CHAPTER V

PEACEFUL PENETRATION PROGRESSES

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]

THE BANKERS’ INTERESTS BECOME MORE EXTENSIVE

The years 1904 to 1909 were lean years, judged by actual progress in the laying of rails from Bulgurlu to Bagdad and Basra. Nevertheless, they were years characterized, on the part of the investors interested in the consummation of the great enterprise, by every possible activity to prepare the way for eventual success on a grand scale. In the spring of 1906, for example, Dr. Karl Helfferich was appointed assistant general manager of the Anatolian Railways, and one year later was elected a managing director of the _Deutsche Bank_ with general supervision over all of the Bank’s railway enterprises in the Near East. The appointment of Dr. Helfferich—who, although he was only thirty-four years of age, had achieved an international reputation—aroused widespread comment and turned out to be an event of first-rate importance in the history of the Bagdad Railway. As a young professor of political science in the University of Berlin, Dr. Helfferich won general recognition as an unusually able economist. He was persuaded to enter the Government service in 1901 and became assistant secretary in the Colonial Department of the Ministry of Foreign Affairs. He was known to be in the good graces of the Emperor and of Prince von Bülow, and it was said that he became their chief adviser on Near Eastern affairs.[14] The choice of such a distinguished person as directing genius of the Anatolian and Bagdad Railways gave renewed confidence in Germany that the Bagdad plan would succeed. In Great Britain the appointment was considered an ominous sign that a very real connection existed between the economic enterprises of the _Deutsche Bank_ and the Near Eastern activities of the German Foreign Office.[15]

In 1907 the Anatolian Railway Company, under a contract with the Turkish Government, completed arrangements for the irrigation of the desert plain southeast of Konia. It was planned to water artificially about one hundred and fifty thousand acres of arid land, thus rendering the region independent of weather conditions. The effects of such an improvement would be far-reaching. Much idle land would be made available for profitable farming, and the yield of soil already under cultivation would be developed materially. Increased production might lead to a surplus of agricultural products for export, and the greater purchasing power of a prosperous Anatolian farming class would stimulate import trade. Agriculture, commerce, and manufacturing alike, therefore, could be served. The Anatolian Railway Company issued some 135,000 new shares of stock to defray its part of the expenses, hoping to be richly compensated by increased traffic on the railway. The Imperial Ottoman Treasury issued £800,000 of Konia Irrigation Bonds, an outlay which it hoped to offset by increased taxes from the Konia district, by rentals and sales of irrigated lands, and by decreased guarantees to this section of the railway.[16]

A number of German banks, meanwhile, were pushing their financial operations in the Near East. The success of the _Deutsche Palästina Bank_[17] encouraged the formation of other similar institutions. The _Nationalbank für Deutschland_, in 1904, founded the _Banque d’Orient_, with offices in Hamburg, Athens, Constantinople, Salonica, and Smyrna. The following year the _Dresdner Bank_, in coöperation with other large Austro-German financial institutions, inaugurated the important _Deutsche Orientbank_, with a capital stock of sixteen million marks. This latter bank took over the Hamburg and Constantinople offices of the _Banque d’Orient_ and established a large number of branches of its own, including those at Alexandria, Cairo, and Smyrna. The _Deutsche Orientbank_ became an active promoter of industrial enterprises in Asiatic Turkey; for example, in 1908 it organized _La Société pour Enterprises Electriques en Orient_, a company which proceeded to take over the surface railways as well as the electric light and power concession of Constantinople. In 1908 the _Deutsche Bank_ itself formally opened an office in Constantinople for the transaction of a general banking business.[18]

The entry of these German banks into the Near Eastern field was of no small importance to the British and French financial institutions already there. The German bankers allowed liberal rates of interest on time and check deposits and permitted reasonable overdrafts at low rates. These practices were in sharp contrast with the rigid regulations of the older-established banks. The _Deutsche Bank_ undertook to collect claims of local merchants against the Turkish Government; through its influence in the Government departments it cut red tape and secured payments which otherwise might have been delayed for years. Constantinople business men welcomed their emancipation from the ultra-conservative methods of the older institutions, and it was not long before a very thriving business was being transacted by the German banks and their agencies in the Near East.[19] Here was a high-powered bomb to disturb the quiet which heretofore had ruled in the banking community of Constantinople and of Asiatic Turkey. Germans were disturbing the financial, as well as the commercial and industrial, _status quo_ in the Near East!

The advance of the German banks in Turkey was almost certain to be the first step in a more general industrial and commercial penetration. This will be the more readily understood if one recalls the close coöperation which characterized the relationships between the German banks and the business interests of the empire. This coöperation which amounted, in effect, to financial interdependence—was one of the striking features of the German economic advance in the generation before the Great War. It strengthened German industrial enterprises at home and promoted German trade and investments abroad. If a great business needed capital, the banks furnished the necessary funds by the purchase of securities which made them at once creditors and copartners in that business. Sooner or later this connection would find expression in the appointment of a representative of the bank on the supervisory council of the industrial enterprise; occasionally a “captain of industry” would be elected to the board of directors of the bank. Although this procedure of interlocking directorates was not unique to Germany—it was an established practice in the United States, certainly—there was no country in which these alliances were so far-reaching, or in which financial power was so centrally controlled, as in the German Empire. In Germany finance and industry were wedded—permanently united for better or for worse.[20]

Of this alliance of banking and business the _Deutsche Bank_, chief promoter of the Bagdad Railway, was a shining example. Its industrial connections were too numerous to catalogue. It enjoyed intimate financial relations with hundreds of companies engaged in every important branch of manufacturing in Germany; it was represented on the directorates of the North German Lloyd and Hamburg-American steamship lines; it was the organizer of and chief stockholder in the German Petroleum Company. It was the owner of a number of overseas banking corporations stretching their activities from South America on the west to China on the east. The officers of the _Deutsche Bank_ firmly believed that the export of capital and the export of commodities should go hand in hand. The other banks associated in the Bagdad Railway enterprise likewise were closely affiliated with important industrial enterprises. For example, the _Dresdner Bank_ held the vice-chairmanship of Ludwig Loewe & Company, prominent manufacturers of munitions, and the chairmanship of the Orenstein Koppel Company, manufacturers of railway supplies. The _Bank für Handel und Industrie_ possessed interests in the _Allgemeine Elektrizitäts-Gesellschaft_, the German General Electric Company. A still further evidence of this close association of financial and industrial interests was furnished in January, 1905, when the chief German banks entered into a “community of interests” with August Thyssen and Hugo Stinnes, the steel and coal barons of Germany.[21]

If German business men were likely to be interested in the economic development of Asia Minor, what was the nature of this interest?

BROADER BUSINESS INTERESTS DEVELOP

Speaking to the Reichstag in March, 1908, Baron von Schoen, Foreign Secretary of the Empire, explained a few of the opportunities which the Bagdad Railway opened to German industry and commerce. “The advantages,” he said, “which accrue to Germany from this great enterprise, conceived on a grand scale, are obvious. In the first place, there arises the prospect of considerable participation of German industry in the furnishing of rails, rolling stock, and other railway materials. Furthermore, German engineers, German construction workers, and German contractors are very likely to find remunerative occupation in the construction of the railway. Finally, it is certain that with the rising civilization and the higher standard of living of the inhabitants of the country, a new market will be made available. That this territory will be opened up not merely for us, but also for other nations, we can allow without envy.... What we have in view is the development of regions that seem to be worth developing; we wish to coöperate in awakening from a sleep of a thousand years an ancient flourishing civilized region, thereby creating a new market for ourselves and others.”[22]

This same idea had been advanced by others on other occasions. The _Alldeutsche Blätter_ of December 17, 1899, had prophesied that the construction of the railway by a German-controlled syndicate would result in the purchase of some eighty million dollars’ worth of German products and that, once completed, the railway would open to German business an enormous and wealthy market. Lord Ellenborough, speaking in the House of Lords of the United Kingdom, on May 5, 1903, expressed the opinion that “the capital disbursed in constructing the railway would be largely spent on German steel industries, and on salaries to German engineers and German surveyors, so that even if the railway, as a railway, were a failure, it would not be a total loss to Germany.”[23] The British Consul General at Constantinople pointed out, in 1903, that, in addition to all of the aforementioned advantages, there would be innumerable special opportunities for the remunerative investment of German capital in the regions traversed by the railway.[24]

Events seemed to establish the wisdom of these expressions of opinion. Rails for the Bagdad line were ordered in Germany from the Steel Syndicate (_Stahlwerksverband_). Transportation of materials from Europe to the Near East was arranged for through German steamship companies. German engineers were given the executive positions in the construction and operation of the railway. Important subsidiary companies were formed for the construction of port and terminal facilities, for the building of irrigation works, and for other purposes incidental to the railway proper. German banks established branches on the ground in order to take advantage of other opportunities for the profitable investment of surplus funds.[25]

There was much evidence, however, to indicate that the preëminently German character of the railway was not preserved. An English observer, after a trip over the Anatolian lines in 1908, wrote that he noted a great predominance of Turkish, Greek, and Italian employees over the Germans. “The fact is,” he maintained, “that the people who run the line, though Germans, care first for their own pockets and next for Germany. They buy or employ what is cheapest and most suitable and do not care a finger-snap for the origin of an article or a servant. Patriotism occupies a small place in the calculations of promoters. The tendency to deal with the Fatherland must always be strong, but it is founded chiefly on the fact that the German knows the goods available in his own country better than the goods of other countries and that credit and banking facilities are more easily obtained at home. The master impulse in every German engaged in business in Turkey, as in business men of every other nationality, is to make money for himself as soon as possible.” This same observer pointed out that there was an astonishing absence of German employees in even the more responsible positions of the Anatolian Railway and that the great majority of the unskilled laborers were Italians.[26]

Ultra-patriotic Germans, furthermore, denounced Dr. von Gwinner and his associates for not making the Bagdad Railway an exclusively Teutonic enterprise. A speaker at a Berlin branch of the Pan German League had this to say of the situation: “The Bagdad Railway, which in its origins was entirely German, has, thanks to the criminal negligence of the _Deutsche Bank_, become almost wholly French. The German schools along the line of the Railway, which were established by von Siemens, have fallen into decay. The officials of the Railway speak French. The ordinary language for transacting the business of the Railway is French, although the French share of the capital is only thirty per cent. The German engineers may as well be called home to-day as to-morrow.”[27]

Nevertheless, the rapid expansion of German financial interests in the Near East and the established policy of the German banks to encourage and assist export trade were factors in a remarkable development of German trade in the Ottoman Empire, as will be indicated by the following table:[28]

EXPORTS FROM IMPORTS TO TURKEY TO TURKEY FROM YEAR GERMANY—MARKS GERMANY—MARKS

1900 30,400,000 34,400,000 1901 30,000,000 37,500,000 1902 36,500,000 43,300,000 1903 37,700,000 50,200,000 1904 43,500,000 75,300,000 1905 51,600,000 71,000,000 1906 55,000,000 68,200,000 1907 55,100,000 81,500,000 1908 47,600,000 64,000,000 1909 57,300,000 78,900,000 1910 67,400,000 104,900,000 1911 70,100,000 112,800,000

This table eloquently describes the nature of the advance of German economic interests in Turkey. It does not, however, tell the whole story. Was this advance the result of a general increase of prosperity in the Ottoman Empire in which the Germans shared in common with other traders? Or was the increase in German trade out of proportion to the progress of other nationals—perhaps at the expense of the French and British? The following tables will help answer these questions:[29]

EXPORTS FROM TURKEY TO UNITED TO AUSTRIA KINGDOM TO FRANCE TO ITALY HUNGARY YEAR MARKS MARKS MARKS MARKS

1900 118,760,000 86,220,000 22,520,000 35,220,000 1901 122,000,000 26,120,000 31,540,000 1902 130,520,000 83,040,000 28,980,000 35,580,000 1903 127,400,000 81,200,000 38,120,000 39,900,000 1904 122,760,000 73,120,000 31,300,000 39,120,000 1905 118,960,000 80,780,000 42,240,000 37,640,000 1906 129,440,000 91,600,000 45,100,000 39,300,000 1907 136,600,000 95,320,000 50,480,000 34,640,000 1908 109,220,000 70,760,000 44,580,000 34,360,000 1909 109,320,000 79,000,000 59,080,000 36,600,000 1910 100,660,000 77,000,000 48,000,000 43,340,000

IMPORTS TO TURKEY FROM FROM UNITED FROM AUSTRIA KINGDOM FRANCE FROM ITALY HUNGARY YEAR MARKS MARKS MARKS MARKS

1900 102,920,000 29,800,000 29,720,000 53,440,000 1901 128,220,000 37,880,000 43,800,000 57,100,000 1902 123,980,000 37,200,000 40,400,000 61,380,000 1903 114,020,000 36,640,000 45,360,000 65,120,000 1904 151,960,000 40,880,000 53,280,000 77,600,000 1905 139,300,000 42,420,000 57,200,000 76,660,000 1906 167,040,000 47,300,000 70,900,000 92,620,000 1907 147,380,000 46,380,000 63,040,000 89,920,000 1908 145,260,000 51,600,000 58,700,000 69,240,000 1909 156,280,000 54,600,000 67,740,000 77,040,000 1910 177,160,000 58,400,000 94,000,000 107,300,000

Certain important conclusions may be drawn from these statistics:

1. British trade continued during the decade 1900–1910 to dominate the Near Eastern market. With total imports and exports in the latter year of over 277,000,000 marks it was in no immediate danger of being outstripped by its nearest rivals—a German trade of about 172,000,000 marks and an Austro-Hungarian trade of about 150,000,000 marks.

2. France, whose Near Eastern trade in 1900 had proudly held a position second only to that of the United Kingdom, was being obliged to accept a less prominent place in the economic life of the Ottoman Empire. During the first ten years of the new century French merchants obviously were being outmaneuvered by Germans, Austro-Hungarians, and Italians. In spite of a total increase of 17% in exports and imports between France and Turkey it was apparent that French trade was not keeping the pace; during the same period Austro-Hungarian trade showed an increased valuation of 81%, German trade of 166%.

3. Although it continued to dominate the Near Eastern market, British commerce, likewise, was losing ground. Between 1900 and 1910 it showed an increase of only 25% as compared with the Italian record of 172% during the same period. During the decade British exports, although showing an increased valuation, fell off from 35% to 22–1/2% of the total import trade of Turkey; for the same period German exports achieved not only an absolute gain of almost eighty million marks, but also a relative increase from 2–1/2% to 11–1/2% of the whole.

4. The advance of German trade was not equal to the advance of Italian trade in the Ottoman Empire during the same period. This explains, in part, the rapidly increasing political interest of Italy in the Near East and seems to set at rest the notion that the Germans acquired a stranglehold on exports and imports from and to Turkey.

5. Looking at the question from a purely political standpoint, one’s attention is struck by the fact that commercial laurels in the Ottoman Empire were going to the nationals of the Triple Alliance powers. Economically, Turkey was leaning toward the Central Powers. Few international alliances are not based upon coincidence of economic interests; it appeared that a solid foundation was being laid for the eventual affiliation of Turkey with the Triple Alliance.

SEA COMMUNICATIONS ARE ESTABLISHED

Exports and imports, however, are not the only items which enter into the international balance sheet. As has been so amply demonstrated in the experience of the British Empire, ocean freights may constitute one of the chief items in the prosperity of a nation which lives upon commerce with other nations. It was not surprising, therefore, that upon the heels of German banks and German merchants in the Near East closely followed those other great promoters of German economic expansion, the steamship companies. The success of the _Deutsche Levante Linie_, established in 1889,[30] indicated that there was room for additional service between German ports and the cities of the Aegean and the Mediterranean. Accordingly, in 1905, the Atlas Line, of Bremen, inaugurated a regular service from the Baltic to Turkish ports. One line was to ply between Bremen and Smyrna, with Rotterdam, Malta, Piraeus, Salonica, and Constantinople as ports of call. Another of this same company’s lines was to carry freight and passengers from Bremen to the Syrian city of Beirut. During the same year the North German Lloyd was responsible for the formation of the _Deutsche Mittelmeer Levante Linie_, providing service between Marseilles and Genoa and Smyrna, Constantinople, Odessa, and Batum.[31] The considerable increase of trade between Germany and Turkey made a very real place for these lines, especially in the transportation of such commodities as could not be expected to bear the heavy charges of transportation by rail through the Balkans and overland to German cities. These lines were put into operation to provide for a traffic already in existence and waiting for them.

Such was not the case, however, with the establishment of German steamship service to the Persian Gulf. Here British trade had been dominant for centuries. The German railway invasion had not as yet reached Mesopotamia, and German trade in this region was negligible. The establishment of a German steamship service to Basra would be equivalent to the throwing out of an advance guard and reconnaissance expedition on behalf of German trade. Incidentally it would mean the destruction of the practical monopoly which had been enjoyed by the British in the trade of Irak. It was considered of no slight importance, therefore, when, in April of 1906, the Hamburg-American Line announced its intention of establishing a regular service between European ports and the Persian Gulf. An office of the Company was immediately opened at Basra, and in August the first German steamer, with a German cargo, made its way up the Shatt-el-Arab. Soon afterward the Hamburg-American Line inaugurated, also, a service between British ports and Mesopotamia, and it provided a regular schedule of sailing dates, a luxury to which merchants doing business in the Near East had not heretofore been accustomed. With the aid of a government subsidy the German company cut freight rates in half. This rude disturbance of the _status quo_ in the shipping of the Persian Gulf dealt a severe blow to British companies engaged in the carrying trade between European ports and Mesopotamia. After a futile rate war the British lines, represented by Lord Inchcape, came to an agreement, in 1913, with their German competitors, ending a rivalry which had been the cause of considerable concern on the part of their respective foreign offices.[32]

In order to coöperate with the attempts of Germans to have a share in the trade of the Mesopotamian valley, the German Government established a consulate at Bagdad in 1908. The services of this consulate, supplementing the pioneer work of the Hamburg-American Line, had immediate results in the development of commercial relationships with the Land of the Two Rivers. The value of exports from Basra to Germany increased from about half a million dollars in 1906 to slightly in excess of a million dollars in 1913; German goods received at Basra during the same period increased from about half a million dollars to almost nine million dollars. Herr von Mutius, the German Consul at Bagdad, conducted an active campaign of education and propaganda, urging upon business men at home the importance of participating further in the development of the economic resources of the land of the Arabs.[33]

The establishment of steamship communication between Europe and Asiatic Turkey was welcomed by the Bagdad Railway Company. To widen the scope of usefulness—and, consequently, to increase the revenues—of the railway it was essential that every feeder for freight and passenger service be utilized. This was a consideration in the agreement with the Smyrna-Cassaba line and in the purchase, in 1906, of the Mersina-Tarsus-Adana Railway.[34] The establishment of connections with the former system developed a satisfactory volume of traffic with Smyrna. The acquisition of the latter line provided direct connections with the Mediterranean coast.

Nevertheless, the promoters of the Bagdad Railway were by no means satisfied with their terminal ports. Constantinople was at a disadvantage as compared with Smyrna in the trade of Anatolia. Smyrna was within reach of the Bagdad system only over the tracks of a French-owned line which might not always be in the hands of well-disposed owners. The prospects that the Railway soon would reach Basra were not very bright. Mersina was limited in its possibilities of development—shut off by the mountains from Anatolia, on the north, and Syria, on the south, it was the natural outlet only for the products of the Cilician plain.

The port which the company sought to bring under its control was Alexandretta, on the Mediterranean, seventy miles from Aleppo. Article 12 of the concession of 1903 assured preference to the Bagdad Railway Company in the award of a “possible extension to the sea at a point between Mersina and Tripoli-in-Syria.” The construction of a branch from the main line to Alexandretta would provide the Railway with sea communications for the valuable trade of northern Syria and the northern Mesopotamian valley, then almost entirely dependent upon the caravan routes centering in Aleppo. Accordingly, negotiations were begun in the spring of 1911 looking toward the building of a branch line to Alexandretta and the construction of extensive port facilities at that harbor.

Serious financial difficulties were encountered, however, in the promotion of this plan. The Young Turk budget of 1910 had announced that no further railway concessions carrying guarantees would be granted. Even had the Government been disposed to depart from its avowed intention, it would have been unable to do so. Suffering from the usual malady of a young government—lack of funds—it was running into debt continually and finding it increasingly difficult to borrow money. Early in 1911 the Imperial Ottoman Treasury addressed a request to the Powers for permission to increase the customs duties from eleven to fourteen per cent. _ad valorem_. Great Britain immediately announced its determination to veto the proposed revision of the revenues, unless the increase were granted with certain important qualifications. Sir Edward Grey informed the House of Commons, March 8: “I wish to see the new régime in Turkey strengthened. I wish to see them supplied with resources which will enable them to establish strong and just government in all parts of the Turkish Empire. I am aware that money is needed for these purposes, and I would willingly ask British trade to make sacrifices for these purposes. But if the money is to be used to promote railways which may be a source of doubtful advantage to British trade, and still more if the money is going to be used to promote railways which will take the place of communications which have been in the hands of British concessionaires [_i.e._, the Lynch Brothers], then I say it will be impossible for us to agree to that increase of the customs duty until we are satisfied that British trade interests will be satisfactorily guarded.”[35] This clear pronouncement of British policy made it plain that no increased Turkish customs revenues could be diverted to the proposed Alexandretta branch. It was even doubtful if further funds would be forthcoming for the construction of the main line beyond El Helif.

This complicated domestic and international situation led to the conventions of March 21, 1911, between the Imperial Ottoman Government and the Bagdad Railway Company. One of these conventions provided for the construction of a branch line of the Bagdad Railway from Osmanie, on the main line, to Alexandretta, but without kilometric guarantee or other subsidy from the Turkish Government. A second convention leased for a period of ninety-nine years to the Haidar Pasha Port Company the exclusive rights of constructing port and terminal facilities at Alexandretta—including quays, docks, warehouses, coal pockets, and elevators. As in the case of the Bagdad Railway itself, public lands were to be at the disposal of the concessionaires without charge, and private lands were to be subject to the law of expropriation if essential for the purposes of the Company. Within the limits of the port the Company was authorized to maintain a police force for the maintenance of order and the protection of its property.[36]

Because of the refusal of the Powers to permit an increase in the customs, the Turkish Government was unable to assign further revenues to the payment of railway guarantees. The Bagdad Railway Company thereupon agreed to proceed with the construction of the sections from El Helif to Bagdad without additional commitments from the Imperial Ottoman Treasury. The Company likewise renounced its right to build the sections beyond Bagdad, including its concession for the construction of port works at Basra, with the proviso, however, that this section of the line, if constructed, be assigned to a Turkish company internationally owned and administered.[37] This surrender by the Bagdad Railway Company of its rights to the pledge of additional revenues by the Ottoman Treasury and its surrender of its hold on the sections of the railway beyond Bagdad are by far the most important provisions of the conventions of March 21, 1911.

German opinion, as a whole, considered these self-denying contracts of the Company an indication of the willingness of the _Deutsche Bank_ and the German Government to go more than half way in removing diplomatic objections to the construction of the Bagdad Railway.[38] There were Englishmen, however, who felt that the conventions of 1911 were a mere gesture of conciliation; in their opinion the renunciation of these important rights was bait held out to win foreign diplomatic support and to induce the participation of foreign capital in the Railway and its subsidiary enterprises. Lord Curzon, for example, expressed to the House of Lords his belief that technical and financial difficulties made it impossible for the German bankers to proceed with the construction of the Bagdad line without the assistance of outside capital. He was firmly of the opinion that no railway stretching from the Bosporus to the Gulf could be financed by a single Power.[39]

The unsettled political conditions in Turkey, meanwhile, had delayed, but not halted, construction of the Bagdad Railway. The years 1910 and 1911 were marked by progress on the sections in the vicinity of Adana. From that Cilician city the railway was being laid westward to the Taurus Mountains, eventually to pass through the Great Gates and meet the tracks already laid to Bulgurlu. Eastward the line was being constructed in the direction of the Amanus mountains, although there seemed to be little chance for an early beginning of the costly tunneling of the barrier. During 1911 and 1912 attention was concentrated on the building of the sections east of Aleppo, which in 1912 reached the Euphrates River. The branch line to Alexandretta was completed and opened to traffic November 1, 1913.[40] Financial difficulties in the way of further construction of the main line were overcome in the latter part of 1913, when the _Deutsche Bank_ disposed of its holdings in the Macedonian Railways and the Oriental Railways to an Austro-Hungarian syndicate. The funds thus obtained were re-invested in the Bagdad Railway, and the necessity was obviated for a further sale of securities on the open market.[41] In 1914 the Amanus tunnels were begun, a great steel bridge was thrown across the Euphrates, the sections east of Aleppo were constructed almost to Ras el Ain, in northern Mesopotamia. In addition, rails were laid from Bagdad north to Sadijeh, on the Tigris, before the outbreak of the Great War.[42]

Thus far we have considered the Bagdad Railway almost entirely as a business undertaking. In its inception, in fact, it was generally thus regarded throughout Europe. As time passed, however, the enterprise overstepped the bounds of purely economic interest and entered the arena of international diplomacy. The greatest usefulness of the Bagdad Railway was in the economic services it was capable of rendering the Ottoman Empire and, further, all mankind. Its widest significance is to be sought in the part it played in the development of German capitalistic imperialism. Its greatest menace was its consequent effects upon the relations between Turkey, Germany, and the other Great Powers of Europe. The succeeding chapters will deal with the political ramifications of the Bagdad enterprise.

BIBLIOGRAPHICAL AND EXPLANATORY NOTES

[1] Dr. Arthur von Gwinner (1856- ) is one of the most distinguished of modern financiers. He was born, appropriately enough, at Frankfort-on-the-Main when that city was a center of international finance. His father, a lawyer, was an intimate friend of Schopenhauer and the latter’s executor and biographer. In 1885 young Gwinner married a daughter of Philip Speyer and thus became a member of one of the famous families of bankers in Europe and America. For a time he conducted a private banking business in Berlin, but in 1894 he became an active director of the _Deutsche Bank_. Two years later he was sent to America to supervise the reorganization of the Northern Pacific Railway by its European creditors; and while he was in the United States, he formed lasting friendships with J. Pierpont Morgan and James J. Hill. In 1901 he succeeded Dr. von Siemens as the guiding spirit of the _Deutsche Bank_, which under his administration made even more remarkable progress than under his capable predecessor. As managing director of the _Deutsche Bank_ he became president of the Anatolian and Bagdad Railway Companies. It was in 1909 that Dr. von Gwinner’s father received from the Kaiser the patent of hereditary nobility—an honor said to have been intended as much for the distinguished son as for the distinguished sire. Intellectually, Dr. von Gwinner is an international man: he quotes Dickens and Shakespeare and Molière, Goethe and Schiller and Lessing, with almost equal facility. His delightful personality stands out in all the Bagdad Railway negotiations.

[2] _Infra_, Chapter IX. The French bankers also shared in the ownership of the construction company. A. Géraud, “A New German Empire: the Story of the Bagdad Railway,” in _The Nineteenth Century_, Volume 75 (1914), p. 967; _Report of the Bagdad Railway Company_, 1903, pp. 4, 8.

[3] Among the German members were Dr. von Gwinner; Dr. Karl Testa, representative of the German bondholders on the Ottoman Public Debt Administration; Dr. Alfred von Kaulla, a director of the _Württembergische Vereinsbank_, and original concessionaire of the Anatolian Railways; Dr. Karl Schrader, a member of the Reichstag; Dr. Kurt Zander, general manager of the Anatolian Railway Company. The directors nominated by the French interests were Count A. D’Arnoux, Director General, and M. Léon Berger, French member, of the Ottoman Public Debt Administration; MM. J. Deffes, G. Auboyneau, P. Naville, Pangiri Bey, and A. Vernes, of the Imperial Ottoman Bank, the last-named being vice-president of the Bagdad Railway Company; M. L. Chenut, a member of the Ottoman _Régie Générale de chemins de fer_. The Turkish members of the Board were Hamdy Bey, representative of the Ottoman bondholders on the Public Debt Administration; Hoene Effendi, under-secretary in the Ministry of Posts and Telegraphs; and two Constantinople bankers. The Swiss were Herr Abegg-Arter, president of the _Schweizerische Kreditanstalt_, of Zurich, and M. A. Turrettini, of _L’Union financière de Genève_. The Austrian was Herr Bauer, of the _Wiener Bankverein_, and the Italian was Carlo Esterle, of the Italian Edison Electric Company, of Milan. There were few important changes in the personnel of the Board of Directors between 1903 and 1914, perhaps the most notable being the election of Dr. Karl Helfferich, in 1906. _Cf._ _Reports of the Bagdad Railway Company_, 1903, _et seq._

[4] _Cf._ _Parliamentary Debates, House of Commons_, fourth series,