Banking on the State
The Financial Foundations of Lebanon
Hicham Safieddine



Illusions of Financial Independence

O Lebanese [Citizen]

There can be no political independence without economic independence and no economic independence without bayt al-mal al-Lubnani [i.e., a Lebanese central bank]. Otherwise, we will see our agriculture, industry, commerce, and tourism endangered.
—petition by Lebanese political parties, business associations, and labor unions, 1953

In 1918, when British-led armies marching out of Egypt occupied Damascus, paper currency issued by the Ottoman Imperial Bank (BIO) was still in circulation. British authorities introduced sterling-tied Egyptian bank notes to finance their military expenditures in the newly acquired former Syrian provinces of the Ottoman empire. They threatened to imprison anyone who refused to accept them as payment. One year later, control of the northern part of the provinces, encompassing modern-day Syria and Lebanon, was passed on to French rule. The handover was in partial fulfillment of the Sykes-Picot agreement for the partitioning of the Ottoman empire secretly concocted by the allies during the Great War. The French chose the prosperous port city of Beirut on the eastern Mediterranean as their administrative capital. Soon enough, they found the constant buying of Egyptian pounds to finance their own military needs costly and cumbersome, and they turned to the BIO for assistance. Under Ottoman rule, the BIO was a private Anglo-French venture. Founded in 1863, it had monopolized the issue of Ottoman paper money and acted as Istanbul’s financial agent. It also served as a private arm of European financial investment and capitalist expansion into Ottoman lands, with Beirut as its gateway. Under French rule, the BIO’s regional headquarters in Beirut’s Ain el-Mraisseh district was reconstituted as the Banque de Syrie et du Liban (BSL).1 The new bank’s first order of the day was the issue of a local paper currency dubbed the Syrian lira. Pegged to the French franc, the lira was declared legal tender to replace other currencies, including Egyptian pounds, for military and other payments. Across the mountains from Beirut, the short-lived Arab government in Damascus, which had assumed control of the city following British withdrawal in 1919, refused to acknowledge the Syrian lira. It had declared its own Syrian dinar as legal tender. The dispute was settled in favor of the lira by force of arms rather than trade when French invading forces reoccupied Damascus in July 1920.

This heated battle over currency control reflected the increasingly important role of monetary regimes in the formation of post–World War I nation-states and, to borrow Timothy Mitchell’s phrase, fixing their economies. The year Damascus fell to the French, bankers and economic experts from around the world gathered at a League of Nations’ international financial conference in Brussels and declared that “central banks should be created in every politically independent country without any exception [emphasis added].”2 The Geneva conference two years later reiterated this belief. The Great War itself had highlighted the expediency of having a central bank ready to finance war activities. In the interwar years of hyperinflation, the need to maintain financial and economic stability granted the idea of central banking further prestige and sway. Central banking became “an entirely separate branch of banking as compared with commercial banking, investment banking, industrial banking, and agricultural banking.” It developed “its own code of rules and practices” that elevated it into a “science . . . acknowledged by many.”3

Central banks perform three major roles, which evolved over time, in the construction and consolidation of newly emerging nation-states, defined as the twin processes “of creating new sovereign entities and . . . new centres of power and control.”4 Firstly, they issue and manage a single national currency, whose circulation within national territory to the exclusion of other currencies creates a monolithic monetary space. Secondly, they act as the government’s financial agent for the purposes of fiscal management and in certain cases economic development. Thirdly, they regulate the banking sector and encourage the growth and deepening of national money markets. In the early twentieth century, central banks were increasingly seen as centers of “moral authority in moments of crisis” and symbols of economic independence. They were also credited with the ability to develop sounder banking systems. In the wake of World War I, “an orgy of central banking propagation” ensued in countries that lacked central banking institutions, “based on the simple belief that it was necessary to establish a miniature replica of the Bank of England or of the Federal Reserve Bank of New York.”5 Between 1920 and 1954, close to fifty such central banks were created.6

The poorly examined and vaguely understood creation of central banking institutions in the modern Arab world, which lasted well into the mid-twentieth century, was highly distorted by colonial policies in the interwar period. Under European rule, Arab monetary systems, and by extension economies, were not conceived in parallel with the newly demarcated national polities and their borders. This is because French and British authorities, while expected to pave the way for eventual independence after mandatory rule, did not draft monetary policy with a view to consolidating local state power over newly charted national boundaries. Rather, they did so in accordance with the logic of colonial material interests and political expediency. This led to the formation of what I term heteronomous national economies, whereby state-instituted monetary regulatory regimes and nationally imagined markets did not overlap with territorial boundaries. The role of central banking in the mutually constitutive formation of Lebanon’s and Syria’s political economies is a case in point.7

Upon the abovementioned pacification of the Arab government in Damascus, French authorities split the newly acquired Syrian territories into four Syrian statelets and a Greater Lebanon with Beirut as its capital. All five entities were, however, declared a “single territory from the monetary and customs point of view.”8 When the Syrian statelets were eventually united into a single country in the 1930s, Lebanon retained its separate political status but the two countries continued to share a common market and monetary system. In 1943, Lebanese political leaders, led by President Bishara Khoury (in office 1943–52) and Prime Minister Riad Solh, took advantage of war-weary France. Backed by Britain, they declared the country’s political independence following a fresh round of parliamentary elections. In 1946, French troops stationed in both countries withdrew. The French political and military mandate over Lebanon and Syria had ended. But the monetary mandate, embodied in the customs union and the single currency tied to the French franc and issued by the BSL, did not.

Terminating this monetary dependency on France precipitated divergent Syrian and Lebanese paths of financial regulation and economic development. Negotiations with Paris led to separate monetary agreements for Lebanon (1948) and Syria (1949), which in turn hastened the breakdown of the customs union in 1950. More significantly, central banking reform, perceived by most “Third World” nations at the time as a cornerstone of attaining economic independence, followed a different trajectory in each country. In Syria, the government unilaterally withdrew the BSL concession as a state bank in 1953 and eventually replaced it with a national central bank. The Bank of Syria acted as a primary instrument of state-assisted agricultural and industrial economic development. In Lebanon, the BSL’s French director René Busson, rarely mentioned in Lebanese historiography, continued to act as a de facto financial governor of the country. BSL monetary policies furthered the creation of an open economy in which the services sector reigned supreme. The BSL concession lasted for two decades after independence, at which point a national central bank replaced it. Inaugurated on April 1, 1964, Banque du Liban (BDL) was billed by Lebanese authorities as the primary symbol of economic sovereignty and the last step towards full independence. Press reports described it as a means of projecting state power and enhancing national pride. Such proclamations were, and remain, illusions of financial independence. Lebanon’s financial foundations, the subject of this book, tell a more complicated and globally connected story.

Lebanon’s financial system is the product of the interaction of colonial monetary control, national institution-building, global currents of technocratic knowledge, and private business interests. These interactions took place under two historical conjunctures: French financial rule (1919–48) and Lebanese financial restructuring (1948–75). Under French rule, the BSL was the backbone of a financial regime that linked the colonial economy to the French metropole. BSL credit policies, coupled with a franc-exchange standard that pegged the lira to the franc favored French capital investment over local economic development. In the post–World War II period, Lebanese bankers9 gradually took on the function of “strategic monitoring” of the Lebanese economy via the banking sector and constantly bargained for their share of financial power on the political stage.10 On their watch, the country’s financial foundations were reconstituted in the context of U.S. financial hegemony, large regional capital flows, and global circuits of financial know-how. American officials based in Beirut were eager to see the BSL replaced by a national central bank that would cease favoring French-tied capital over its American competitors. During this formative period, Lebanon’s capital, Beirut, became the region’s financial hub thanks to large flows of petrodollars and the influx of finance capital fleeing nationalization in nearby countries like Syria, Iraq, and Egypt. Between 1945 and 1960, the number of banks in Lebanon skyrocketed from 9 to 85.11 Lebanon became a “merchant republic” where ruling elites, whose wealth largely depended on imports and financial services to the region, fiercely guarded the laissez-faire system and portrayed it as the panacea for the country’s economic prosperity.12

The merchant republic narrative and its corollary the laissez-faire paradigm have dominated classical histories of modern Lebanon. In these works, Lebanon’s laissez-faire economy is read through the lens of entrepreneurial creativity of the mercantile-financial class, informal networks of familial and sectarian relations, or structural analysis of economic sectoral growth.13 By contrast, the institutional architecture of financial regulation and monetary policy underpinning the emergence of laissez-faire is rarely examined. Recent and insightful studies of Lebanon’s post–World War II political economy have gone a long way towards dispelling these national myths and transcending the accompanying historiography. But with rare exceptions, they remain largely concerned with how the Lebanese state, in the first decade after independence, shaped the free market through full deregulation of capital flows.14 I reverse the direction of inquiry and examine how market forces and private actors, including bankers, financial experts, and bureaucratic officials haggled over and shaped the state and its major financial institution, the central bank.15 In the post–World War II independence era, state financial institutions like central banks were a major instrument of engineering national economies in much of the “Third World.” Lebanon, its open economy notwithstanding, was no exception. Its laissez-faire regime was the product of conscious and constantly contested state policies, top among them central banking design. The primary guarantor of the longevity of laissez-faire and banker influence was the BDL, rather than reified market forces or an entrepreneurial spirit.


The BDL’s managerial structure and monetary functions were largely dictated by dynamics of political power and financial profit rather than well-defined notions of national economic development. The central bank served rather than challenged the interests of an oligarchy of local financiers, such as the Eddé brothers, who banked on the state much more than the market to reproduce the dominance of the banking sector in the economy. The Eddés were key figures in founding the two institutional pillars that turned the country’s banking sector into an organized political community largely immune to state authority. The first of these was the Banking Secrecy law of 1956. The elder Eddé brother, Raymond, the law’s architect, told the press a year prior to its passing that his “greatest ambition was to turn Lebanon into the bank of the Arab world” the same way Switzerland acted as the money warehouse of Europe.16 The law accomplished the twin objectives of attracting large sums of Gulf capital and shielding it, as well as the bankers, from state inspection and taxation for decades to come. The second pillar was the Association of Banks in Lebanon (ABL), the first of its kind in the Arab world, which was founded in 1959 under the leadership of Raymond’s younger brother Pierre, who was head of Bank Beirut Riyadh at the time. The ABL’s goal was to “create cooperation among its members in matters pertaining to professional affairs and furnish mechanisms for [achieving] common interests and collectively defend these interests in the form of collective representation of its members in public or other administrations.”17

Unlike often-studied state institutions like the Chamber of Deputies, personal status courts, or religious councils, the ABL and the BDL were one step removed from sectarian politics, while simultaneously forming the deep structural basis for reproducing the economic power sustaining this sectarian system. Sectarian quotas did affect who was who at the BDL, but mattered much less than ideological orientation and vested interests. At the time of its founding, the person most qualified to serve as BDL governor was Joseph Oughourlian, a longtime consultant to the BSL and a veteran of banking regulations. But his sectarian Armenian identity relegated him to the role of deputy governor for his long years of service. Still, he left his conservative managerial imprint at every major juncture of building the financial system, from delinking the Lebanese lira from the franc in 1948 to the 1963 drafting of the law of money and credit that created the central bank. The ABL, meanwhile, was not a nationally driven, let alone a sectarian, endeavor. Members were initially either allied with or opposed to French capital. Lebanese bank members retained a controlling vote, but founding members included local, Arab, and U.S. banks. Chase Manhattan’s Beirut-based manager Julius Thomson was a founding board member.

The ABL furnished the new barons of banking with a formal and institutional, rather than familial or sectarian, framework in which to interfere in monetary policy. In the late 1950s, pressure by international financial institutions (IFIs) and local experts for setting up a strong central bank mounted. The ABL was highly successful in lobbying for a largely toothless central bank even if the bank retained a degree of managerial autonomy and state officials portrayed its founding as the culmination of economic independence. The collapse of Intra, the country’s largest bank, three years later exposed the unsustainability of unfettered laissez-faire banking. The crisis was a watershed in the history of Lebanese banker power. It shook the status quo of anti-regulation to a point that threatened the laissez-faire system itself. In effect, state intervention through the BDL became both a political and a market necessity. State actors and ABL bankers returned to the drawing board. They sank Intra but saved the sector by creating new administrative structures linked to the BDL, including a U.S.-inspired deposit insurance scheme. They also agreed to regulatory measures such as minimum reserve requirements and the categorization of long- versus short-term credit institutions. This new regulatory regime, however, reinforced rather than constrained laissez-faire policies by making the system more resistant to future shocks.


1. The BIO was first reconstituted as the Banque de Syrie, then as the Banque de Syrie et Grand Liban, and finally as the Banque de Syrie et du Liban (BSL).

2. Pauly, Who Elected the Bankers? attributes the call for central banks to be independent and free of political interference to the 1933 London Economic Conference (p. 63). See also Yaffi, “Monetary and Banking System of Lebanon,” 174.

3. Plumptre, Central Banking in the British Dominions, 14.

4. Owen, State, Power, and Politics, 5–6.

5. Sen, Central Banking in Undeveloped Money Markets, 5, 6.

6. For a list of central banks established between 1920 and 1954, see Yaffi, “Monetary and Banking System of Lebanon,” 185–87.

7. Mitchell’s Colonizing Egypt was one of the earliest anglophone studies of Arab state formation in the late and post-Ottoman context, and his Rule of Experts examines the “economy” in particular as a site of producing the nation in the Middle East, in which respect see also Owen, “Middle Eastern National Economy” and Seikaly’s exploration of dynamic class constructions in mandate Palestine in her Men of Capital. On the making of national identity, see Massad, Colonial Effects. Thompson, Colonial Citizens, considers the production of state and citizen from the perspective of gender. On authoritarian political economy, see Bassam Haddad’s Business Networks in Syria. Finance is much less studied. Davis, Challenging Colonialism, examines the rise and collapse of Bank Misr in Egypt, but does not extend to the postcolonial period; see also Izz al-Arab, European Control. More recently, Adam Hanieh has opened new horizons of understanding financialization and money market formation in the contemporary Arab world; see his Money, Markets, and Monarchies.

8. Oughourlian, Histoire de la monnaie libanaise, 28.

9. Unless otherwise stated, the term “bankers” throughout this book refers to bank owners and first-tier executives rather than bank employees.

10. Nasr and Dubar, al-Tabaqat al-Ijtimaiyyah fi Lubnan, 134.

11. Achi and Ayache, Tarikh al-Masarif fi Lubnan, 166.

12. Gates, Merchant Republic of Lebanon.

13. See Sayigh, Entrepreneurs of Lebanon; Khalaf, Lebanon’s Predicament; Makdisi, Lessons of Lebanon.

14. Gaspard, Political Economy of Lebanon; Gates, Merchant Republic of Lebanon.

15. See also Abu-Rish, “Conflict and Institution Building in Lebanon”; Pauly, Who Elected the Bankers?; Cassis, Crises and Opportunities; Calomiris and Haber, Fragile by Design.

16. Eddé made these remarks to Le Commerce du Levant on August 6, 1955; see Achi and Ayache, Tarikh al-Masarif fi Lubnan, 163.

17. Association of Banks in Lebanon, “Annual Report 1960,” 12.