Between war and peace: The Ottoman economy and foreign exchange trading at the Istanbul bourse

Did events during the First World War reflect in the foreign exchange rates? A new  EHES working paper by Avni Önder Hanedar, Hatice Gaye Gencer, Sercan Demiralay, and İsmail Altay from different universities in Turkey provide evidence on the foreign exchange trading at the Istanbul bourse of the Ottoman Empire to shed light on this question.

They examine the influence of political risks on the foreign exchange rates at the Istanbul bourse during the First World War. Their empirical methodology is identifying the abrupt changes in the value of Lira against the currencies of the neutral countries at the Istanbul bourse, i.e., the Dutch Guilder, the Swedish Krona and the Swiss Franc. They exploit unique data on daily foreign exchange rates announced at the Istanbul bourse from May 1918 to June 1919. The data are manually collected from the Ottoman Empire’s official newspaper, i.e., Takvim-i Vekayi.

A column of Takvim-i Vekayi showing the value of Turkish Lira against several foreign currencies on 27 August 1918 (Takvim-i Vekayi. (28 August 1918). Kambiyo: 6.

They fill the gap in the historical literature on the Ottoman economy for the period ended by the First World War, in which there is a lack of empirical research (See Hanedar, Hanedar, & Torun (2017, 2016)). Furthermore, the literature on the impacts of the First World War on foreign exchange rates is confined (See Hall (2004), Kanago & McCormick (2013)).

The findings pinpoint the sudden changes in the value of Lira against the currencies of the neutral countries at the Istanbul bourse during important war-related events pointing out that the end of WWI was approaching. The war and occupation of the Allies deteriorated the economy of the Ottoman Empire, whereby the inflation levels surmounted along with the huge budget deficits. These circumstances were reflected in the foreign exchange rates and the Lira devaluated significantly against the currencies of the neutral countries by the end of the war.

 

The value of one Lira against Swiss Franc, Dutch Guilder, and Swedish Krona, 1918–1919. The three vertical lines in the graph represent the armistices signed by Bulgaria, the Ottoman Empire, and Germany, respectively. (Click to enlarge)

The research uncovers the effect of the war-related events on the foreign exchange rates using data from the First World War and validates the significance of these events at the beginning of the 20th century. It can be suggested that even at the war conditions, the Ottoman foreign exchange market displayed efficiency to some degree in the period marking the end of WWI. 

This blog post was written by Avni Önder Hanedar, researcher in economics and econometrics at (Dokuz Eylül University and Sakarya University).



The working paper can be downloaded here: http://www.ehes.org/EHES_108.pdf




References

Hall, G. J. (2004). Exchange rates and casualties during the First World War. Journal of Monetary Economics, 51(8): 1711–1742.

Hanedar, A. Ö., Hanedar, E. Y., and Torun, E. (2016). The end of the Ottoman Empire as reflected in the İstanbul bourse. Historical Methods, 49(3):145–156.

Hanedar, A. Ö., Hanedar, E. Y., Torun, E., and Ertuğrul, M. (2017). Perceptions on the Dissolution of an Empire: Insight from the İstanbul Bourse and the Ottoman War Bond. Defence and Peace Economics, (Forthcoming).

Kanago, B. and McCormick, K. (2013). The Dollar-Pound exchange rate during the first nine months of World War II. Atl. Econ Journal, 41(4): 385–404.

Takvim-i Vekayi. 30 May 1918–11 June 1919.