Turkey, the Great Powers, and the Bagdad Railway: A study in imperialism

by Edward Mead Earle

The Financiers Get Their First Profits

The convention of March, 1903, marked the beginning, not the end, of the work of the promoters of the Bagdad Railway. Ahead of Dr. von Gwinner[1] and his associates lay all sorts of obstacles, some of which proved to be insurmountable. There were the financial difficulties and risks attendant upon the task of borrowing and expending the funds for the construction of the railway—estimated at about one hundred million dollars. There were the technical difficulties of constructing a line across obstinate mountain barriers and inhospitable desert plains. There were the political difficulties of retaining the friendship of notoriously fickle Ottoman ministers and of preventing diplomatic opposition on the part of foreign powers. Events proved that this was to be a thorny path indeed—a path which was to lead through political intrigue, diplomatic bargaining, a Turkish revolution, and a world war.

The concessionaires began work in a manner indicative of a determination to succeed in spite of all obstacles. The Bagdad Railway Company was incorporated in Constantinople, March, 1903, under the joint auspices of the Deutsche Bank and the Imperial Ottoman Bank, as provided by their mutual agreement of 1899. Almost immediately an invitation was extended to British capitalists to participate in the enterprise. Three-cornered negotiations were conducted by German, French, and British bankers—under the watchful eyes of their respective foreign offices— to arrive at some satisfactory plan for internationalization of the railway. An agreement was reached by the financiers by which British capital was to share equally in ownership and control with the German and the French, but the hostile attitude of the English press and the disapproval of the Balfour Government led to the abandonment of the proposed tripartite syndicate.[2]

Failing to secure British cooperation, the concessionaires proceeded to finance the Bagdad Railway by other means. Ten per cent of the stock of the Company was subscribed by the Ottoman Government, ten per cent by the Anatolian Railway Company, and the remainder by an international syndicate headed by the Deutsche Bank. The Board of Directors was enlarged to twenty-seven members, as follows: eight Germans, chosen by the Deutsche Bank; three Germans elected by the Anatolian Railway Company; eight Frenchmen designated by the Imperial Ottoman Bank; four Ottomans; two Swiss; one Austrian; and one Italian.[3] The control of the Bagdad Railway Company thus remained in Turco-German hands, but French and other interests were too well represented to justify the criticism that the railway was a purely German enterprise secretly coöperating with the German Foreign Office. In fact, in 1903 Mr. Balfour and Lord Lansdowne were as much alarmed by the possibility of pernicious French activities in the line as they were disturbed by the predominantly German character of the scheme.[4] Baron von Schoen, one-time German Foreign Secretary, described the Bagdad Railway as “an Ottoman enterprise which has an international character under German guidance.”[5]

The great resources of the Deutsche Bank were now brought into play to provide the funds for the construction of the first section of the railway. The necessary capital was to be secured, it will be recalled,[6] by the sale of an issue of Imperial Ottoman Bagdad Railway Bonds amounting to 54,000,000 francs. With comparatively little difficulty the German share of the loan was subscribed, but the allotment of the Imperial Ottoman Bank and its associates was not so easily disposed of, because of the decision of the French Government to exclude the Bagdad Railway Bonds from the Bourse. Nevertheless, the entire loan was successfully underwritten, and by November, 1903, preparations had been completed for the construction of the line from Konia to Bulgurlu, a distance of 200 kilometres.[7]

Building of the railway went forward with great rapidity, and the rails reached Bulgurlu by early autumn, 1904. On October 25, the Sultan’s birthday, this first section of the Bagdad Railway was opened to traffic with pompous ceremonies. And well might the concessionaires have celebrated! Not only had they passed the first milestone of their great task, but they had made a comfortable profit on their operations. By numerous economies the Bagdad Railway Company had saved 3,697,000 francs of the 54,000,000 francs allowed by the Ottoman Government to defray the costs of construction. The commissions of the bankers in underwriting the bond issue, it was said, raised the total profit on the first section of the railway—before a single train had been operated—to about 6,000,000 francs.[8] This surplus, however, was not all available for distribution among the concessionaires. A reserve fund of almost 4,000,000 francs was established to provide for the subsequent construction of the costly sections across the Taurus and Amanus mountains. The promoters had to be reimbursed for preliminary expenditures, such as the expensive surveying of the entire line from Konia to the Persian Gulf. Included in these “out of pocket” payments was a large item for backshish—gratuities to Ottoman dignitaries. “Nobody,” said Dr. von Gwinner, “having done business in Turkey ignores the fact that backshish on the Bosporus ruled supreme and was hitherto an absolute condition of any contract. We had to pay in proportion to the importance of a business of some £20,000,000.”[9] Djavid Bey informs the author that the item of backshish must have amounted to almost £100,000, “for during the Hamidian régime friendship between sovereigns was not enough to bring about the granting of a concession.”

Within nineteen months after the Turkish Government had issued its bonds to cover the cost of the project, the first section of the Bagdad Railway, from Konia to Bulgurlu, had been completed. The success of the concessionaires in this part of the enterprise might have been taken as a criterion of rapid progress with the further construction of the line to the Persian Gulf. Such an expectation, however, would have been premature. Beyond Bulgurlu lay the Taurus mountains and innumerable engineering difficulties which could be overcome only after the expenditure of considerable time and money. The Turkish Government, furthermore, was in no position to issue additional bonds to the amount of fifty or sixty millions francs to cover the costs of constructing the second section of the line. Interest and sinking fund charges on the first issue of Bagdad Railway bonds were a serious drain on the treasury; additional charges of a like character could be met only by an increase of the customs revenues of the Empire. Such an increase could not be effected, however, except by international agreement, because under existing treaties between Turkey and the Great Powers all import duties were fixed at eight per cent ad valorem.[10]

In 1903, coincident with the first issue of bonds for the Bagdad Railway, the Ottoman Government had requested permission to increase these duties to eleven per cent but had been unable to obtain the consent of the interested nations. It was not until 1906, after prolonged and irritating negotiations, that the Powers agreed to a three per cent increase, effective in July of the following year. Even then, however, the higher duties were assented to under a number of restrictions which rendered difficult the diversion of the increased revenue to the payment of railway guarantees; elaborate regulations were incorporated in the treaties prescribing expensive reform of the government of Macedonia and costly readjustments in the customs administration.[11]

By 1908, nevertheless, Turkish fiscal affairs were in a sufficiently satisfactory state to enable the Government to conclude arrangements for the construction of succeeding sections of the Bagdad Railway. On June 2 of that year an imperial iradé was granted authorizing the extension of the line from Bulgurlu to Aleppo and thence eastward to El Helif (near Nisibin), a distance of some eight hundred and forty kilometres. The completion of this portion of the line would bring the railway to a point about eleven hundred miles from Constantinople and only a little over seven hundred miles from Basra. Arrangements were effected for the immediate issue of the Imperial Ottoman Bagdad Railway Four Per Cent Loans, Second and Third Series, to an amount of one hundred and eight million and one hundred and nineteen million francs respectively, to provide the capital necessary for the building of the railway. Interest and sinking fund payments on these loans were guaranteed from the surplus of net revenues accruing to the Imperial Government from the Ottoman Public Debt. In case of emergency, certain taxes (notably the cattle tax) of the vilayets of Konia, Adana, and Aleppo were pledged for this purpose.[12]

Only a month after the conclusion of this convention the Near East was thrown into a state of turmoil as a result of the outbreak of the first of the Young Turk revolutions. Under these circumstances it appeared inexpedient to the Bagdad Railway Company to push construction of its line until such time as a reasonable degree of security should be restored. It was not until December, 1909, therefore, after the deposition of Abdul Hamid, that good friend of German enterprise in Turkey, that a construction company was formed to build the railway across the Taurus and Amanus mountains. During the autumn of the same year a Franco-German syndicate underwrote the second and third series of Bagdad Railway loans, thereby providing the necessary funds for the work.[13]