This is the second of three articles discussing the history of fiat money. This article will discuss the adoption of fiat money by the Ottoman Empire and its consequence on the people of Mount Lebanon. In order to provide the reader with an understanding of fiat money, I will be using the following definition at the beginning of all three articles.
Fiat Money, or what is known as government money is money issued by decree, authorization or order which are the synonyms for the Latin word fiat. It is important to understand that there is a difference between government money redeemable in gold, and irredeemable government money. The latter is the money that has been used internationally by the start of the world war I while the first was the form of money used by the gold and silver standards. With redeemable money, the government just has the responsibility of minting standard units of metal or printing paper backed by gold. The government does not control the supply of money. After interacting with many Lebanese locals, it seems that people think that their Lebanese pounds are in fact backed by gold in the central bank. There is this huge misconception that current fiat money is still redeemable or at least its value is set by the amount of gold that exists in Banque du Liban. However, Lebanese pounds, are in fact, an irredeemable form of government money, just like almost every other currency post 1913 and beginning of world war I. With irredeemable form of fiat money, the government’s debt and paper is used as money, and the government has the ability to increase its supply as it sees fit. And even if the people decide to use other forms of money as exchange or try to increase the supply themselves, they run into to the risk of being punished. Therefore, fiat currencies were adopted after 1913 by force and not because of the natural hard money beating soft money mechanism.
History of Manipulation of Ottoman Currency and Creation of Fiat
Ottoman Empire: The Manipulation of Qurush
Under the Ottoman rule, the Akce and after that the Qurush were the official coins used for transactions in all the Ottoman Empire, including Mount Lebanon. Mount Lebanon, being somewhat independent from the Ottoman Empire and adopting a Laissez-Faire approach for their economy was doing very well and enjoyed economic stability in the 17th century until the mid-18th century. Back then, the people of the mountain relied mostly on Silk production and exportation of it. It was up until the end of the 18th century where everything would change for the people of the mountain.
The Ottoman Empire engaged in multiple wars in Russia, Iran and Egypt and the revolution in the Balkan and Greece. Those events pushed the Ottoman Empire to strengthen their military which caused the public deficit of the Ottomans to grow significantly. The spending during the end of the 18th and beginning of the 19th century grew to 250% and 300%. Naturally in order to close this gap and raise funds, the Ottoman government just like every other government would do, took the taxation approach. The Ottomans increased taxes on all the regions under their empire. This taxation increase saw great opposition from the population of Mount Lebanon. After all, the people of Mount Lebanon felt minimal connection to the wars of the Ottomans and their Imperialistic goals.
Tax collection was not very efficient for the Ottomans, and the deficit was just growing even more in the 19th century. Therefore, new measures took place, like confiscation of the fortune of the high class of Mount Lebanon and lowering the weight of the currency which back then was the Turkish Qurush. The Qurush being a silver coin was ‘‘coin clipped’’ as it was devalued from 5.9 grams of silver in 1808 to 2.32 grams of silver in 1822 (A 60% decrease) and to 0.5 grams in 1831–1832. The coin clipping process resulted in the Qurush losing 83% of its value in only a 24 years duration. This decrease led to its decrease in value from 8 Qurush for 1 British pound in 1800 to 104 Qurush for 1 British Pound in 1839. The Ottoman currency lost 90% of its value compared to the European currencies between 1788 and 1844. This resulted in one of the most massive hyperinflations in Lebanese history as the prices of nutritional goods rose to more than 10 times between the years 1780 and 1850.
Such policies increased prices drastically which affected the spending of the Ottoman government to rise even more. The people of the Ottoman Empire and more precisely the people of Mount Lebanon lost trust in the national currency and started investing in European ones. The 19th century ensued in a lot of the people of the mountain and more specifically the Maronite population to emigrate to Europe, North America, North Africa and Asia. This emigrant population was what kept the Mount Lebanon economy on its feet during the 19th century as the expatriates would send funds in more valuable currencies for their families in the mountain. The heavy taxation and devaluation of the currency killed one of the most important sources of revenue for Mount Lebanon, which is silk production. The people of northern Mount Lebanon started selling off their land, since the people of the mountain were only getting poorer, for the first time in their life they started relying on debt. The capital accumulation era under a stable monetary system came to an end and the people resorted to selling off assets and acquiring loans.
Those reforms also led to major conflicts between the Aamya (the peasants of the mountain) and the army of Ameer Bashir II (The ruler of Ottoman Lebanon in the early 19th century).
Last but not least, these reforms led the Maronites of Mount Lebanon to build political ties with France and taking into consideration the international political tensions between the French and the British, the latter party had to side with the other majority in Mount Lebanon which were the Druze. These geopolitical events caused major stiffness between the Maronites and Druze. These tensions eventually brought us to the famous 1860 Mount Lebanon Civil War. A war between the Maronite Aamya of northern Mount Lebanon and the Druze overlords.
The process of currency manipulation or “Coin Clipping’’ was done by a lot of historical empires, and the most noticeable one was the Roman Clipping of the Aureus which also led to major economic downturns for the Roman Empire. This process was usually a short-term solution for increasing government spending, but also an economic catastrophe on the long run. Coin clipping would destroy the savings of the people and thus end the said coin’s store of value functionality, cause hyperinflation as the coins would become almost invaluable and most importantly it would slow down development as it would hugely higher people’s Time Preference. In modern day Keynesian economies, devaluing currencies which is also known as mild inflation can easily be done through fiat money and it is considered a proper way to stimulate the economy by “encouraging” consumption. Without taking into consideration the main role of money which is to be a store of value. Having a proper store of value is the most efficient way to stimulate the economy as it encourages what matters the most and that is investment of savings rather than investment of debt or consumption. The truth is consumption does not need a stimulus, it is done naturally through human’s natural need to consume for survival, transportation, social relations, security, entertainment etc. On the other hand, consumption for war is never achieved organically. No one wants to invest in or go to war expect those who benefit from it and those who benefit from it have their ways to obtain liquid money they did not earn by either coin clipping (pre 1914, unless you're a Carthagian check my first fiat money article) or simply printing paper money under the modern fiat monetary system.
Most of the Ottoman Period saw great prosperity for the people of Lebanon. The Ottoman Empire was one of the biggest and most prosperous Empires in human History. This era was mostly characterized by a capitalist free economy, in which almost every Ottoman Imara enjoyed autonomy and was decentralized from the central government. It was in the final 50 years or so when everything would collapse for the Ottomans but more so for the people of Mount Lebanon. In order to finance the ever-increasing government expenditures, the Ottoman empire failed to tax their decentralized Imaras and instead they resorted to devaluing their coins and multiple times tried to introduce the Turkish paper money which was not redeemable for any gold or silver. Turkish Lira (the first paper money on Lebanese soil) became mostly spread in the Ottoman Empire in the 1914 and consequently the Empire collapsed in 1918 after the end of World War I.
Ottoman Empire on The Gold Standard
The second half of the 19th century saw almost all the big countries of Europe move towards the gold standard. After the conclusion of the Franco-Prussian war in 1871 all major powers of Europe shifted to the same monetary standard, which is gold. The Ottoman Empire wanted to jump on this same trend.
The Ottoman Empire felt the need to adopt a Gold monetary standard mainly because silver was quickly devaluing internationally (Stock-to-Flow ratio going down). And since originally, the Ottoman government formally declared bimetallism in 1844 with a fixed gold-sliver ratio, it became increasingly hard for them to sustain the fixing of that ratio. Therefore around 1876, the Ottoman government moved away or tried to move away from bimetallism just like every other European government during the time. According to newly formed regulation, in March 1880, the empire’s monetary standard was to be the gold lira. However, unlike most other European monetary standards the Ottoman one was not fully gold standard. Therefore, technically the Ottoman government moved towards a limping standard by maintaining a gold-silver ratio. The limping standard was based on the following approach, the gold was mostly used for international trade while the silver was being used more internally for local trades.
The Turkish lira’s value was 100 Qurush in Istanbul, the financial and commercial centre of the entire Empire. However, this stability was the exception and not the rule for other provinces of the Ottoman Empire. As the price of one Turkish lira highly differed from one province to another against the silver Qurush. According to Tuncer, 2011; Schneider et al. 1994 in 1883 the price of 1 Turkish Lira in Beirut was 123 silver Qurush while during that same year the price of the Lira in Istanbul was 108.3 Qurush. Moreover, in 1888 the price in Basra was a whopping 148 Qurush and it even reached 158 in 1889. In Izmir it highly fluctuated between 125 and 178 Qurush between 1905 and 1907.
Many reasons caused this inconsistency in the price of the Lira between Ottoman provinces. Since the issuing location of the Turkish liras was Istanbul, some would argue that transportation cost of the said currency affected the price to go up in the far away provinces. Gold coins were not even in circulation in Beirut and Izmir, same could be said about Palestine, Syria and Basra. In Trabzon the most used currency was the Austrian thaler, while in Jerusalem, Antalya, Inebolu and Zongudak the French francs and British pounds had replaced every other Ottoman currency. The survival of such foreign currencies was mainly due to the fact that the decentralized provinces of the Empire almost completely lost trust in the Ottoman Empire and especially after the coinage manipulation detailed earlier. Therefore, to gain the trust of the people of those provinces in paper money, which even though they are redeemable in gold was an impossible task to achieve by the Ottoman government. Moreover, there was a widespread of counterfeiting, which was beyond the government’s control. Add to that, in Beirut and Mount Lebanon for instance, the region’s international trade conditions specified the currency and exchange rate disparity. However, to go back to our initial point, the Ottoman’s failure to make the entire Empire under the Gold Standard was only a trust issue.
In conclusion, one cannot compare the European Gold standard which brought with it La Belle Epoque era of Europe with that of the failed to adopt Gold standard of the Ottoman Empire. In a way, the Ottoman Empire was doing well as much as it can under the limping standard and for sure provinces who were still using silver coins as a store value saw their savings not increasing in value as fast as those whose savings were in Gold, namely the savings of the European population. However, the people of Beirut and Mount Lebanon, during this specific era heavily relied on remittances from relatives who were living and working in Europe and North America. Therefore, the economy stayed on its feet specially after the Ottoman Feudalist reforms mentioned above that attempted in crippling it. The Lebanese population also had political relations with Britain and France, each of these countries sided with one of the two big communities of Mount Lebanon, which were the Maronites and Druze back then. Tensions between them loomed large but at the same time the people were receiving highly needed funds from two of the biggest powers of the world. Therefore, even though paper money of the gold standard was completely redeemable in gold and hence its physicality served to be a hard from of money, it ended up in failure to impose under the Ottoman Empire. As mentioned above, even such currency as it is not fiat in definition also needed trust to survive. With a history of coinage manipulation, and turning non fiat paper money into fiat paper money (the "kaime" will be discussed later in the next section) the people of the Empire simply did not trust paper gold liras and preferred holding hard physical silver coins.
Fiat Money Under the Ottoman Rule
The first form of fiat money issued by the Ottoman government back in 1844 was the kaime. The earliest example of these notes were handwritten documents issued in denominations of 500 Qurush. Since at first these notes carried an interest rate and had a maturity, we could not consider them “fiat currency” in its strict sense. The government’s goal in issuing these notes was to “facilitate commerce” and it thrived to make the population accept them as legal tender exactly like gold and silver. These notes performed relatively well until 1852, but from 1853 to 1862, the government issued large quantities of non-interest bearing and unbacked notes to finance the ever-increasing government spending, which consequently led to hyperinflation. To solve this problem in 1863 the government withdrew all the kaime in circulation with the help of short-term loans from the Imperial Ottoman Bank (IOB). This whole paper money experience done by the Ottoman government resulted in a loss in trust by the people of the Empire towards their government and money issuing entities and hence the failure of the application of the Gold standard later in 1880. In the Gold Standard the government had to issue Turkish lira redeemable for gold but at the same time the people of other provinces away from the issuing location in Istanbul did not trust any form of “paper money” coming out of the Ottoman government. However, little did the people of the Empire know that in the 20th century they will be forced to use a form of fiat money which is very much similar to the kaime post 1853 in order to finance some even bigger expenditures in 1914.
Turkish Fiat Lira
In 1914, just like every other government that participated in World War I, the Ottoman Empire completely gave up the gold standard and adopted a fiat monetary system. However, as explained previously, the gold standard was mostly adopted by Istanbul the rest of the Ottoman empire heavily relied on the silver coins for their day to day transaction and to store value. In order to finance the increasing government spending of the War, the Ottoman Empire increased the limit of issue of the IOB to 4 million Liras. Later in April 1915, the Ottoman government abolished the IOB’s right to issue notes and authorised the Ministry of Finance to issue 6.5 million Liras of paper money. In Lebanon, the people of the mountain were still using silver coins up until 1914 when the Ottoman government began their efforts in confiscating silver by introducing fiat money.
In 1914, World War I broke out in Europe and The Ottoman Empire played a major role in this war. Ottomans sided with the Germans against the Entente block which was the main factor in the economic downturn of the entire Ottoman Empire. This decision ultimately resulted in the Great Famine of Mount Lebanon which lasted from 1915 until September 1918. Many history and politics scholars studied this specific dark period in the Lebanese history and came with many conclusions on what was the main reasons behind the great famine of Mount Lebanon which resulted in the death of half of the population. Some of the most popular reasons were the Entente power blockade of the Mediterranean along with Jamal Pasha’s policy which barred crops from entering Mount Lebanon from Syria, the confiscation of wealth and food done by the Ottoman government, and lastly the arrival of locusts who devoured all the remaining crops on Lebanese land.
Since our subject is centred around fiat money and currency manipulation, I will discuss how the confiscation of wealth by the Ottomans was executed and how it aggravated the War of Famine in Mount Lebanon and Beirut and how the introduction of fiat money helped the Ottoman government play a huge part in the entire process.
The first source of wealth the Ottomans could easily put their hands on were the remittances sent from abroad, which as mentioned earlier were the main contributor of the second half of the 19th century economic stability. Remittances were the main sources for the families of mount Lebanon. After the Feudalist reforms done by the Ottomans which devalued the Qurush and increased taxes, it became almost impossible for local workers and investors to accumulate capital and thus relied on their expat relatives to send them money and invest in their own country in the hope to come back to it sometimes in the near future. The Ismail Haqqi Bey report estimated that “about one hundred and fifty thousand Lebanese now lived in the diaspora, sending home money”. When the war began, the Ottomans closed down foreign banks and consular mail services of the British, French and Austrian in Beirut. Thus, remittances confiscation became an easy task for the Ottoman government. More often than not, the money sent by the people in the diaspora did not reach the pockets of their family rather it entered those of the Ottoman Government. The people of Mount Lebanon were left without their main source of income and they had to deal with whatever their economy could provide under an even stricter rule than the Feudalist one of the 19th century. Adam Smith the father of free market economies argues that famines are not due to the inability of the market to produce food, rather it’s the non-availability of money in the hands of the producers and the consumers.
The non-availability of money resides in the adoption of fiat currency and confiscation of hard money done by the Ottoman government on the people of Mount Lebanon. They would force the sale of silver coins for un-backed Turkish liras. This caused a huge increase in prices (in Turkish liras) and some merchants would not even accept payments in paper money. The adoption of a fiat monetary system did not only help the Ottomans finance the Great War, but it also killed the wealth of the people in the Empire and was one of the main reasons behind the Great Famine of Mount Lebanon.
1914 and the beginning of World War I saw the end of the era of people’s choice in using the money they think is suitable for them and decided by the free market. Up until this day, the fate of the people's wealth is entirely in the hands of big governments and central banks (Satoshi Nakamoto begs to differ). The Bureaucrats simply go behind closed doors and decide the supply of money based on their very own governmental interests, but more importantly their political interests. You can always get re-elected if you have your own money printing machine.