In the Ottoman Empire, economic activities such as Treasury operations, money and credit transactions and trade in gold and foreign currencies were executed by various establishments such as the Treasury, the Mint, jewelers, moneylenders, foundations and guilds. In this organizational structure that prevailed until the second half of 19th century, the Ottoman Empire minted gold coins on behalf of the Sultan.
The Ottoman Empire put cash banknotes (Kaime-i nakdiye-i mutebere) into circulation in 1840.
During the Crimean War, in 1854, the Ottoman Empire, which borrowed from other nations for the first time in history, needed a state bank to assume an intermediary function in the repayment of external debts. As a result, the "Ottoman Bank (Bank-ı Osmanî)", headquartered in London, was established with English capital in 1856. The fundamental powers of the Bank were limited to lending in small amounts, making advance payments to the Government and discounting some 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)" and became 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 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.
The capital of the Imperial Ottoman Bank retained by other nations triggered reactions in time and these reactions laid the foundation for establishing 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, which would have assumed central bank functions.
After the First World War, on account of the global trend of nations to formulate their monetary policies independently by establishing their respective central banks, which would be authorized to issue money, and to reinforce the political independence gained in the War of Independence with economic independence, deliberations about the establishment of a central bank in Turkey gained pace. This issue was first addressed in the 1923 Izmir Economic Congress with a special emphasis on founding a “national state bank”. In 1927, the Minister of Finance, Abdülhalik Renda, submitted a draft bill on the establishment of a central bank.
Following the enactment of the law, Turkey exchanged views with central banks of other countries on establishing the Turkish Central Bank. In 1928, after having been invited to Turkey, Dr. G. Vissering, a member of the De Nederlandsche Bank (Central Bank of Netherlands) Board of Governors, highlighted in his report the necessity for an independent central bank not affiliated to the Government. In 1929, this idea was espoused by Italian expert Count Volpi who 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 was prepared for the Bank 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 in the Official Gazette of 30 June 1930 under the name “The Law on the Central Bank of the Republic of Turkey No. 1715”. Following the centralization of duties carried out by various institutions and organizations, the CBRT started to function on 3 October 1931. The shares of the Bank, which acquired legal status as a joint stock company to manifest that ‘it is not a public entity’ and that ‘it is independent’, were divided into (A), (B), (C) and (D) classes. Class (A) shares belong solely to the Treasury, and, 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; and Class (D) shares are allocated to Turkish commercial institutions and to legal and real persons of Turkish nationality.
According to Law No. 1715, the primary objective of the CBRT was to support economic development of the country. To this end, the Bank was authorized to set rediscount ratios (the main policy instrument), regulate money markets and the circulation of money, execute Treasury operations, and take measures related to the stability of the Turkish currency. The Bank was also vested with the exclusive privilege of issuing banknotes in Turkey. Additionally, the Bank assumed the role of treasurer of the Government. Under the fixed exchange rate regime implemented during that period the Government was the authority that set exchange rates.
The independence of the CBRT and low levels of inflation prevailed during the 1930s, as the Government could not intervene in the Bank’s realm of authority and decisions.
During the1940s, which were dominated by the adverse effects of the Second World War, the CBRT, 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 Bank’s sources, and these sources were rendered available to the public through short-term advances provided to the Treasury. An important development for the CBRT in that period was the establishment of the Banknote Printing Plant in 1955 and from 1957 onwards banknote-printing started in Turkey. With the transition to planned economy in the 1960s, the CBRT continued to provide resources to the public sector by pursuing expansionary monetary policies parallel to the economic circumstances of the time and industrial development. It was during this time that the majority of practices related to foreign exchange control were transferred to the CBRT.
In order to adjust to the global changes that occurred in the aftermath of the Second World War and to enhance the efficiency of the CBRT, the Law on the Central Bank of the Republic of Turkey No. 1211 was accepted on 14 January 1970. Thus, the CBRT, turning a new page in its history, was vested with a new structure in line with, albeit partially, novelties in the field of the economy and central banking of the time. The said Law brought significant changes to the legal status, organizational structure, duties and powers of the Bank. As per the CBRT’s legal status as a joint stock company, its capital was increased from Turkish lira 15 million to Turkish lira 25 million. Furthermore, it was stipulated that the Treasury’s share should not constitute less than 51 percent of the capital.
With Law No. 1211, the "Office of the Governor" was founded to ensure equivalence in terms of international representation, foreign relations and protocol, and Mr. Naim Talu became the first “Governor” to assume this title. Moreover, a new decision-making body composed of the Governor and the Deputy Governors was established under the name of the Executive Committee. This top-level decision-making body of the Bank, the Board of Directors, which consisted of eight members, was transformed into the "Board" of the Bank, consisting of six members. Besides, 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 "Head Office".
The said Law also introduced significant changes in terms of enhancing the Bank’s duties and powers. First of all, the CBRT’s control over direct and indirect monetary policy instruments was extended and the Bank was authorized to conduct open market operations to regulate money supply and liquidity. Meanwhile, it was decided that the Government would consult the Bank while taking measures with respect to money and loans. The Bank was authorized, through rediscount transactions, to lend medium-term loans to support investments and economic development. The upper limit for short-term advances to the Treasury was increased to 15 percent of budget allocations pertaining to the respective year.
The 1980s saw important developments that might be described as a turning point for both the Turkish economy and the CBRT. The decisions of 24 January 1980 sparked a structural transformation in the Turkish economy. Price controls were abandoned so that prices would be formed within the framework of market mechanisms, and a policy of free trade was adopted. With the launch of the financial liberalization process, important steps were taken to ensure the necessary infrastructure for implementation of monetary and exchange rate policies in compliance with the market economy. In the same period, it was decided that interest rates on deposits and loans would be determined by market conditions. Furthermore, 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 effectively. 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 CBRT started to conduct 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 units 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 requirement of the market without endangering the stability of exchange rates and interest rates. The targets announced in 1990 were achieved; yet, problems such as the pressure of the Gulf War on the financial sector, political instability, lax financial 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’s sources, coincide with this period. On 21 April 1994, limitations were imposed on the Treasury’s use of CBRT funds; and with the protocol signed between the Bank and the Treasury in 1997, it was concluded that the Treasury would not use short-term advances from the CBRT from 1998 onwards.
In the 1995-1999 period, the CBRT followed policies geared towards ensuring stability in the financial markets. A period of uncontrollable inflation paved the way for the adoption, in the year 2000, of a new, exchange rate based stability program. However, amid the aggravating loss of confidence in the economy that emerged by the end of 2000 and the crisis that broke out in mid-2001, the said program ceased to be implemented and the free floating exchange rate regime was adopted on 22 February 2011.
Following the crisis, the Turkish economy underwent a structural transformation. During this process, significant amendments were made to the CBRT Law on 25 April 2001; above all, it was explicitly described in the Law that the primary objective of the CBRT was to achieve and maintain price stability. Within this scope, it was stipulated that the Bank would at its own discretion determine the monetary policy that it would implement and the monetary policy instruments that it was going to use; thus, the Bank was vested with “instrument independence”. Moreover, the Law also stipulated that the Bank would support the growth and employment policies of the Government without conflicting with the objective of achieving and maintaining price stability. Besides, achieving financial stability was described as the supportive objective of the Bank. Furthermore, the Law prohibited the Bank from granting advances and extending credits to the Treasury and to public establishments and institutions, and from being a purchaser, in the primary market, of debt instruments issued by the Treasury and public establishments and institutions. Thus, the utilization of Bank funds for the purpose of public finance was prevented. Within the scope of the amendment to the Law, the Monetary Policy Committee was established so as to institutionalize monetary policy strategies and decision-making mechanisms.
In 2002, the CBRT adopted a modern monetary policy strategy, namely the “inflation targeting regime”. During the implementation of the implicit inflation targeting regime of the 2002–2005 period, the Bank tried to lay the basis for the regime by ensuring the necessary pre-conditions, strengthened its technical and institutional 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 set up to ensure the effectiveness of communications policies.
From 2005 onwards, the Monetary Policy Committee started to announce in advance its program of meetings to increase predictability of policy decisions. The outcome of this entire process was the explicit inflation targeting regime that started to be implemented in 2006.
Upon achieving some progress in the disinflation process, a two-stage monetary reform was launched in order to emphasize the Bank’s determination in its efforts, 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 (YTL) and coins of the New kuruş (YKr) were put into circulation from 1 January 2005 onwards.
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.
Following the global crisis, increased volatility in risk appetite and short-term capital flows, accompanied by the growing awareness regarding financial stability, led the central banks to seek alternative policies. In this context, the CBRT has gradually introduced a new monetary policy framework as of late 2010 through modifying the inflation targeting regime. The new framework treats financial stability as a supplementary objective without prejudice to price stability. In line with this, the CBRT uses a set of instruments including the interest rate corridor, reserve requirements and the Reserve Option Mechanism.
As of today, the CBRT, as a credible institution, pursues its policy implementations with its highly qualified members of staff and modern infrastructure within an ever-dynamic framework by keeping a close watch on global and domestic developments.