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Interest Rates and Foreign Capital in Egypt Under British Occupation

Published online by Cambridge University Press:  03 March 2009

Bent Hansen
Bent Hansen
Affiliation:
Professor of Economics, University of California at Berkeley, Berkeley, California 94720.
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Abstract

My archival studies in Egyptian banks reveal that nominal interest rates charged by foreign financial capital in Egypt fell strongly as compared with European rates throughout the period 1882–1914. Interest differentials declined by 2 to 2 ½ percent. This is explained by the increasing confidence of European investors with British occupation and policies. To explain the large inflow of financial capital after 1900 a sharp decline in real interest rates, related to the upsurge of agricultural prices, is posited. The case offers interesting parallels to present-day problems of excessive indebtedness in Third World countries.

Type
Articles
Information
The Journal of Economic History , Volume 43 , Issue 4 , December 1983 , pp. 867 - 884
Copyright
Copyright © The Economic History Association 1983

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References

He wishes to acknowledge his indebtedness to M.Abdel Moneim Roushdy, General Manager, National Bank of Egypt, Cairo, and Ali Sabri Yassin, Chairman of the Board of Directors of Crédit Foncier Egyptien, Cairo, for giving him access to archival material in the banks and in various ways being helpful with practical matters. Employees in the banks were extremely cooperative, in particular George Abboud, who compiled interest series and other information in Crédit Foncier. The National Library of Egypt (dar el kotub) kindly gave him access to its stacks. The research was supported by NSF Grant SOCSES80-06214. Points raised by an anonymous referee are gratefully acknowledged.

1 Landes, David S., Bankers and Pashas (Cambridge,Massachusetts, 1968) concentrates on the crucial period 1860–1866 when Egyptian public borrowing got out of hand. A popular general description of the policies of Ismail and the operations leading up to the final consolidation of the Egyptian public debt in 1879 can be found inGoogle ScholarMarlowe, John, Spoiling the Egyptians (London, 1974).Google Scholar

2 Landes, Bankers, Table 2, pp. 339–40; Marlowe, Spoiling the Egyptians, p. 173.Google Scholar

3 Hawtrey, R. G., A Century of Bank Rate (London, 1938), Appendix 1 and 2.Google Scholar

4 Owen, Roger, The Middle East in the World Economy, 1800–1914 (London, 1981), chaps. 4 and 5;Google ScholarIssawi, Charles, An Economic History of the Middle East and North Africa (New York, 1982), chap. 4.Google Scholar

5 Annuaire Statistique de l'Egypte, 1914 (Cairo, 1914). One Egyptian pound, £E, was at par equal to pound sterling 1.026.Google Scholar

6 Crouchley, A. E., The Economic Development of Modern Egypt (London, 1938);Google ScholarOwen, E. R. J., Cotton and the Egyptian Economy, 1820–1914 (Oxford, 1969); andGoogle ScholarOwen, Roger, The Middle East, chap. 5. Cromer's own version in Modern Egypt (London, 1908) is worth consulting.Google Scholar

7 Crouchley, A. E., The Investment of Foreign Capital in Egyptian Companies and Public Debt (Cairo, 1936), p. 169.Google Scholar

8 Rearrangement of official budget data as published in Annuaire Statistique de l'Egypte, 1914, chap. 20, “Finances de l'état.” See Hansen, Bent, “Saving and Investment, Flow of Funds for Egypt, 1884–1914” (Working Paper No. 135, Dept. of Economics, University of California at Berkeley, 10. 1979).Google Scholar

9 Friedman, Milton and Schwartz, Anna J., Monetary Trends in ihe United States and the United Kingdom. Their Relation to Income, Prices, and Interest Rates, 1867–1975 (Chicago, 1982), chap. 10.CrossRefGoogle Scholar

10 Fishlow, Albert, “Latin American External Debt: The Case of Uncertain Development” (forthcoming, 1983).Google Scholar

11 Direction du Contentieux, Ministère des Finances, Dette flottante contentieuse (Cairo, 1880), Part 2, “État de créances reconnues par l'état, Faisant l'objet d'instances en cours.”Google Scholar

12 Zannis, Joseph, Le crédit agricole en Egypte (Paris, 1937), p. 35.Google Scholar

13 Brinton, Jasper Yeates, The Mixed Courts of Egypt (rev. ed., New Haven, 1968), p. 76. The Mixed Courts were instituted in 1875 on the initiative of the Egyptian government to replace an older system of consular courts for foreigners. The Mixed Courts were under the protection of the Capitulary Powers. Two-thirds of the judges were foreigners. All litigation that involved a foreign party or a foreign interest came before the Mixed Courts. Special codes applied to foreigners. No law could be passed affecting foreigners without approval of the Mixed Courts. The Egyptian government was subject to the jurisdiction and judgment of the Mixed Courts.Google Scholar

14 Zannis, Le crédit agricole, p. 36.Google Scholar

15 Crouchley, Investment, p. 155–56.Google Scholar

16 For details see Appendix, Tables 2, 3, and 4 in Hansen, Bent, “Interest Rates in Egypt, 1881–1913” (Working Paper No. 163, Dept. of Economics, University of California at Berkeley, 10.1981).Google Scholar

17 The mortgage loan rate for Crédit Foncier de France was 4.9 percent in 1913; Annuaire Statistique de France (retrospective edition, Paris, 1961), p. 345. The corresponding figure for Egypt was 6.5 percent. French data for years before 1913 do not appear to be available.Google Scholar

18 For details, see Hansen, “Interest Rates,” Appendix, Table 1; Memorandum, National Bank of Egypt, Interest Rates, 1898–1914 [henceforth, Memorandum], Archives of National Bank of Egypt, Cairo.Google Scholar

19 Hansen, “Interest Rates”; Memorandum.Google Scholar

20 Hawtrey, A Century of Bank Rate, p. 121.Google Scholar

21 Ibid., pp. 54–61.

22 Hansen, “Interest Rates”; Memorandum.Google Scholar

23 For complete explanation of the interrelationships between output prices, interest rates, land values, and mortgage loans we would need a macroeconomic portfolio model that included all important assets and liabilities and considered saving and investment activities. An attempt to formulate and analyze such a model for Egypt for this period is made in Bent Hansen, “Wealth and Capital Gains in a Colonial LDC: Egypt before World War I” (Working Paper No. 168, Dept. of Economics, University of California at Berkeley, May 1983). This model includes land, gold, crops, and mortgage loans.Google Scholar

24 Wattleworth, Michael, “Report on the Construction of Agricultural Indexes for Egypt, 1887–1968” (Institute for International Studies, University of California at Berkeley, 09. 15, 1975), Appendix, Table 43, p. A–127.Google ScholarHansen, Bent, “Prices, Wages, and Land Rents, Egypt, 1895–1913” (Working Paper No. 131, Dept. of Economics, University of California at Berkeley, 10 1979), Appendix, Table 3, p. 27.Google ScholarOwen, Roger, Middle East, p. 233.Google Scholar

25 The concept of “real” rate of interest is not well defined. There is uncertainty about the price index to be applied. A profound problem is what should be understood by “in real terms.” Modern monetary theory often assumes that “in real terms” should mean “in terms of consumer goods.” It may be argued that for traditional societies “in real terms” should be taken to mean in terms of gold or land.Google Scholar See Hansen, , “Wealth,” p. 5.Google Scholar

26 Medium-term is my translation of the expression à court terme used in Crédit Foncier's Inventaires and applying to loans of one to ten years.Google Scholar

27 Albert Fishlow suggests that in estimating real returns on foreign debt, export prices should be used for deflating outpayments, import prices for deflating inpayments. (“Latin American External Debt”).Google Scholar

28 Information about peasant debts in 1913 is given in Annuaire Statistique, 1914, p. 509. The total land value of all farms smaller than five feddan was about £E159 million. Total debts of these farms to Agricultural Bank of Egypt was £E3.9 million and to other creditors (mostly money lenders, presumably) £E12.1 million.Google Scholar

29 The Egyptian Gazette, Alexandria, 29 Dec. 1903.Google Scholar

30 Crouchley, Investment, pp. 58–59; Owen, Middle East, p. 233.Google Scholar

31 Hansen, “Interest Rates.”Google Scholar

32 Ibid.

33 Owen, Middle East, p. 233.Google Scholar