Nearly a millennia ago, the Europeans laid the groundwork for state financial management for centuries to come with the installations of major financial and banking institutions embedded into the state. And since this shift in economic organization, the craft of financing and money-moving has dominated entire economies and politics within states and across the world. Though the actual details of financing have evolved since the Crusades, the fundamental trends of finance have remained largely the same since colonial times.
Financial machinations of the 1800’s followed the same general trends as those in previous centuries. Joint-stock companies allowed people to pool money into large scale projects, banks provided loans to both states and wealthy individuals, and banks themselves controlled a large enough amount of the economic pie to collapse entire economies if they failed. If anything, the most important trend from the 19th century was the quickening of the rate of financial interactions of these established financial institutions, facilitated by the technological advances of both rail and telegraph. This uptrend, continuing exponentially, has culminated in our current digital system of global finance.
In the 1860’s, the nominally independent state of Khedivial Egypt was under the control of a viceroy, or khedive, of the Ottoman Empire. Loosely controlled by the Ottomans, the Egyptian Empire stretched from present-day Syria to Sudan. For Egypt, as with much of the rest of the Middle East, there was no centuries-long traditions of moneylending institutions. This can be partly attributed to the influences of Arabic and Islamic traditions regarding how contracts were formed, and partly because most of the capital in the economy was already centralized in institutions called waqfs, which were endowments meant to further public works projects. In addition, the common relationship between the moneylender and the receiver was akin to the sharecropping system in the American South, with moneylenders charging exorbitant rates that kept the Egyptian common man, or fellahin, subordinate to the normally state-entwined moneylender. These laws, although they varied from location to location and culture to culture, were at least somewhat standardized to provide communities with the most basic forms of investment.
The rapid expansion of European culture and boundaries during periods of colonization were bound to bring economic changes. Egypt, at the time only beginning to become part of a much larger globalized economic system, entered the international market with force at the beginning of the American Civil War. In the fractured United States, the Union had begun to strangle the cotton export-based cotton industry of the South, and the South’s production had to rapidly grow accustomed to a wartime economy. This created an artificially high demand for Egyptian cotton to fuel the industrialized world of Northern Europe, with the absence of the American South’s King Cotton. With the cash crop money flowing into the hands of the Egyptian Khedivate, who owned nearly half of the land in the kingdom, the monarch began funding an attempt to modernize Egypt into a state worthy of European recognition.
The confusing story of Egypt’s colonization focuses on Isma’il Pasha, the final Pasha of a free Khedivial Egypt, and the overarching economic forces that began to ensnare his nation at the time of his ascension. The Pasha’s rule was tainted from the start as the previous Pashas had left a massive national debt after meddling with European bankers and institutions.
The intrusion of European bankers in the realm of Egypt and the Middle East began with the exporting of international banking systems. Although initially incompatible with the less-advanced financial systems of rural towns, the local financial systems of the Middle East quickly grew (or were forced) to accommodate the new European banks. Centered in the most populous cities such as Istanbul or Alexandria, the European banks took advantage of the aforementioned culturally-based loan systems of exploitation to draw money back to Europe, and out of the hands of Egypt’s ruling and modernizing classes. The interest rates common for the Middle East practices, which could easily reach double-digits, were impossible to charge in the European markets. For the Sultans, Shahs, and Khedives who were notorious money-spenders, the amount of loans being contracted combined with the high interest rates allowed for European banks to make a killing at the expense of the non-European monarchs and the people inhabiting their land.
The straw that broke the camel’s back for the Egyptian monarch was the construction of the Suez Canal. Funded by raising stock, the canal’s main backers included the French, British, and the Khedive himself, who owned almost half of all Egyptian industry. The issues arose with the close of the American Civil War, when the overinflated cotton bubble collapsed in Egypt due to the flooding of the cotton market with crops from both the United States and British Colonial India. With much of the Egyptian treasury in debt due to the costliness of modernization, further short-term loans were taken from European banks, meant to stabilize the monarchy while the international price of cotton was expected to return to the windfall levels of earlier years.
However, the price of cotton never returned to pre-war prices, much to the dismay of both the Egyptian monarchy and the average American cotton farmer. For the Egyptian crown, there was no choice but to continue taking out new loans to pay off the debts of old loans. Compounded with the cost of industrialization, the debts of the Egyptian government grew out of control. A hundred million pounds sterling in debt, the Pasha had no way of defending himself from an internal revolt in 1879 due to economic collapse, or the inevitable foreign intervention that would follow. Both the British and French, under the pretenses of protecting the investments of their banks, forced Egypt to accept financial bondage that included all finances being handled by foreign actors. In addition, the Egyptian crown was forced to sell all its stock in the profitable Suez Canal, allowing the British to take over the project and become majority shareholder. With Europeans in control of Egypt’s finances, Isma’il was deposed in favor of his more malleable son and Egypt became a “veiled protectorate” under British protection, with Egyptian-controlled Sudan becoming a condominium, also controlled by Britain.
The stories of past economic collapse yield the same parables as the ones found in other nations today. Don’t borrow more than you can pay back, always know what you’re investing in, and one of the greatest motivators of international change is the threat of losing an investment wholesale. If anything sets the narrative apart, the story of the rise of Egypt’s single-commodity economy is the perfect example of a bubble, and the economy of the pre-modern state provides an easy-to-understand backdrop for anyone looking to see how heads become clouded when the money seems endless. With many experts highlighting the economic factors that precipitated the Arab Spring, parallels should be recognized when we analyze how Western nations still find themselves meddling in the Middle East on behalf of overarching economic forces, when the real forces for change may be hidden by masses of contracts and investment obligations.