of 1853-1856 was followed by a new period of economic mismanagement. For the first time, the Ottoman Empire borrowed large sums of money from foreign powers.


The Crimean War and the Ottoman Empire

gile battle balaklava painting
The Charge of the Heavy Brigade at the Battle of Balaclava, by Godfrey Douglas Gile, 1897, via National Army Museum, London


In July 1853, the troops of Russian Tsar Nicholas I entered the Ottoman Empire’s territory in what is now Romania. Sultan Abdulmejid held off on declaring war, as he wanted to secure foreign assistance before committing his troops to battle.

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The sultan would secure the support of the British and French empires, which perceived the Russian expansion as a threat to their interests in the Mediterranean. They preferred the status quo of a weak Ottoman Empire that could not challenge their colonial aspirations over a Constantinople controlled by Russia.


It would take three months, but in October, the British and French pledged to support the Ottomans. With military assistance from the great powers, the Ottomans halted the Russian advance. By 1854, the allied forces managed to turn the tide and push into Russian territory.


The Ottoman government had always been hesitant to take on foreign loans. However, during the hostilities of 1854, the need for funds was so high that the empire relented and entered into loan agreements with its European allies.


Unable to withstand the combined military power of three empires, the Russians sued for peace in 1856.


The Ottoman Debt Spiral

galata bridge constantinople pedestrians
Le pont de Galata, Constantinople, by François-Léon Prieur-Bardin, 1901, via Sotheby’s


Between 1854 and 1874, the Ottoman Empire struck 15 loan agreements with foreign powers. The loans were taken on with the aim of restructuring the empire’s dysfunctional bureaucracy, centralizing revenues and expenditures, and modernizing the army.


Bad planning and mismanagement led to much of the borrowed money being spent in ways that did not lead to an increase in state revenue. The Ottoman government also spent part of the borrowed money on repaying loans it had made with merchant families known as Galata bankers. These families, many of whom lived in the Galata district of Constantinople, had loaned to the Ottoman government for centuries.


In addition to entering foreign loan agreements, the Ottoman government continued to borrow domestically from the Galata bankers. Loans would often be paid back using new loans, and over the years, the empire’s debt grew steadily.


As the Ottoman Government’s debt grew, securing new loans with good terms became more difficult.


A Central Bank Controlled by Foreigners

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Headquarters of the Imperial Ottoman Bank, 1896, via Wikipedia


In 1856, Sultan Abdulmejid called for modern banks to be established in the Ottoman Empire. He hoped that creating the institutions would improve the empire’s financial system and foster economic development.


The sultan’s call was heeded by European bankers who, seeing opportunity, flocked to Constantinople.


The Ottoman authorities gave a group of English and French suitors permission to establish a bank that would operate under the name “The Imperial Ottoman Bank.” Negotiations between the Ottoman authorities and European stakeholders on the bank’s governance resulted in the latter group receiving great influence.


As per the agreed-upon terms, the position of general manager had to be occupied by a European. The manager reported to two committees. One committee was based in London and was accountable to British shareholders. The other was based in Paris and was accountable to French shareholders. Decisions made by one committee became effective once ratified by the other committee.


The Ottoman Authorities agreed to have limited influence over the bank’s governance because of the perceived benefits the bank would grant them. For example, the Ottoman authorities could borrow from the newly established Imperial Ottoman Bank at a time when many creditors started to doubt their creditworthiness as a debtor.


The Imperial Ottoman Bank was to serve as the empire’s central bank. It would execute all financial operations of the Ottoman Treasury in Constantinople and would be the government’s financial agent both domestically and abroad. The Ottoman authorities also granted the institution the exclusive right to issue bank notes.


The negotiations over the Imperial Ottoman Bank were indicative of a trend that saw the Ottoman government surrender authority over economic matters to foreigners in exchange for financial services and access to funds.


The Ottoman Empire Defaults

imprisoned ottoman sultan cartoon
Cartoon of an imprisoned Ottoman sultan, by Johan Braakensiek, 1909, via University of Leiden.


Many of the loans that the Ottoman authorities had taken since 1854 were obtained under stern conditions. The interest on domestic and foreign loans was often over 6 percent, with some loans having an interest rate exceeding 10 percent.


On many occasions, the Ottoman government was not able to repay a loan in time. These delays strengthened rumors of bankruptcy, causing Ottoman bonds to become nearly unsellable.


The empire’s economic outlook worsened in 1873 when the European stock market crashed. A financial crisis that became known as the “Panic of 1873” followed. As a result, it became even harder for the Ottoman Government to procure new credit.


Economic circumstances were so dire that in 1874 Galata bankers refused to lend to the government even if the interest rates would be set at 25 percent.


The situation was made worse by floods and draughts throughout the Ottoman Empire in 1873-1875. The calamities caused food shortages and unrest among the peasantry. To prevent widespread famine, the government stepped in and distributed food. As a result of the natural disasters, tax revenues were compromised.


By 1875, the situation had become untenable. The Ottoman authorities announced they would pay back their debt, half in cash and half in 5 percent yielding treasury bonds. As a result of this implicit admission of bankruptcy, the Ottoman State’s credit plummeted. The empire formally defaulted shortly thereafter.


Relinquishing Economic Sovereignty

suez canal postcard
Postcard depicting a sailing ship going through the Suez Canal, early 20th century, via Museum Wales.


In 1875, two-thirds of Ottoman state revenue was used to meet debt repayments.


The economic crisis was felt throughout the whole empire. Ismail Pasha, the Khedive of Egypt, was in such dire need of money that he sold his shares in the Suez Canal to the British government.


In 1877, another war would exacerbate economic hardship. The Russo-Turkish war saw the troops of the tsar push the Ottomans back to the gates of Constantinople. A British fleet of warships interfered and deterred the Russians from taking the capital. A peace treaty brokered by the great powers was signed in July of 1878.


The Russo-Turkish war had run the Ottoman state coffers dry to the extent that the government could not pay salaries to civil servants and soldiers.


Under the direction of the manager of the Imperial Ottoman Bank, a plan was drawn up to gain access to much-needed credit by winning over the support of local bankers.


The proposed solution involved the state surrendering tax revenues to repay loans. The state agreed to earmark the revenues from its stamp, spirits, fishing taxes, silk tithe, salt, and tobacco monopolies.


The plan worked as intended. The tax proceeds proved sufficient to meet the installments of the debt. Foreign creditors, seeing that domestic loans were being repaid, felt left out of a good deal. They opened negotiations with the Ottoman government in the hopes of securing a similar arrangement. The talks resulted in an agreement signed in 1881, known as the Muharrem Decree, which gave foreign creditors claims to Ottoman tax revenues.


As agreed per the Muharrem Decree, collecting the tax revenues would befall a to-be-established institution, the Ottoman Public Debt Administration (OPDA). The new body was to be run by Europeans and would be subject to minimal Ottoman control.


In return for ceding the tax revenues irrevocably, the outstanding debt of the empire was reduced by almost 40 percent. In addition, the yearly charges on the debt were cut by over 80 percent.


Collecting the Debt: From Ottoman Empire to Turkey

ottoman public debt administration istanbul headquarters
The Ottoman Public Debt Administration headquarters in Cağaloğlu, via Wikipedia.


In the years following 1881, the tax revenues specified in the Decree of Muharrem were brought under the control of the OPDA. The institution’s primary functions were collecting taxes and distributing them to foreign bondholders.


The OPDA also served as an intermediary for European companies seeking to invest in the Ottoman Empire. As such, the institution helped foreign companies secure lucrative contracts for railway development. These contracts sometimes included rights of ownership of mineral deposits and forests near the to-be-constructed railways.


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A volume of watercolours of the Ottoman Empire, by Charles Hamilton Smith, c.1830s-1840s, via Sothebys


Through the OPDA’s services, European investors gained increasing ownership over the Ottoman Empire’s natural resources and infrastructure. English, French, and German investors benefited from the OPDA in particular.


Tax revenues ceded to the Ottoman Public Debt Administration grew over the years. By 1914, around one-third of the Ottoman state’s revenue was collected by the OPDA and funneled to Europeans.


To act out its mandate, the OPDA employed thousands of people. At its peak, the institution had 9000 employees, which was more than the Ottoman finance ministry.


The Ottoman Public Debt Administration was successful in paying out the debt owed to foreign creditors. Between 1882 and 1914, the OPDA paid out the equivalent of 113 million British pounds in debt.


As time passed, the Ottoman Empire slowly began recovering from its precarious economic situation. With the establishment of the Republic of Turkey in 1929, a third of the outstanding debt was forgiven.


Turkey paid the last installment of its debt to the OPDA in 1954, exactly a century after the Ottoman Empire had taken on its first foreign loan.

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By Ilias LuursemaMA & BA Middle Eastern StudiesIlias holds both a BA and an MA in Middle Eastern Studies from the University of Groningen, the Netherlands. His academic research focused on migration and the Libyan crisis. He now works as an independent researcher, writer, and editor and contributes to projects on topics that include history, politics, and economics.