- Regulation of the amount of money,
- Regulation of the credit volume,
- Management of gold and foreign currency reserves,
- Execution of domestic and external payments.
In this system that prevailed until the second half of the 19th century, the Ottoman Empire minted gold coins on behalf of the Sultan.
In the face of the financial problems triggered by domestic borrowing and wars, the Ottoman Empire printed banknotes (Kaime-i Nakdiye-i Mutebere) and put them into circulation in 1840.
During the Crimean War in 1854, the Ottoman Empire borrowed from other nations for the first time in its history. As it needed a state bank to assume an intermediary function in the repayment of these external debts, the Ottoman Bank (Bank-ı Osmanî) was established in 1856 with English capital and with its headquarter in London. The fundamental powers of the Bank were limited to lending in small amounts, making advance payments to the Government, and discounting certain Treasury bills.
In 1863, the Ottoman Bank was dissolved and restructured as an English-French partnership under the name Bank-ı Osmanî-i Şahane (Imperial Ottoman Bank), becoming a state bank. The Imperial Ottoman Bank was granted the sole privilege of issuing banknotes for a period of thirty years. The Bank, acting as the treasurer of the state, was assigned to collect state revenues, make payments on behalf of the Treasury and discount Treasury bills, as well as making interest and principal payments pertaining to domestic and foreign debts.
Over time, the fact that the capital of the Imperial Ottoman Bank belonged to other nations triggered reactions, which laid the foundation for the idea of a national central bank. Efforts towards establishing a central bank with domestic capital culminated in the establishment of the Ottoman National Credit Bank (Osmanlı İtibar-ı Millî Bankası) on 11 March 1917. However, the defeat of the Ottoman Empire in the First World War prevented the bank from becoming a national bank that would assume central bank functions.
After the First World War, deliberations about the establishment of a central bank in Turkey gained pace in line with the global trend of nations to formulate their monetary policies independently by establishing their respective central banks with the authority to issue money, and the motive to reinforce the political independence gained in the War of Independence with economic independence. This issue was first addressed at the Izmir Economic Congress in 1923 with a special emphasis on founding a “national state bank”. In 1927, the draft bill on the establishment of a central bank, submitted by the Minister of Finance Abdülhalik Renda, was accepted. Turkey exchanged views with central banks of other countries during the establishment stage of the Turkish Central Bank.
In 1928, Dr. G. Vissering, a member of the De Nederlandsche Bank (Central Bank of Netherlands) Board of Governors, was invited to Turkey. In his report, he underlined the necessity for an independent central bank not affiliated to the Government. In 1929, the Italian expert Count Volpi also suggested that the establishment of a central bank was necessary to ensure stability of the Turkish currency. Following these developments, the Government took the initiative to draft the necessary legal framework for the establishment of a central bank, and a draft law was prepared with the contributions of Prof. Leon Morf from the University of Lausanne.
The law was enacted by the Grand National Assembly of Turkey on 11 June 1930 and published on the Official Gazette of 30 June 1930 as the Law on the Central Bank of the Republic of Turkey No. 1715.
Following the centralization of duties carried out by different institutions and organizations, the Central Bank of the Republic of Turkey (CBRT) started to function on 3 October 1931. The Bank acquired a legal status as a joint stock company to demonstrate that it is not a public entity and that it is independent.
The Bank’s shares were divided into (A), (B), (C) and (D) classes:
- Class (A) shares belong solely to the Treasury (For the purpose of strengthening the Bank’s independence, it is stipulated in Law No. 1715 that these shares shall not constitute more than fifteen percent of the capital).
- Class (B) shares are allocated to national banks.
- Class (C) shares are allocated to banks other than national banks, and to privileged companies.
- Class (D) shares are allocated to Turkish businesses, and to legal and real persons of Turkish nationality.
According to Law No. 1715, the primary objective of the Central Bank was to support the economic development of the country. To this end, the Bank was authorized to:
- Set rediscount ratios, employing them as the main policy instrument,
- Regulate the money market and the circulation of money,
- Execute treasury operations,
- Take measures regarding the stability of the turkish currency,
- İssue banknotes exclusively,
- Act as the treasurer of the government.
In this period, the authority to determine the exchange rate under the fixed exchange rate regime rested with the Government.
The 1930s, when the Government could not intervene in the Bank’s realm of authority and decisions, were marked by Central Bank independence and low inflation levels.
During the1940s, which were dominated by the adverse effects of the Second World War, the Bank, like its peers all over the world, implemented policies to offset the public finance deficit rather than implementing an independent monetary policy. Therefore, the general price level increased more than threefold in the 1938-1948 period.
During the 1950s, growth and rapid development were financed by the Central Bank’s resources. These resources were rendered available to the public through short-term advances provided to the Treasury. An important development for the Central Bank in that period was the establishment of the Banknote Printing Plant in 1955, and accordingly Turkey started printing banknotes as of 1957.
With the transition to a planned economy in the 1960s, the Bank pursued expansionary monetary policies and continued to provide resources to the public sector parallel to the economic conditions of the time and the requirements of industrial development. It was during this time that the majority of powers related to foreign exchange control were transferred to the CBRT.
This law introduced significant changes to the legal status, organizational structure, duties and powers of the Bank as follows:
Capital: Maintaining its legal status as a joint stock company, the Central Bank’s capital was increased from 15 million Turkish liras to 25 million Turkish liras. Furthermore, the law stipulated that the Treasury’s share in the capital should not be less than 51 percent.
Executive Committee: A new decision-making body composed of the Governor and the Deputy Governors was established, which was named the Executive Committee.
Board: The Board of Directors, which was the top-level decision-making body of the Bank with its eight members, was changed to the Board of the Bank consisting of six members.
Additionally, the General Assembly of Shareholders was named the General Assembly; the Board of Auditors was named the Auditing Committee; and the General Directorate was named the Head Office.
- Extended control over direct and indirect monetary policy instruments,
- Authority to conduct open market operations to regulate the money supply and liquidity,
- Providing consultation to the Government on measures regarding money and loans,
- Extending medium-term loans to support investments and economic development, through rediscount transactions.
The decisions of 24 January 1980 sparked a structural transformation in the Turkish economy. The important developments of this period are:
- Price controls were abandoned so that prices would be formed within the framework of the market mechanism, and a policy of free trade was adopted.
- With the launch of the financial liberalization process, important steps were taken to provide the necessary infrastructure for monetary and exchange rate policies in compliance with the market economy.
- As part of the monetary policy, it was decided that interest rates on deposits and loans would be determined by market conditions.
- The fixed exchange rate regime was abandoned, and the Turkish currency was devalued* against foreign currencies.
In 1983, the Bank was empowered to manage gold and foreign exchange reserves. In addition, it was incorporated into the Law that the Bank would carry out its fundamental duties in compliance with the basic requirements of the economy and with the objective of achieving price stability. The Bank started conducting open market operations in 1987 and became a pioneer in the establishment of money and foreign exchange markets in the modern sense.
In 1989, with Decree No. 32 on the Protection of the Value of Turkish Currency, economic agents were allowed to conduct foreign exchange transactions, and having declared the Turkish currency “convertible”, a relatively more flexible exchange rate regime was adopted.
In 1990, for the first time, the Bank announced a monetary program which aimed to meet the liquidity need of the market without prejudice to the stability of exchange rates and interest rates. Although the targets announced in 1990 were achieved, the Gulf War in the following period significantly affected the Turkish economy. Problems such as the pressure on the financial sector, political instability, lax fiscal policy, and the fragile structure of the banking sector hindered achievement of macroeconomic stability and led to a financial crisis in the first quarter of 1994.
Initial regulations proposed to prevent the financing of public debts – a key element of the period of high inflation – by the Bank also coincide with this period. On 21 April 1994, limitations were imposed on the Treasury’s use of CBRT funds. Moreover, with a protocol signed between the Bank and the Treasury in 1997, it was concluded that the Treasury would not get short-term advances from the CBRT from 1998 onwards.
* Devaluation: Lowering of the exchange value of a country’s currency with a Government decision. Practiced generally in countries that have a fixed exchange rate system and a balance of payments deficit.
In the 1995-1999 period, the CBRT followed policies geared towards ensuring stability in the financial markets. As inflation could not be brought under control, a new exchange rate-based stability program was adopted in 2000. However, amid the aggravated loss of confidence in the economy that emerged towards the end of 2000 and the crisis that broke out in 2001, this program ceased to be implemented. Consequently, the free floating exchange rate regime was adopted on 22 February 2001.
In line with the structural transformation in the Turkish economy after the crisis, significant amendments were made to the CBRT Law on 25 April 2001. These amendments are as follows:
- The Law explicitly defined the primary objective of the Central Bank as to achieve and maintain price stability.
- It was stipulated that the Bank would determine at its own discretion the monetary policy that it would implement and the monetary policy instruments that it would use. Thus, the Bank was vested with instrument independence.
- The Law also stipulated that the Bank would support the growth and employment policies of the Government provided that they do not conflict with the objective of achieving and maintaining price stability.
- Achieving financial stability was described as a complementary objective of the Bank.
- The Law prohibited the Bank from granting advances and credits to the Treasury and other public establishments and institutions, as well as from purchasing, in the primary market, the debt instruments issued by these institutions. Thus, the utilization of Bank funds for the purpose of public finance To institutionalize monetary policy strategies and decision-making mechanisms, the Monetary Policy Committee was established.
In 2002, the CBRT adopted the inflation targeting regime as a modern monetary policy strategy. Under the implicit inflation targeting regime implemented between 2002 and 2005, the Bank endeavored to ensure the necessary preconditions for the regime, strengthened its technical and corporate infrastructure, developed estimation models, and expanded its data set. During this process, the Research Department was restructured as the Research and Monetary Policy Department, and the Communications Department was established to ensure the effectiveness of communications policies.
As of 2005, the Bank started announcing in advance the schedule of its Monetary Policy Committee meetings to increase predictability of policy decisions.
This entire process was concluded with the adoption of the explicit inflation targeting regime in 2006.
In this period, a two-stage monetary reform was launched to emphasize the Bank’s determination in its efforts to sustain the progress achieved in the disinflation process, to enhance the credibility of the Turkish currency, and to eliminate various problems arising from high denominations.
- In the first stage, six zeros were removed from the Turkish lira, and banknotes of the New Turkish lira and coins of the New kuruş were put into circulation as of 1 January 2005.
- On 1 January 2009, the second stage of the reform was launched by removing the prefix “New” used on the “New Turkish lira” and “New kuruş”, and Turkish lira banknotes and coins were put into circulation with new designs and sizes.
The Central Bank, which has a long and deep-rooted history from the Ottoman Period to the present, continues to perform its duties and powers entrusted in law to the highest standards, and thus steers the Turkish economy.
Today, the CBRT is a credible institution with highly qualified staff and modern infrastructure that pursues its policy implementations within an ever-dynamic framework by keeping a close watch on global and domestic developments.