Central Bank of the Republic of Turkey

• 1. Introduction

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  On the 3rd of October 1931, the Central Bank of the Republic of Turkey opened for business in a country not yet a decade old. Its founding followed years of foreign counsel. Economists and legal scholars from several countries helped shape the final law. The institution that emerged would hold the exclusive right to print Turkey's currency, its most tangible symbol of monetary sovereignty. What nobody could predict was how often, over the following ninety years, that power would be contested, suspended, and reclaimed.

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• 2. Ottoman Origins

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  In 1840, the Ottoman Empire introduced paper banknotes for the first time, calling them the Kaime-i nakdiye-i mutebere. Before that, the empire had minted gold coins on behalf of the Sultan. The Crimean War, which began in 1854, made the empire's fiscal strain acute. That war was the first time the Ottoman Empire borrowed from foreign nations, and to manage the repayments, the government needed a proper state bank.

  The Ottoman Bank was established in London with English capital in 1856. Its powers were narrow at first: small loans, advance payments to the government, and the discounting of Treasury bills. In 1863, the bank was restructured as the Imperial Ottoman Bank, an English-French partnership. It was granted the sole privilege of issuing banknotes for thirty years.

  The Imperial Ottoman Bank acted as the state's treasurer, collecting revenues and managing payments on domestic and foreign debts. Its foreign ownership generated resentment among Ottoman nationalists over time. That resentment helped drive the founding of the Ottoman National Credit Bank on the 11th of March 1917. In Ottoman Turkish, the institution was called the Osmanlı İtibar-ı Millî Bankası. The Ottoman defeat in the First World War came before the bank could assume central banking functions, and the project stalled.

  The Imperial Ottoman Bank's thirty-year banknote privilege had been due to expire; when it did, the empire itself was already gone.

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• 3. Building a National Bank

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  The 1923 Izmir Economic Congress was the first major economic forum of the new Turkish Republic, and it called explicitly for a 'national state bank'. Turkish leaders wanted economic sovereignty to complement the independence secured in the War of Independence. Four years after the congress, the Minister of Finance Abdülhalik Renda put a draft bill before parliament.

  In 1928, Gerard Vissering visited Turkey at the government's invitation. Vissering held a seat on the board of governors of the Central Bank of Netherlands. His report argued that an independent central bank, not affiliated with the government, was essential. The following year, Italian expert Count Volpi added his voice, arguing that such a bank was necessary to ensure stability of the Turkish currency. Prof. Leon Morf of the University of Lausanne then contributed to drafting the actual legal text.

  The Grand National Assembly enacted the founding law on the 11th of June 1930. Its official title was 'The Law on the Central Bank of the Republic of Turkey No. 1715'. The Bank's shares were divided into four classes. Class A shares were allocated to the Treasury but capped at no more than fifteen percent of total capital, a structural safeguard for independence. The Bank's primary mission under this law was to support economic development, with rediscount rates as its main policy instrument.

  The 1930s proved the wisdom of that independence clause: with the government unable to intervene in Bank decisions, the decade was marked by low levels of inflation.

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• 4. Mid-Century Pressures

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  Between 1938 and 1948, the general price level in Turkey increased more than threefold. The Second World War dominated that decade. The Central Bank, like its peers elsewhere, shifted toward covering public finance deficits rather than pursuing independent monetary policy.

  Short-term Treasury advances became the Central Bank's primary channel for financing growth in the 1950s. A significant milestone came with the establishment of the Banknote Printing Plant in 1955. From 1957 onwards, Turkey printed its own banknotes rather than having them produced abroad.

  With the transition to a planned economy in the 1960s, the Central Bank deepened its role as a public sector financier. Expansionary monetary policies supported industrialization. During this period, the majority of practices related to foreign exchange control were transferred to the Bank, expanding its regulatory reach considerably.

  By the end of the decade, the legal framework from 1930 had grown visibly out of date, and the government moved to draft a comprehensive successor law.

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• 5. The 1970 Reform

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  On the 14th of January 1970, the Grand National Assembly accepted Law No. 1211, a sweeping update to the Bank's legal and organizational framework. The Bank's capital was raised from TL 15 million to TL 25 million. The Treasury's shareholding was now required to constitute no less than 51 percent of total capital.

  Law No. 1211 created the 'Office of the Governor' as a formal title, designed to ensure the Bank's standing in international representation and protocol. Naim Talu became the first person to hold that title. The top decision-making body, previously an eight-member Board of Directors, was restructured into a smaller six-member Board.

  Open market operations were authorized for the first time under Law No. 1211, giving the Bank a modern instrument to regulate money supply and liquidity. The government was now required to consult the Bank when taking measures related to money and credit. The short-term advance ceiling for the Treasury was raised to 15 percent of that year's budget allocations.

  By 1970, the Bank had a new organizational structure and a new policy toolkit; the financial changes of the decade ahead would demand both.

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• 6. Liberalization and Crisis

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  The decisions of the 24th of January 1980 set off a structural transformation in the Turkish economy. Price controls were dismantled, free trade was adopted, and interest rates on deposits and loans moved to market determination. The fixed exchange rate system was abandoned and the Turkish lira was devalued against foreign currencies.

  In 1983, the Bank was formally empowered to manage the country's gold and foreign exchange reserves effectively. Open market operations began in 1987, making the Central Bank a pioneer in the establishment of modern money and foreign exchange markets in Turkey. In 1989, Decree No. 32 on the Protection of the Value of Turkish Currency opened foreign exchange transactions to all economic units. With the lira declared convertible, a more flexible exchange rate regime took effect.

  In 1990, the Bank announced a monetary program for the first time, targeting market liquidity without destabilizing exchange rates or interest rates. The targets were met. Political instability, Gulf War pressures, loose fiscal policy, and a fragile banking sector converged by the first quarter of 1994. The result was a financial crisis. On the 21st of April 1994, formal limits were placed on Treasury access to Central Bank funds.

  A protocol signed between the Central Bank and the Treasury in 1997 went further still. From 1998 onwards, the Treasury would draw no short-term advances from the Bank at all. The years 1995 to 1999 were devoted to restoring stability in financial markets. In 2000, Turkey launched an exchange rate based program to tackle chronic inflation. Confidence was eroding by the end of that year. On the 22nd of February 2001, the program was abandoned and free-floating exchange rates were adopted.

  The crash of that exchange rate program triggered a fundamental overhaul of the Central Bank's legal mandate, one that was completed within two months.

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• 7. Price Stability

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  On the 25th of April 2001, barely two months after the adoption of free-floating rates, Turkey amended the CBRT Law in a sweeping overhaul. The new text stated explicitly that the Bank's primary objective was to achieve and maintain price stability. The Bank was granted what the law called 'instrument independence': it would choose its own monetary policy tools without government direction. The Monetary Policy Committee was established at this time to institutionalize policy decision-making.

  In 2002, the Bank adopted what it called the 'inflation targeting regime'. The implicit phase, covering 2002 to 2005, was devoted to building the necessary infrastructure. The Research Department was restructured as the Research and Monetary Policy Department. A new Communications Department was established to ensure effective public messaging around policy decisions.

  From 2005 onwards, the Monetary Policy Committee began publishing its full-year meeting schedule in advance. This gave markets greater certainty over the timing of policy decisions. The explicit inflation targeting regime launched in 2006. A two-stage currency reform accompanied this transition. On the 1st of January 2005, six zeros were removed from the Turkish lira. New Turkish lira banknotes, abbreviated YTL, and New kuruş coins entered circulation. On the 1st of January 2009, the prefix 'New' was dropped. Turkish lira banknotes and coins were reissued with entirely new designs and sizes.

  The Monetary Policy Committee is chaired by Fatih Karahan. Its members include Osman Cevdet Akçay, Hatice Karahan, Elif Haykır Hobikoğlu, and Fatma Özkul. As of the end of 2018, Treasury-held Class A shares constituted 55.12 percent of the Bank's capital. That majority stake sits alongside an explicit legal mandate for instrument independence, a tension the Bank navigates in every policy decision it makes.

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