WW2 began in the Autumn of 1939. On September 1, while Poland’s insufficient military power entered a hopeless struggle against the German forces which occupied Poland by entering from four different points, France and England declared war against Germany. In the following weeks and months many European countries found themselves in a painful and bloody fight that would last for years. These were followed by the bloody conflicts in the Far East first between Japan and China, then between Japan and the USA., giving the war a global dimension. Turkey was able to spend these years by staying out of the armed conflicts but it was not possible to stay away from the effects and the results of the war, and she could not.
In reality Turkey, just like many other countries, felt the threat and distress of the possibility of a war in Europe much earlier than 1939, since mid-1920s. Added to this distress was the continuing problems of the great economic crisis which had spread throughout the world since the autumn of 1929. Therefore, the two basic factors that shaped Turkish economic policy in the pre-WW2 years were the preparations against a possible war and the search for a remedy for the problems of the world economic crisis.
The Shadow of the Approaching War
The coming into power of Mussolini and his Blackshirts in 1922 created enough worry for Turkey. The desires of Mussolini and his supporters over Turkish soil, together with the growing power of the Fascist Party, increased the possibility of a clash of arms. A very serious political crisis between Italy and Turkey in the Spring of 1926 revealed this possibility clearly. Benito Mussolini, who had greatly strengthened his dictatorship within his country, stated, in private conversations, his wish to land troops on the southern coasts of Turkey using the opportunity of the discord between Turkey and England about Mosul. The rumours about these conversations spread wide in the Turkish public opinion. Despite the refutation of these rumours by the Italian public authorities and the apparent normalisation of the Turkish- Italian relations after the 1926 agreement resulting from the discussions about Mosul, everyone was aware that Mussolini’s ambitions over Turkish soil continued. As a matter of fact, Italy’s desire to invade Turkey’s southern coasts, came to the fore again in the 1930s and worried Turkish authorities. The fact that these worries were based on serious foundations became clear when Italy attempted to invade Ethiopia in 1935 and Albania in 1939.
The expansionist policy followed by Hitler, after his Nazi Party took possession of the power in 1933, constituted a different stress for Turkey. Germany’s occupation of the Rhine area in 1936, its forcing Austria to a de facto integration in 1938, again in the same year its invasion of the Sudets area and then the whole Czeckoslovakia, caused worries in Turkey as in many countries about how far this expansionism would advance.
In the months following the start of WW2, Germany’s invasions stretching as far as the Turkish frontiers increased the worry and stress of occupation threats to great dimensions. The Germans had either virtually invaded Yugoslavia, Romania, Greece and Bulgaria or had taken them under control by means of puppet governments. Thus, in 1940 the German armies had virtually pressed in upon Turkish frontiers.
After that, Turkey lived with the possibility of facing an attempt of invasion by the German forces throughout the war. In Thrace and Egean, people slept and woke up with that possibility.
Traces of The Great Economic Crisis in The World
The panic atmosphere which unsettled the New York Stock Exchange on October 24, 1929, quickly turned into a massive sale rush which involved all the shares. This panic, which at first was thought to be temporary and was hoped to rectify on its own, intensified in the following months and brought with it the bankruptcy of many largescale firms and banks. This deep depression which, by a chain reaction, led to the bankruptcy of other firms and banks not only unsettled The USA in the pre-war years but also turned into a great economic crisis which spread throughout the world.
Both the industrialized countries and the producers of agricultural products had their share of this crisis. However, the greatest difficulty was experienced by the countries whose export depended on agricultural products. The balance of payments of the exporters of agricultural products suffered great deficits because of the large scale drops in the world price of the agricultural products, the decreasing demands of industrialized coutries for agricultural products, and the trade rates that turned to their disadvantage.
Turkey, who initially could not comprehend the scale of the World Economic Crisis, very shortly began to experience, like the other exporters of agricultural products, the distress caused by the deterioration in the balance of payments. The following years were spent in efforts of finding remedies to mitigate this distress.
The first big step in this direction was taken on February 20, 1930, by the acceptance of the law number 1576 on The Protection of The Value of Turkish Currency. This law, which was brought as an addendum to law no.1447 on Stocks, Bonds and Foreign Exchange Markets, was valid not only during the war but also for the following fifty years. İn fact, this short law of seven articles was predicted to remain in force for only a temporary period of three years. Clearly, it was hoped that the extraordinary economic conditions that prevailed in the international area would be removed. However, the validity period of the law was extended twelve times and finally, on December 11, 1970, with law no.1224, it was put into force indefinitely.
In the extraordinary conditions of the time that required quick decisions, it was seen suitable to give the Council of Ministers the authority for statutory decrees and to support them with severe sanctions. In fact, the Council of Ministers Decision no.1, which was enacted immediately after the Law was published, stated that speculations on foreign exchange, foreign currency, stocks and bonds were forbidden. With Decision no.2 that came immediately after, certain regulations were brought related to the allocation of foreign currency.
The problems in the foreign economic relations of the year 1930 could be observed in the Law no.1705 which was accepted on June 15 of the same year. With this law which brought state control over domestic and foreign trade, the application of a tight foreign exchange regime and the clearing system in export was begun.
President Atatürk, Prime Minister İnönü and the other administrators of the young republic were striving to create the institutions that would constitute the foundations of a strong and continuous economic structure while fighting against the problems in foreign economic relations created by the World Crisis. The efforts for the establishment of a central bank and the liquidation of the Ottoman debts without causing too much burden, should especially be mentioned. The establishment of a central bank, whose preparations had been continuing for some time, was realised in 1930. The Turkish Republic Central Bank Law no.1715 was accepted on June 15. However, 16 months had to pass until the Bank completed its organisation and actually started to work on October 1931. With the establishment of the Turkish Republic Central Bank, the central banking functions which were carried out by the Ottoman Bank until tilishment of the Chat time, were taken over by the newly established bank.
The negotiations with the public debt creditors came to a definite conclusion on April 22, 1933, three years after the establishment of the Central Bank. Indeed, according to an agreement on this issue signed in 1928, the Turkish Government continued its payment of debts until May 1930, but with the deepening economic crisis conditions the government wanted the old agreement to be opened to negotiation, putting forth the necessity for a reduction in the burden of debt. The new agreement, signed in Paris in 1933 between the creditor representatives and the Turkish Republic, provided some payment facilities for Turkey such as a discount in the capital amount and the payment to be made in French Frank.
Meanwhile, in adiition to the widespread effects of the World Economic Crisis, Turkey’s balance of payment problems began to be felt intensely. This hardship was explained, during the discussions of the 1933 Budget Law in the TGNA, by Mustafa Abdülhalik Bey, the Minister of Finance of the İsmet İnönü government, as follows:
“ The economic crisis that shook up the world had important reflections on countries such as ours whose export is limited to agricultural products. Agricultural products lost their values with a higher ratio than the value of industrial products. While we tried to compensate for this decrease in price by increasing the value of our exports, we were faced with the precautions taken by every country such as customs barriers, quota systems, foreign currency limitations.”
The difficulties mentioned by Abdülhalik Bey forced the Council of Ministers in 1933 to take new precautions directed towards more limitation of imports. With a Council of Ministers Decision based on the Law of The Protection of The Value of Turkish Currency, it was decided that “ Exchange, and buying and selling of foreign currency should be made by banks and bankers who have permission from the Ministry of Finance. Stockbrokers could only fulfill the orders of these banks and bankers on buying and selling.”
In 1933 one of the important steps of institutional structuring in economy was taken and Loan Transactions Law no.2279 was published. The purpose of the law was to prevent pawnbroking which large masses of peole complained about, and to organize the credit market ouside of the banking system. The organisation related to banks that played the most important role in the credit market was made with the acceptance of a Banking Law in 1936.
This period when Turkey tried to provide financial-economic institutionalization in the conditions of the Great World Crisis and tried to lessen the problems arising from the balance of payments, is also the period when great efforts were made to increase real investments. Within this framework, on the one hand railroad investments were increased for the development of the transportation infrastructure of the country while on the other hand the First Five Year Industry Plan began to be implemented as of 1933.
The years starting with 1933 and continuing until WW2 comprises the various applications of ‘statism’ in economic policy. The fact that the Law For The Encouragement of Industry which was enacted previously did not give the expected results, and also the success of the five-year-plans applied in the Soviet Union resulted in the state undertaking the duty of leadership in industry which had been expected from the private sector until the 1930s. However it was continuously emphasized by the senior administrators of the state that statism, different from the socialism in the Soviet Union, was a special economic order born from the conditions of Turkey. The logic of such an economic order is found in the speech made by Prime Minister İsmet İnönü in August 1930 on the occasion of the opening of Ankara-Sivas railroad:
“…The doctrine of Liberalism is difficult for the whole country to understand. We are in reality, temperate statist in economy. What has driven us towards this direction is the need of the country and the mental tendency of this nation. Everyone and every place looks for a remedy in the treasury. The city which does not have electricity, the place with a bad harbour or the man who cannot find a job all consider the government as an addressee. As temperate statists, we are culpable for not being able to keep up with the inclination and demand of the people. Is it something this country can understand to abandon statism and lead them to expect every blessing from the activities of the financiers?”
The period of 1933-1939, was a time when the efforts of the state itself for industrial production was very intensive with the setting up of various textile and sugar factories, and the construction of railroads. In this respect, it is a period when the core of the establishments, which in our day are called state economic enterprises, were created. In fact, because of the increasing number and growing problems of these establishments, there appeared the necessity to draw a new legal framework for them. In 1938, the law no 3460 was enacted. It was called The Law About the Establishment, Management and Control of Economic Enterprises Whose Capital Was Completely Provided by The State. This law specified the basic rules about these institutions for the following twentyfive years.
Economic Priorities of the War Period
When WW2 started, one of the greatest concerns of the government was meeting the food and clothing requirements of the people and the armed forces. After 1941, there were serious difficulties in the provision of wheat which traditionally played a basic role in the alimentation of Turkish people. The main reason for these difficulties was the decrease in the labour power which would work in agricultural production because a large male population was kept under arms, leading to the drop of grain production; another reason was the fact that wheat-grain import became extremely difficult under the conditions of the war.
The speech made by Prime Minister Refik Saydam in the National Assembly in the beginning of 1941 revealed these difficulties and the urgent economic priorities of the government:” Our greatest effort is to keep the balance in the economic and trading area, to provide food, clothing and fuel which would meet the minimum requirements of Turkish citizens, to take under tight control the transportation and selling business, to increase production to a level above our means and especially to strengthen the fight against profiteering.”
The importance of the economic problems which grew with the threat caused by the war conditions was pointed out in President İnönü’s address to the nation on the occasion of the Republic Day on October 29: “ We are all prepared for difficult duties to protect the integrity of our national will..The remedy for not being mixed up in the great fire, and the first condition for performing our duty honourably if we do get mixed up despite our diligence, is not to forget even for a minute that we live amidst the fire…We have to do a great deal of harvesting, we have to work more than ever in the workplace and in the field.”
Şükrü Saracoğlu, who was appointed as Prime Minister by President İsmet İnönü after Refik Saydam’s passing away in July 1942, said the following about the problem of food in the speech he made at the assembly: “When the war began, the state had a wheat stock of 250 thousand tons. The amount in the hands of the people and the merchants was probably not less than this amount. That means we entered the war years with a stock of 500 thousand tons of wheat. This stock allowed us to live comfortably for only two years. We were quite pressed when we entered the third year. In this year, despite some hundred thousand tons of grain aid by England, which I consider my duty to remember with gratitude in your presence, we had to take very stern and strict limitation measures and we reduced the size of bread which is the staple food of the people. In spite of all these, we are stil unable to eliminate the shortage of bread. The calculations show that we have a deficit of 350 thosand tons only in wheat…”
The insufficiency of production and import to satisfy the consumption made it necessary to apply rationing in bread consumption. Based on the National Protection Law, with the decisions of Council of Ministers, the distribution of bread in the cities was made with ration cards. In the beginning, the amount was 375 grams per day for adults and different amounts were used for children and workers in hard labour. In time, the bread ration was decreased. However, because of the emerging drawbacks, it was decided in the fall of 1942 , to limit the distribution of bread with ration cards to İstanbul and İzmir and to remove the application in other cities.
The insufficiency of wheat stocks brought out the necessity of lowering the quality of bread even before the necessity of rationing. In a Council of Ministers decision published in February 1941, it was decided to produce standardized bread and to mix 15% rye and 30% barley to the wheat used for this purpose. Likewise, in another decision, the state was allowed to appropriate stocks of wheat. In time, this application was generalized to other agricultural products such as cotton and corn.
Naturally, the shortages due to war conditions were not limited to wheat. Increases in the price of many items, especially those that are imported, and shortages and tightnesses in their provision began to be observed. In 1940, the prices of sugar, petrol, tea, tobacco, alcohol, matches, cotton, silk and glass were increased. These price increases were not limited to that year but continued in the following years. Because of the difficulty in the import of fuel oil, limitations were imposed on the use of private and commercial vehicles.
National Protection Law
The tendency and necessity to resort to stringent measures, which were observed in almost every country where there emerged a fight with hardship, shortage, price increases and a tendency for black market brought about by the conditions of war, were also felt in Turkey. National Protection Law no.3780 which was accepted by the TGNA on January 18, 1941, constituted the basic legal means of this necessity. The Law gave the state great authority on a variety of topics ranging from the nationalization of private enterprises by the intervention of the Council of Ministers, to mandatory purchases, imports and determination of maximum sale price. The National Protection Law carried the characteristics of an extraordinary law of extraordinary conditions as it contained restrictions concerning the freedom of labour of workers in addition to the limitations it brought to enterpreneurs. The general framework of the authorization given to the government was drawn in article 1 of the law:
“ Article 1- With the purpose of consolidating the structure of the state economically and financially in extraordinary conditions, the Cabinet Council is given duties and authority within the conditions and ways shown in this law. The extraordinary conditions are as follows:
A- General or partial mobilisation,
B- The possibility of the state to enter the war
C- War between foreign countries that also concerns The Turkish Republic.”
The reluctance of the executives for the enaction of this law was explained by Prime Minister Refik Saydam in a speech he made in February 1941 as follows:
“…The Government left the decision for the application of the National Protection Law to the last minute, that is, it tried to work with normal means as far as possible so as not to disturb normal life. When it was observed that this was not possible, there was no hesitation in taking extraordinary measures.”
With a decree of the Council of Ministers, an Inter-Ministry Coordination Council was formed to control the application of the National Protection Law which began to be executed as of February 1941, to prepare the precautions to be taken and to observe the ones already taken. The council was composed of the Ministers of Finance, Defence, Commerce, Economy, Transport and Agriculture.
Sometime after the Law was begun to be implemented it was deemed necessary to increase the sanctions and with a change made made in December 1941 the punishments stipulated in the National Protection Law were increased.
During the War years because some export items of Turkey carried special importance for armament and the continuation of war efforts they became a critical item in the relations of the Allied and Axis Powers with Turkey. Among these items, chromium attracted the attention because of its place in the production of quality steel. After the war began, although it was announced that the export of chromium to Germany was stopped with a government decision in 1940, this announcement did not satisfy the Allied Powers and especially England complained that although Turkey’s sale of chromium to Allied Powers was greatly decreased, its export of chromium to Germany actually continued and even increased. In the beginning of 1944, the export of chromium to Germany was stopped completely as a result of the increase in the pressure of the Allied Powers.
Pangs of Taxation
In the beginning of WW2, Turkish taxation gained a stable structure with the taxes accepted under the efforts of filling the revenue chasm that was created when the dime levy was removed in 1925. The structure formed by the profit tax in the area of direct taxes, the general consumption tax and the private consumption tax in the area of indirect taxes was completed by land-building taxes, inheritance and transfer taxes, road taxes, levies and charges at the customs.
This tax structure specified in 1920s were basically kept in 1930s, but due to the World Economic Crisis and the increasing threats of war,there was an attempt to complete it at certain points and to correct the failing parts. The profit tax of the wage earners was increased in order to get more tax from the wages, which was seen to be the basic tax assessment before the greatly dropping incomes of the agricultural producers because of the Economic Crisis. A new building and land tax was accepted; new taxes were added to the existing ones under the names of “crisis tax”, “balance tax”, “ help to the air force tax”. Also, the general consumption tax was given a simpler structure when it was understood that the first form caused great application problems.
The public expenditures which increased with the begining of WW2, created new requirements for increase in the incomes of the state. Since it was impossible to make a deep rooted reform in taxation under the extraordinary conditions of the war, the requirement for an increase in the incomes of the state was met on the one hand, by raising the existing tax amounts and on the other hand, by imposing new taxes with somewhat extraordinary qualities. In addition, the Law for The Encouragement of Industry was repealed and the exemptions it provided were removed.
The changes that increased the taxes were the result of the wish to increase the revenue as well as the specific tariffs applied in the indirect taxes. This was because the drop in the general price level, and the decrease in the production and import lead to a decrease in the absolute value of the revenue provided by these taxes. Moreover, the national defence expenses made it necessary to increase the tax revenue not only as an absolute value but also as a ratio of the GNP.
Therefore, almost all taxes were increased with laws no.3828,4040,4041,4226,4415,4430, 4437, 4565, enacted on various dates during the war. These increases in indirect taxes made it impossible to buy some consumption products such as sugar.
The Government also felt the necessity to levy new taxes to provide the revenue which could not be obtained in spite of the tax increases during the war years. Among these, the property tax and the soil products tax left deep marks in the political and economic development of Turkey in the following years.
The Property Tax and the Agricultural Products Tax
It can be said that the thought of transfering to the state some of the increasing wealth of a segment of society that became rich because of the war conditions, as well as meeting the requirements of the state, played a role in the creation of the property tax. This thought is clearly found in President İsmet İnönü’s opening speech of the National Assembly about ten days before the acceptance of the property tax. In this speech on November1,1942, İnönü said:
“…We should remember with pain that for two years, there has been no help from the society for the efforts spent by the Governments of the Republic in organizing the food issues of the nation. So today, the first problem to be solved is to restore the general trust atmosphere. The old knocker farm landlord who considers the troubled times as an opportunity never to be acquired again, the profiteer merchant who dares make, if he could, the air we breathe into a trade commodity, and a few politicians who consider these stringencies as a great opportunity for their political ambition and who act for an unknown foreign nation, have been sabotaging arrogantly the life of a great nation…”
The people who were targeted clearly with these words were those who benefited from the war greatly by profiteering and obtaining great gains. These people constituted the main target of the Law About Property Tax no.4305 which would be created ten days later. This target was stated quite clearly in the first article of the law.
“Article 1- A liability called the Property Tax has been established, for one time only, to be collected over the wealth and extraordinary profit of the owners of wealth and profit.” This law of 17 articles which aimed at subjecting the people whose wealth increased in the extraordinary conditions of the war years, caused a great reaction especially among the businessmen in İstanbul because of the problems in its assessment method and application. The assessment of the tax depended on the decisions of the valuation commissions which were formed by unusual methods, and the contention of unconstitutionality for these decisions was prevented by an article in the law. Since the taxable base and and tax rate were not clearly stated in the law, it was inevitable to be faced with small or large injustices in the valuations. Those who did not or could not pay the tax were sent to the labour camps in Eastern Anatolia. In the years 1942 and 1943, a revenue of 318 million lira was obtained from the assessment of 463 million lira of the Property Tax. The taxpayers’ debts which could not be collected by the state were written off in 1944 with law no.4530. About 2000 taxpayers who could not pay their tax were sent to labour camps in the years 1942-43
Property tax can be considered to have brought a short term solution to the revenue requirement of the state, because the tax revenue of over 300 million lira constituted 35% of the state income of the previous year. However, because of the extraordinary character of the tax this was a short term relief.
Property tax had important results both politically and economically. In fact, establishing a one time tax for extraordinary wealth or increase of wealth under extraordinary conditions such as WW2 could be and has been defended with financial and ethical justifications. At times like these, when a large segment of the society is in financial difficulty, when some people make sacrifices of their blood or their lives, it is not easy to object to the transfer of the wealth of some people who become rich because of the conditions. From this point of view , there was no fault in the thought that led to the creation of a tax such as property tax. However, the points criticised in the application between the years1941-1942 are the mistakes in the organisations related to the imposition and collection of the tax and the fact that the tax method did not include items that would prevent unjust applications.One result of the property tax application was the fact that Turkish –moslim businessmen made their presence felt in business life where until then the weight of the non-moslim capital was greatly felt, by becoming partners with the minorities or partially taking over their businesses.
Another tax which was applied during war years was the Agricultural Products tax. The Government hoped that this tax, which could be considered as the appearance,in a new and more modern form, of the dime levy which was removed in 1925, would be limited to the continuation of the extraordinary conditions. Indeed, the tax which was established in mid-1941 was repealed in 1944 with law no.4553. The duty of the collection of this real tax and the conversion of the product into currency was given to the Agricultural Products Office. Because of this duty and other widespread duties undertaken related to the buying of various agricultural products,the Office soon became an important means of economic policy applications.
The Immediate Aftermath of the War
WW2 ended with the unconditional surrender of Germany on May7,1945, and Japan on August 14, 1945. Before these dates,the TGNA had decided to declare war against these two countries on February 23, 1945. With the extraordinary conditions of the war years left behind, it was time to solve the political and economic problems that had accumulated in those years. The years between 1945 and 1950 passed with the efforts to find solutions to these problems and bring Turkey an effective political-economic structure.
Immediately after the war ended, there appeared some new initiatives that carried great economic importance. It is worth mentioning the law no.4753, for Providing Land for The Farmer, enacted in 1945. This law, just like the property tax, created politically important results with the role it played in political discussions and in the opposition of the Democratic Party.
At the end of WW2, Turkey tried hard not to be left outside the international formations. For this purpose, in 1944 she joined the Bretton Woods Conference which resulted in the establishment of IMF and the World Bank, and in 1945 she joined the San Francisco Conference which founded the United Nations Organisation, and signed the agreements as a founding member. The relations with international organisations would play an increasingly important role in the determination of the political-economic policies of Turkey in the years that followed.
In the few years after the war, there were preparations for important changes in Turkey’s tax structure. These preparations were concluded in 1949 and the profit tax that had remained in force since 1926 was replaced by the income and corporate tax system. ( Laws no. 5421 and 5422) . The Tradesman Tax and the Tax Procedure Laws were also put into force. Thus, the present structure of the Turkish tax system was created in outline. There were attempts to rectify the not- so- successful results of the first years and in spite of the deep-rooted changes of 1961 when these laws were completely reviewed, the foundation of the system kept its form of 1949-50. In time, there were important additions such as the Value Added Tax.
