View from the Galata Tower (built by the Genovese) over old Constantinople with the Bazaar
Exactly three weeks ago, the European Association for Banking History (abbh) held its annual conference in Budapest. The Magyar Nemzeti Bank, Hungary’s Central Bank , was kind enough to host the meeting. Many people wondered why we chose the “esoteric” topic of hyperinflation. Unfortunately, the answer is closer than we like. Inflation returned to the developed world after Covid. Two G-20 members, Argentina and Türkiye, suffer from hyper-inflation. Albeit Argentina – due to President Milei’s new policy - now dropped below the definition threshold of inflation exceeding every month 50% over a 12 months period.
Türkiye however, where we will be sailing later this summer, remains in the “dog house. In June 2024, inflation “eased” from its May peak of 75.4% to 71.6%. It is not the first time that we sail in Türkiye when inflation hits hard. I remember our trip from Göcek to Jaffa in 2018. The Turkish Lira lost half its value and dropped to almost USD 7. Our stewardess who studied maritime law cried when her savings for an exchange year in the US melted away. She was never able to go. Inflation may be a statistical number. But for people with lower income it is devastating. Inflation destroys their savings and income.
Note the small peak in Summer 2018 when we were sailing from Türkiye to Israel
One of our conference participants in Budapest was Argentina’s former Central Bank Governor Federico Sturzenegger. He described in his speech how people experienced inflation in his country. When his grandfather got his daily salary in the morning, little Federico had to run with the bills to the next exchange bureau. Buy dollars “at any price”, his granddad told him. By mid-morning, prices were already adjusted to new levels. By evening, a salary could be worth nothing.
Ex-Governor of the Argentinian Central Bank, Federico Sturzenegger, in Budapest June 2024
Türkiye has now lived through four bouts of high inflation during the last one hundred years. Hyperinflation typically happens when governments lose control over fiscal and monetary policy. It is often a result of wars, when empires fall apart or at a time of fundamental change like the end of communism in 1989.
Turkish Territorial Losses after the First World War in 1918
Türkiye has seen it all. The loss of the First World War (1914 – 19118) reduced the Ottoman Empire from 25 to 13 million people. Iraq, Syria, the Levant and Yemen became French or English protectorates. In 1918, Türkiye’s expenditure exceeded tax revenue by factor 4 – the deficit was financed by the printing press. Not surprisingly, the Istanbul consumer price index shot from 130 in 1915 to 2’205 in 1918. The Ottoman Lira dropped to almost zero. The country defaulted on its debt. In 1923, the new president Kemal Atatürk had to start from scratch. Most Turks had lost everything.
Kemal Ataturk rebuilt Türkiye from the Ashes of the Ottoman Empire
Türkiye stayed neutral in the Second World War (1939 – 1945). But despite not fighting, the war did a lot of harm. Completely surrounded by war participants (formally neutral Persia was occupied by Russia and England), the army remained fully mobilized during the war years. Import and Exports come to a halt due to the naval clashes in the Mediterranean and the Black Sea. The GDP fell by 35%, the cost of living quadrupled. WWII indirectly wiped out the progress made in the years after 1923. People’s savings were gone again when the Turkish Lira had to devalue. No wonder, the US included Türkiye in the Marshal Plan - even though it was designed for countries devastated by the Second World War.
Turkish GDP developed far less dynamic than in Asia (1960 - 2000)
In the 4 years following 1945, the Turkish economy recovered to pre-war levels. With the Korean war, agricultural exports experienced fast growth. The country’s capital stock however remained depleted. There were few private investments into the country’s industry. With Türkiye’s admission to NATO (to counter the Soviet Union’s demand for control of the Straits), came high defence expenditure. One full Turkish brigade fought in Korea. The state tried to compensate for the lack of private investments. Its share of industrial production rose to 50%. But it was not enough. With its structural current account deficit, the country kept above waters only thanks to the financial assistance from multilateral institutions (IMF and Worldbank) and the USA.
Türkiye became a NATO Member in 1952 and sent an entire
Brigade to Korea
Türkiye’s inward-looking industrial policy, lack of foreign investments, little access to technology and limited free trade agreements resulted in anemic growth from the 1960 – 2000. The comparison to the 5 Asian Tigers, China or India is not flattering. Like them, Turkey was a low-cost country. But its primary export stayed textiles and agriculture. From my days as junior banker I remember how many Letters of Credit we issued for Swiss clients who imported inexpensive Turkish clothes.
Istanbul's first Suspension Bridge over the Bosporus was only opened in 1973
The oil-shock in 1973 and its repercussion triggered increased inflationary pressure. It stayed above 20% from 1977 to 2003. Elder Turkish people remember this period well. There were over 20 governments these years – people started to talk about the “Italian” disease. There were military coups. Not surprisingly, government policies changed on the fly. Various policies were tried. Partial exchange liberalization, financing the government deficit by bonds, price controls, a crawling peg to the USD. Nothing helped. Turkish people had no faith in the government. It was the third big inflation since 1918. The USD remained the “unofficial” currency of the country.
Turkish Inflation from 1960 - 2024. From the late 1970s on, Inflation was around 20%
When Erdogan became prime minister in 2003, the Turkish economy improved. In 1995, Türkiye had signed a Free Trade Agreement with the EU covering goods but not agricultural products or services. Foreign Direct Investment started to pick up. Many large European companies like Siemens or Electrolux set up manufacturing sites and produced their goods there. Today, almost all large TV screens, most of the white goods (washer, dryers, freezers, fridges) and many of our trains are made in and around Izmir, the Turkish industrial center on the Aegean. Capital markets opened, the central bank implemented inflation targets. Not surprisingly, inflation came down and stayed subdue for two decades. Would Türkiye finally escape the scourge of inflation?
Under Erdogan, Foreign Direct Investments started to flow
Sadly not. Erdogan’s style of government led to political instability, a failed coup, mass arrests and purges in the educational, judicial and military system. In a nutshell, half of the country’s people lost their faith in the government. It was the time when it became obvious that there were many white elephants – the Turkish government had invested into too many big projects which never made a return. Oversized and underutilized harbors and airports and many empty highways are the most prominent examples. Not all the infrastructure built was as successful as what was done around Istanbul.
The outsized stimulus packages during Covid broke the camel’s back. Foreign currency revenue from tourism dropped sharply. With almost no fossil fuels, the country is very sensitive to price fluctuations in the oil and gas market. In 2022 inflation shot up to 72.3 %. The Turks did what they always do during periods of inflation – the demand for dollars went up. The Turkish Lira devalued sharply and stands now between 32 and 33. Only six years ago, it was just below 7 per USD. The loss of the Central Bank’s independence and its crazy policy of lowering interest rates to fight inflation made the situation worse. The USD as “shadow” currency is back again.
Retierees and Low Income Citizens suffer most from the high Levels of Turkish Inflation
At our conference in Budapest, Prof. Harold James titled his speech “who makes hyperinflation”. He pointed out that hyperinflation was not an act of God. It is made by humans. When it is politically more convenient to pay for large deficits with the printing press rather than having a political debate about spending, then hyperinflation may result.
Prof. Harold James from Princeton University during his intervention at the Conference
It is easy to see why this happens during wars. But Türkiye is not at war. It now needs a stable fiscal and monetary policy. Building an economy on rapid currency devaluation never worked in history. As always, less affluent Turks who use cash or keep their money in bank accounts pay for the inflation. In the name of development, an unjust tax is imposed on the poorest. I hope the Turkish government comes to its senses and respect the hardworking and friendly Turkish people we meet on every trip. They deserve better.
Comments