The Ottoman Empire needed new sources to finance the war, as it was evident that the budgetary revenues were far from being enough for this purpose and the state treasury was virtually empty. The fiscal allocation for the 1914-15 period amounted to 34 million Ottoman Liras, with a mere 20 million Liras available for discretionary employment; the remainder was directed towards the Ottoman Public Debt Administration (Düyun-u Umumiye). Within this allocation, the Ministry of War received 6 million Liras, the Gendarmerie 2 million Liras, and the Ministry of Navy 1.3 million Liras. These allocations, however, proved insufficient to sustain an army comprising 800 thousand personnel while simultaneously waging a multi-frontal conflict. Moreover, the imminent war was anticipated to further diminish the already constrained revenue streams.

Before the entry to the war, the government initially pursued financial succour from Germany. Germany, cognizant of the imperative to furnish substantial financial aid for the Ottoman Empire to mount a robust military endeavour, was approached for assistance.

In October 1914, the German government committed to furnish 5 million Ottoman Liras (where 1 Ottoman Lira equated to approximately 20 German Marks) at a 6 percent interest rate, contingent upon the Sublime Porte promptly fulfilling its alliance obligations. Germany was obliged to disburse 250 thousand Liras within ten days of signing the accord, followed by 750 thousand Liras within ten days of Turkey's declaration of war against Britain and Russia. The residual amount was to be dispensed in monthly increments of 400 thousand Liras.

There was, however, a divergence of viewpoints between Enver Pasha and Cavid Bey on this matter. While Enver Pasha advocated for a moratorium on the Ottoman Public Debt Administration's budget allocation, Cavid Bey insisted on debt settlement to uphold the government's credibility. The impasse culminated in Cavid Bey's resignation on 2 November 1914, yet he retained control of the Ministry of Finance, rendering Talat Pasha's interim ministerial appointment largely ornamental. Cavid Bey would later rejoin the cabinet in 1917.

The loan agreement with Germany, consummated on 10 November, featured advantageous repayment terms and a commitment from the German Embassy in Istanbul for a potential subsequent loan on analogous conditions. The sole quandary pertained to the physical conveyance of gold, particularly through the Balkans and the potentially sympathetic Romania, aligned with the Entente. Although the initial instalments reached Istanbul unscathed, the burgeoning tensions in the region compelled Berlin to suspend shipments in March 1915. The residual loan disbursements were subsequently assembled from Deutsche Bank and other Istanbul-based sources.

Insufficient Tax Collection

The onset of the conflict eradicated the prospect of external borrowing, the longstanding modus operandi for funding the Empire's budgetary shortfalls since the Crimean War. A viable alternative for financing the war emerged through heightened taxation. In the fiscal year 1913-14, tax revenues totalled 29.4 million Liras (in current prices), constituting approximately 12 percent of the gross domestic product. Notably, two-thirds of this tax revenue emanated from the agricultural sector.

A major effort to augment revenue transpired in the realm of consumption taxes, an avenue previously prohibited by the Capitulations – erstwhile commercial privileges extended to the dominant European powers until the conflict's onset. Initial plans for taxes on consumable goods materialised in 1915, yielding revenues of approximately 200 thousand Liras in the fiscal year 1916-1917. The new tax regime encompassed sugar, petroleum, matches, coffee, tea, cigarette paper, and playing cards. By 1918, revenue projections for this tax scheme were 700 thousand Liras for cigarette paper, 200 thousand Liras for matches, and 60 thousand Liras for playing cards. In the case of alcoholic beverages, a novel system emerged in 1918, predicated on a levy of ⅛ Lira for each percentage point of alcohol content in a beverage. Consequently, revenues from alcoholic beverages surged from 97 thousand Liras in 1915 to 583 thousand Liras in 1918.

Income taxes increased multiple times during the war, notably four times in 1917. In 1918, Parliament approved a tax on war earnings, though its implementation remained dormant throughout the conflict. Concurrently, the halt in trade relations with the external world, precipitated by the war's outbreak, led to a stagnation in customs receipts. Consequently, taxes on production emerged as a fertile ground for fiscal exploitation. The government augmented both direct and indirect taxes on businesses and elevated the tithe levied on agricultural producers from 10 percent to 12.5 percent.

Despite these endeavours, an upswing in tax revenues did not materialise. This lack of success can be atributed to three primary factors. Firstly, the war induced a precipitous decline in industrial and agricultural output. Secondly, numerous taxes were fixed in nominal terms, and escalating inflation resulted in nominal revenues trailing significantly behind rising prices. The government's efforts to recalibrate nominal tax rates proved ineffectual. Thirdly, the populace's inclination to evade taxes increased in tandem with the adversities and dwindling production, thereby diminishing the government's ability to collect taxes.

In an endeavour to secure additional revenue streams, the government resorted to extraordinary measures. Among these was the imposition of a special fee of 30 golden Liras, permitting both Muslim and non-Muslim citizens to procure exemption from military service (Muafiyet-i Askeriye). Another measure involved a requisition system enabling the military to requisition vehicles and supplies from the public, with payment deferred until after the war (Tekalif-i Harbiye). However, numerous services and requisitions acquired by the government during the war through indiscriminate and irregular means remained unsettled.

During the wartime financial exigency, a notable fiscal strategy involved constraining the escalation of remuneration for civil servants. This decision persisted despite the continual erosion of monetary value and a surge in the cost of living, which soared to an unprecedented 2,000 percent above the customary benchmark when measured in fiat currency. Given that salaries constituted nearly half of the budget expenditures, this measure undeniably represented a sweeping economy initiative for the Treasury. However, it proved to be an onerous burden for those dependent on said remunerations amidst the rigours of war.

Concurrently, the government implemented stringent controls on the flows of capital throughout the conflict. Following the pronouncement of a deferment in both international and domestic debt settlements, an array of limitations was imposed on capital movements. This encompassed the proscription of transactions involving gold.

Monetary Expansion

Before the Ottoman Empire's entry into the war, the government based its financial projections on the assumption that 500 thousand Liras per month would suffice to fund the war. However, it soon became apparent that a monthly allocation of no less than 3 million Liras was necessary. Exhausting all alternative avenues, the sole recourse was the issuance of additional paper currency. This strategy found favour with the Germans, who sought to alleviate strain on their gold reserves.

In 1914, the currency in circulation within the Empire comprised 60 million Liras in coins and a mere 1 million Liras in banknotes. Pursuant to the Ottoman Empire's constitution, the exclusive authority to produce paper currency rested with the Banque Impériale Ottomane. This institution, owned by French and British interests, had its primary headquarters in Paris and was administratively overseen in Istanbul by French and British directors. In November 1914, the government approached the bank with a proposal to print 15 million Liras in paper currency, leveraging collateral consisting of 5 million golden Liras acquired from Germany. This solicitation was rebuffed by the bank's Parisian board, explicitly citing Ottoman Empire's entry into war against Britain and France as the grounds for refusal.

Enver Pasha and Talat Pasha expressed dissatisfaction, harbouring aspirations to assume control of the bank and supplant British and French directors with Ottoman nationals. This proposition garnered favour from the Germans, who provided assistance in formulating a policy concerning paper currency. Key figures within the German business community, such as Otto Kaufmann, Director of the Deutsche Bank office, and Franz Günther, Vice-President of the Anatolian Railroad Company (Anatolische Eisenbahn-Gesellschaft) , convened with Ambassador Wangenheim, articulating their endorsement of this initiative to the government. Furthermore, Eugen von Wassermann, a prominent banker, arrived in Istanbul as an advisor for the reorganisation of the Banque Impériale Ottomane.

Cavid Bey adopted an obstructive stance towards the proposed alterations in the bank, advocating adherence to established protocols to safeguard the credibility of the forthcoming currency. Consequently, the plan progressed at a measured pace. It was not until two months following the declaration of war by France and Britain against Turkey that French and British directors were instructed to depart Istanbul, being succeeded by Ottoman nationals. Despite Turkish administration of the bank, Cavid Bey refrained from utilising it for the production of paper currency. His rationale rested on the avoidance of alienating the French, whose goodwill would be imperative in the post-war period.

Cavid Bey proposed a temporary concession of money printing privileges to the Ottoman Public Debt Administration, bypassing the Banque Impériale Ottomane. As the French delegates had departed Istanbul, the decision rested with the remaining representatives—a German, an Austrian, an Italian, and the Turkish delegate, Hüseyin Cahit Bey.

The German delegate, Rudolph Pritsch, disapproved of the proposal due to inadequate gold coverage for the issued money. His stance garnered support from German creditors, compelling Cavid Bey to amend his proposal, ensuring full gold coverage for the anticipated banknotes.

On 23 February 1915, Cavid Bey, Hüseyin Cahit Bey, and Eugen von Wassermann embarked on a journey to Vienna and Berlin to deliberate on the plan and seek financial backing, given the exhaustion of the 5 million golden Liras obtained from Germany. Cavid Bey conveyed to the Austrians the necessity of a joint German-Austrian gold loan amounting to 150 million Francs to sustain the war effort. Count Stefan Burian von Rajecz, the Austro-Hungarian Foreign Minister, expressed a willingness to discuss this, suggesting, however, that the Ottoman Empire should reciprocate with economic concessions. Cavid Bey found this proposition unsatisfactory.

In Berlin, Cavid Bey secured two-thirds of the requested loan, committing to deposit the entire sum in Berlin under the Ottoman Public Debt Administration's seal. This entity, empowered to issue paper currency, guaranteed by gold, unanimously endorsed the proposal on 25 March. Consequently, banknotes totalling 6,583,094 Liras were authorised, with reimbursement in golden Liras slated for post-war periods.

The subsequent loan agreement with Germany materialised on 20 April, heralding the commencement of new currency production. The inaugural series of banknotes, denominated as "cash documents" (evrak-ı nakdiye), debuted in July 1915. The process encountered delays due to requisite legislative accompaniment, yet ultimately, the issuance was substantiated by golden Liras, fostering commendable credibility and public trust. However, given the escalating military expenditures, a mere six weeks following circulation commencement, governmental reliance on German assistance surfaced anew. Enver Pasha urgently communicated to the German General Staff the imperative need for German gold, aiming to satisfy at least a portion of the military's fiscal obligations with hard currency.

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. While Germany was initially reticent to furnish a new loan, preferring to consolidate its gold reserves at the Reichsbank rather than aiding its allies, negotiations ensued. State Secretary of the Treasury, Karl Theodor Helfferich articulated Germany's inability to allocate substantial gold and proposed augmenting the money supply instead of extending a new gold loan. Helfferich advocated the issuance of partially covered banknotes, necessitating the establishment of a new Ottoman bank of issue. German and Austro-Hungarian banks expressed a readiness to contribute to its capital. In contrast, the Ottoman government leaned towards acquiring the Banque Impériale Ottomane, intending to transform it into a state bank.

Conversations regarding the bank and the loan persisted for an extended duration, during which the financial requirements of the Ottoman Army escalated, imperilling the war effort due to a dearth of funds. Confronted with this dire circumstance, Germany consented to extend a fresh loan. On 9 September 1915, Helfferich communicated to the Ottoman Ambassador in Berlin, Hakkı Bey, that a new gold loan amounting to 120 million Marks would be made available by year-end. Subsequently, in response to the Ottoman government's disclosure that an additional 40 million Marks were requisite for financing the ongoing Gallipoli campaign, this request was also acceded to, notwithstanding the absence of any initiative from the Turkish side to establish a new state bank for the issuance of partially secured paper currency.

To furnish financial backing to its ally without expatriating gold, Germany proposed to the Ottoman government the substitution of treasury bonds, secured with gold from prior loans, for the impending one. An accord, endorsed by German State Secretary of the Foreign Office Gottlieb von Jagow and Ambassador Hakkı Bey on 9 November 1915, affirmed Germany's commitment to furnish treasury bonds totalling 160 million Marks to the Ottoman Public Debt Administration, serving as collateral for the envisaged banknotes. These banknotes, constituting the Second Series, were authorised through a decree promulgated on 31 October 1915, with an aggregate value of 6 million Liras.

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.

In 1915, extensive hostilities across multiple fronts precipitated a depletion of financial resources, necessitating the acquisition of new funds. Consequently, on 4 January 1916, the government procured 20 million Liras from Germany through the issuance of treasury bonds. These bonds served as collateral for the forthcoming printing of the Third Series banknotes, totalling 10.9 million Liras.

During this period, the devaluation of paper currency was incessant, engendering an ambiguity regarding the actual worth of held banknotes. Simultaneously, there was an escalating demand for gold Liras. The burgeoning rift between the value of gold and banknotes exacerbated the situation, further complicated by the coexistence of diverse denominations, causing computational quandaries.

Officially, the exchange rate was established at 1 gold Lira equating to 102.6 Piasters, with one silver Mecidiye valued at 19 Piasters. The circulating denominations included banknotes of 1, 2.5, 5, and 20 Piasters, as well as ¼, ½, 1, and 5, 10, 25, and 50 Liras. To rectify the disorder in the market, on 8 April 1916, the government enacted legislation, denoted as Tevhid-i Meskukat, standardizing 1 Lira to 100 Piasters.

During the wartime period, the practice of securing treasury bonds from Germany and subsequently issuing banknotes against them persisted. The Fourth Series, authorized by decrees on 19 August 1916 and 3 January 1917, injected a total of 66 million Liras into circulation. In early 1917, the National Credit Bank (İtibar-ı Milli Bankası) was instituted by the government, endowed with a capital of 4 million Liras. However, the Ottoman Public Debt Administration retained its status as the sole issuing bank until the conclusion of the war.

The statistics reveal that not all advances from Germany were utilised as collateral for banknotes by the Ottoman government. The variance between the aggregate amount of borrowed treasury bonds and the banknotes printed represented a sum sequestered as Marks in German banks, reciprocating the imports from Germany. This strategic maneuver facilitated the acquisition of arms and supplies, allowing Turkey to defer payment for imports from Germany, which, in contrast, had been settled promptly in cash. Consequently, Germany incurred a burgeoning trade deficit, leading to a depreciation of the German Mark vis-à-vis the Ottoman Lira.

In response to this economic quandary, Germany sought a loan of 5 million Liras from the Fourth Series. Opting to lend gold to Turkey and, in turn, borrowing in paper currency proved judicious for Germany. This financial manoeuvre bolstered German purchasing power in the Turkish market and arrested the further depreciation of the Mark.

On 17 February 1917, the Ottoman government sanctioned an additional loan of 42.5 million Liras from Germany. Thirty-two million Liras from this sum were earmarked for the issuance of a new series of banknotes. As per the decree enacted on this date, the commencement of redemption payments was slated to transpire subsequent to the final instalment for the banknotes issued on 19 August 1916. The redemption process was stipulated to span four years, ensuring the completion of war-financed banknote redemptions within 11 years post the war's culmination.

Appeal to the Public

The issuance of the Fifth Series banknotes transpired on 10 April 1917; nevertheless, within a mere six months, this novel financial resource was depleted. During this juncture, the government acknowledged the inflationary repercussions accompanying the incessant printing of banknotes. A novel proposition surfaced – the direct vending of German treasury bonds to the populace, circumventing the need for additional currency printing. This strategic shift aimed to facilitate wartime financing without further monetary expansion.

By mid-1917, the aggregate circulation of banknotes reached 85 million Liras. Cavid Bey postulated that if German bonds amounting to 50 million Liras could be retailed to the public, an equivalent sum of banknotes could be withdrawn from circulation, thereby reverting the money supply to its pre-war status. Unfortunately, this endeavour proved futile. Individuals engaged in speculative practices, utilising their funds to procure goods with anticipations of future gains. The allure of German bonds, offering a modest 4-5 percent interest, failed to entice these economic actors. Consequently, the onus of financing the war disproportionately fell upon the common citizenry. Ineffectual in mitigating the widening income disparity, the government found itself powerless in the face of escalating speculative transactions benefitting the so-called "war profiteers."

After this failure, the government reverted to the recourse of increased paper currency production. Subsequently, in 1917, a resolution was reached to procure a loan of 50 million Liras from Germany, allocating 32 million Liras for the issuance of the Sixth Series banknotes. This initiative was swiftly succeeded by another loan, culminating in the issuance of Seventh Series banknotes, aggregating a sum of 2.5 million Liras.

The augmentation in the quantity of paper banknotes and the reduction in their denominations precipitated a decline in their exchange rates vis-à-vis gold-backed Liras. By January 1916, the circulating amount of Liras had reached 10.7 million, with a marginal 2 percent disparity between the value of paper currency and the golden Lira. In contrast, by January 1917, these figures had escalated to 50.1 million Liras, accompanied by a substantial 72 percent divergence. The trend persisted with further amplification: in January 1918, the circulating Liras soared to 130.3 million, witnessing a staggering 364 percent discrepancy; by October 1918, the figures surged to 161 million Liras, and the disparity peaked at 319 percent.

The escalation in exchange rates for paper banknotes in Istanbul was pronounced, rising from 120 Piasters per gold Lira in early 1916 to 400 Piasters in mid-1917 and eventually peaking at 500 Piasters at the war's conclusion. Moreover, rates were even more elevated in the provinces. According to data presented by Pamuk, in August 1917, the exchange rate in Istanbul stood at 430 Piasters of paper money for 1 gold Lira. Concurrently, the rate was 450 Piasters in Bursa and Izmir, 540 Piasters in Aleppo, 555 Piasters in Beirut, and an imposing 766 Piasters in Mosul.

Over the course of the four-year war, the money supply quadrupled, coupled with a precipitous decline in the output of goods and services, inevitably ushering in a period of escalating inflation.

Between the issuance of the Sixth and Seventh Series of banknotes, the government endeavoured once more to engage in domestic borrowing. However, in contrast to previous endeavours where attempts were made to vend German bonds to the public, the approach adopted this time was more distinctly nationalistic. Historically, domestic borrowing in Turkey had manifested as short-term loans procured from Ottoman bankers. In this instance, compelled by German insistence and notwithstanding the initial reservations of the Ottoman government, a departure was made towards securing long-term loans directly from the public. Germany, in furtherance of this initiative, supplied the requisite gold for both capital and interest payments. On 28 January 1918, the Domestic Borrowing Law (İstikraz-ı Dahili Kanunu) was enacted, marking the initiation of the issuance of government bonds carrying an interest rate of 5 percent.

This foray into domestic borrowing was complemented by a robust propaganda campaign designed to stimulate public investment in these bonds. The populace was informed that the acquisition of these bonds constituted a "patriotic duty," wherein not only would investors reap personal financial benefits in the form of interest payments, but they would also contribute significantly to the national cause. This inaugural endeavour by the Ottoman government to directly solicit funds from the public proved to be efficacious, alleviating financial strain to a certain extent and culminating in a financial influx amounting to 18 million Liras.

Between the monetary reform of 1844 and the outbreak of war in 1914, the Ottoman government minted golden coins amounting to a total value of 69.3 million Liras. Coins valued at 1 million Liras experienced depreciation and necessitated withdrawal from circulation. Approximately 20-30 million Liras persisted beyond the Empire's borders due to territorial losses. Consequently, on the eve of the war, approximately 40 million Liras in golden coins remained in circulation, complemented by an additional 10.7 million Liras in silver coins. 161 million Liras in banknotes entered the market during the war, culminating in a total money supply of 211 million Liras.

Throughout the war, Turkey secured a total loan amount of 235,056,344 Liras from Germany. Of this sum, 148,581,400 Liras materialised as German treasury bonds, while the remainder comprised gold, silver, German Marks, or Ottoman Liras. Moreover, loans were procured from Austria-Hungary, albeit at a lesser volume than those from Germany. Bolstered by this financial assistance, the government issued seven orders of banknotes totalling 161,018,633 Liras, injecting funds into circulation, procuring arms and supplies, and advancing the construction of new railroads. Germany's obligation to cover all wartime issues of Ottoman banknotes with gold or treasury bonds incurred a cost of nearly 4 billion Marks, with an additional half a billion Marks allocated for the procurement and delivery of war materiel to the Turkish armed forces. There emerged a friction between Berlin and Istanbul due to the implementation of financial assistance programs, with Germans perceiving their "generosity" as unduly exploited, while the Turks felt deserving of more aid.