In 1820s the Ottoman Empire experienced significant financial difficulties, which resulted into a considerable increase in the interest rates. Therefore, the state took various strategies to deal with the problem, including through tax-farmers in tax collection. It is during this time that the Galata bankers rose to prominence (Pamuk, 226). Galata bankers were the moneyexchangers (sarrafs), who gained popularity during the 18th century, and grew to large financials. They took advantage of the financial difficulties of the state, especially in addressing the short-term and long-term financial needs. The Galata bankers are known to be providing financial help to the state from 16th century, which explains why their popularity increased over time to an extent of becoming major financial players in the Ottoman Empire (Pamuk, 228).
At some point, the empire changed its financing system from the short-term tax-farming to the malikane system in the long-term (Pamuk, 199). The malikane system involved a large advance payment financing system, which become an important strategy in addressing the financial problems of the state in the long term. The malikanes were absolutely under the control of the state class or the Ottoman askeri, and none of the other social groups were permitted to take part in the auctions (Gerber, 309). However, behind the malikanecis who won the auctions were the financiers who helped them secure the auctions. These are the people who provided them with the initial payments that are required. The proceeds were often shared between the malikaneci, the state, the sarraf, and the subcontractors (Pamuk, 200).
The Galata bankers affected finance and markets in the Ottoman Empire in various ways. As mentioned above, they were involved in involved in lending money for profits. Consequently, their financial portfolio increased significantly over time, something that led them to come together after which they moved their business to Galata, an Istanbul suburb (Gerber, 312). A point to note is that most of the sarrafs originated from the Armenian community. Due to their financial strength, they were favored by the Ottoman officialdom. Their main role remained as the financiers of trade and tax collection, a role that they mastered in throughout the Empire (Pamuk, 202).
In the mid-18th century, Ottoman state’s borrowing needs had increased significantly. Despite the power of the Galata bankers to address such needs, the Ottoman government turned to European financial markets as an alternative to secure more long-term borrowing needs (Academic Press, 204). As a result, European banks and bankers established their businesses in the Empire, which increased competition for the Galata bankers. Even so, the Galata bankers entered into alliances with their competitors and started new banks which offered lending services to the Ottoman government. Therefore, their influence on the financial market of the empire could still be felt despite the new entrants. In fact, they became of great help in 1875-81, when the Ottoman Empire went to war with Russia, and the European bankers were unwilling to finance the state to go to war (Academic Press, 204).
Finally, the influence of the Galata bankers was later to be affected by the involvement of other European countries and Britain in the course of the war. The other countries feared the influence of Russia in the region, and saw the war between the Ottoman Empire with Russia as an opportunity to cut Russia’s influence (Academic Press, 205). The British and other European countries strategically engineered the modification of financial system in the empire, as a way of strengthening the financial base of the Empire to deal with Russia. This was one of the rationale of the Ottoman Empire abandoning debasements and creating a more stable monetary system, the bimetallism system. With this system, the influence of the Galata bankers faded with time.
Academic Press. Handbook of Key Global Financial Markets, Institutions, and Infrastructure. Academic Press, 2012. Internet resource.
Gerber, Haim. The monetary system of the Ottoman Empire. Journal of the Economic and Social History of the Orient, 1999, Vol. 25(3): 308-324
Pamuk, Şevket. A Monetary History of the Ottoman Empire. Cambridge: Cambridge University Press, 2000. Print
Pamuk, Sevket. Institutional Change and the Longevity of the Ottoman Empire, 1500-1800. The Journal of Interdisciplinary History, 2004, Vol. 35(2): 225-247