I was listening to a podcast about him and learning about his reforms made me wonder how he funded such sweeping reforms. If the Ottoman Empire was in such dissaray after WW1, how were they able to afford the war with Greece and then such massive projects which were more social rather than economic in nature. Was there any particular part of the Ottoman Economy that was very profitable?
It might be useful to separate the reforms under Atatürk as social and economic reforms. Social reforms include the abolishment of the sultanate in 1922 and of the Caliphate in 1924, the proclamation of the Republic in 1923, the introduction of a law coalescing all education under secular state authority in 1924, the adoption of the Latin-based Turkish alphabet in 1928, removal of Islam as the official religion in 1928, the gradual granting of suffrage to women in 1930, 1933 and full suffrage in 1934, the introduction of surnames in 1934, the introduction of laicism into the constitution in 1937... The list could go on. The key is that such reforms radically transformed the social, cultural and political life of Turkey. They did cost money, after all. But why they were not super-projects costing billions by their nature. They were of crucial importance but also, in a sense, were "budget-friendly" reforms.
A brief comparison with the Young Turks era preceding the Atatürk era may also prove useful. The Young Turks had comparable aspirations to Atatürk, albeit in a much less radical tone. Their efforts, however, were hindered by wars. Atatürk, who seems to have drawn many lessons from that period, chose to avoid war whenever possible. He firmly believed that centuries of Ottoman warfare did not make life any better for the regular Turk. If his sweeping reforms were to be implemented, a sustained period of peace was necessary. Indeed, this is what happened. In avoiding war and maintaining close relations with key actors in the region (barring the irredentism of Mussolini's Italy in the 1930s), he successfully diverted the country's economic resources as well as its limited manpower to other areas. Hence his dictum: "Peace at home, peace in the World."
Now, the previous paragraph might give a sense of how political astuteness of Atatürk worked to the benefit of his country. This was the case in economic reforms even to a greater extent. Especially in the 1930s, when opposing political blocs were equally interested in drawing Turkey closer to themselves, Atatürk often demanded investment or advantageous loans from them. As a result of such policies, Turkey agreed an 8 Million $ low-interest loan deal with the USSR in 1932, and convinced the British to build a high-tech steel factory in the province of Karabük in the late 1930s. Furthermore, improved means of communication and transportation (including a much-prided brand-new web of railroads built during the Atatürk era), taxation could be more stable. Perhaps one could cite these under the heading of economic reforms, which would also include certain alterations in the taxation system. Some economic reforms strengthened the economy, despite the negative impact of the Great Depression of 1929. Other economic reforms involving a considerable amount of investment were helped by the political astuteness of the Turkish leadership at the time.
Hopefully, this provides a useful perspective in answering your questions! I cannot say this provides the whole picture and an economic historian can go into much more detail, but now it should be clear at least 1- Why some reforms were inherently not economically challenging for the country, 2- How could from an Ottoman Empire in "disarray" emerged the modern Turkey, 3- How centralization and technological advancements strengthened Atatürk's hand, and 4- How Atatürk and his companions' views on international relations and conflicts actually helped the country's economy.
EDIT: I should also mention the capitulations. These were a set of arrangements providing near-invulnerability and almost complete independence to European merchants active in the Ottoman Empire. The historiographical debate still goes on but the contemporary opinion was unequivocal: the capitulations were thought to be a leech feasting on the Turkish economy. Accordingly, they were abolished by the Treaty of Lausanne in 1923. This is an important comparison between the Young Turks' era and the Atatürk era too. It also provides a context for understanding why Atatürk and his companions insisted on building everything they could in Turkey (if possible by the private sector, if not by the state), and hence constructing diverse factories producing steel, sugar, armaments or even garments.
Realize I’m super late, but I wanted to add on.
Just as a disclaimer: Most of my research focuses on the later Turkish Republic, post-1960. I’m comfortable enough with the early Republican and late Ottoman eras, but my focus might colour my answer; I’m less deeply invested in the literature for this period.
Good question! /u/bugraeffendi has a great answer. I just wanted to address two things and maybe go into some more detail.
As /u/bugraeffendi points out, these are separate questions. Most of the reforms were social, and did not demand significant investments. They were pronouncement that were difficult to implement, but were not burdensome in expense. For a tl;dr:
So, onto these.
How did the Turkish Republic afford the economic costs of WWI and the War of Independence?
The Independence War cost less than you might think it was: Atatürk did not need to entirely reinvigorate the military. At the end of WWI, by March 1919, the Ottoman General Staff had discharged almost 338 000 soldiers, leaving only 61, 223 standing, with 256 artillery pieces. However, the Empire kept most of its reserves—some 791 000 rifles, 2000 machine guns and 945 artillery pieces—so once the National Movement secured these, it was less concerned about resupply. The military also benefitted a very well trained officer corps. Even after demobilization the army Atatürk inherited was highly standardized, had a large already trained reserve to draw on, and had a triangular organizational structure that allowed him to mix-and-match veteran and inexperienced battalions, significantly easing (and reducing costs for) mobilization.
On the economic side of the War of Independence, /u/bugraeffendi mentions the capitulations. These amounted to economic liberalizations, but essentially reduced the Ottoman economy to that of a primary producer. This made it dependent on the European economy, and debts skyrocketed. With the 1873 Vienna Stock Market Crash, credit dried up, causing Europe to intervene and establish the Ottoman Public Debt Administration. This significantly improved tax collection. But, with WWI, the Ottomans stopped paying these debts, yet continued to collect through the OPDA. Once the National Movement emerged, it seized these funds to support the war. Also, in the Lausanne Treaty, Atatürk managed to negotiate with the foreign powers so that it only had to pay back about 67% of the Ottoman debt and abolished most of the capitulations of the pre-war era embedded in the Treaty of Sèvres, including the OPDA (some argued Turkey left WWI with fewer debts than any other belligerent).
Now, after the war, the Turkish economy was still in crisis. The economy recovered after the war, but soon collapsed again during the depression (1927-30), which hit Turkey’s economy especially hard. Peasants, workers, and small merchants suffered enormously. This was worsened by the state response. Geared to resolve macroeconomic issues, Atatürk’s administration, especially in the post-1930 étatist period imposed heavy taxes and tariffs to keep a balanced budget. Still, it gave a capital-strapped Turkey funds to invest in its economy.
At the 1923 İzmir Economic Congress, Turkey adopted the “New Turkish Economic School,” a proto-étatist, protectionist, export-oriented economic approach. It aimed to increase private capital accumulation, establish a banking system, and foster development.
Funded by high tariffs and taxes, the Turkish state invested heavily in its economy; foreign capital was accepted for some projects, but Atatürk wanted to prevent a return to capitulations that gave foreigners more privileges than Turks. This included mass nationalization of foreign assets—bought with additional debt, not seized; there was no Suez Crisis for Turkish railways. Turkey began a massive extension of Turkish railways, which in the pre-war was mostly constrained to Western Turkey; İstanbul, İzmir, Konya, Ankara, Adana. Turkey also invested in State Monopolies, of which the tobacco was the most profitable, and after 1926, the liquor monopoly.
The early Republic also created a number of banks and loans to provide capital for domestic industries. The most important were Türkiye İş Bankası (Business Bank), the Türkiye Sanayi ve Maadin Bankası (Industry and Mining Bank) and to a lesser degree, Ziraat Bankası (Agricultural Bank). Together these banks ranked in 10s of million Lira in deposits and almost as much in investments by 1930. This revitalized private enterprise in textiles, ceramics, rice, sugar, and harbours and easing Turkey’s endemic lack of capital. Laws, like the Industrial Encouragement Laws, provided established firms free land and tax exemptions and encouraged mechanization, even if this was slow. Of course, the vast majority of export revenue came from agriculture (the livestock tax amounted to 58.7% of direct taxes in 1929), but these efforts to break away from the Ottoman Empire’s role as a primary producer and build up national industrial capacity were key for the ’50s boom.
Now, what does all this have to do with Atatürk’s reforms? Not much. Atatürk adopted a tight fiscal and monetary policy, geared entirely to balancing the budget, keeping prices stable, encouraging industry and trade, and setting the stage for Turkey’s étatist five-year industrialization plans in the 1930s (significantly supported by Soviet advisors and the loan /u/bugraeffendi mentioned). The economy is worth mentioning for context: money was tight, and aimed at recovery.
But the main problem the reforms faced was administrative implementation. So with that, I’ll answer:
How did Atatürk implement his reforms?
As I mentioned above, Atatürk implemented his reforms by relying on the coercive state institutions inherited from the Ottoman Empire. Moreover, his party’s centralized organization in the single-party era was well-suited to radically expand this state structure and monopolize power.
Atatürk faced difficulties in implementing his reforms, not in affording them. As /u/ bugraeffendi noted, most of the reforms were “budget friendly”. Creating new institutions, like the Directorate for Religious Affairs, the Ministry of Education’s Head Council of Education of Morality, or the Language Committee and later Turkish Language Association, absolutely costs money. But compared to providing capital for economic development, these costs were very small. Still, Turkey managed to run small surpluses through the 1920s, excepting a deficit in 1925 when the agricultural tithe was abolished and replaced by direct taxes. Outside of the mentioned 8 TL loan from the USSR for the five-year plan, it budgeted its expenses to its income.
When the Republic was founded and he became President, he deliberately took his rivals by suprise and sought to link them to the Sultan to secure his position; through this, his 1924 abolition of the Caliphate also was a major blow to his rivals. His control of the military, implementation of suppressive laws like the Maintenance of Order Law, and implementation of a single-party system gave Atatürk enormous legislative power. He banned the rival parties of people like Rauf Orbay or Kâzım Karabekir. By 1925, passing his reforms was not difficult.
Now, implementing them is a different story. The Republican People’s Party (Cumhuriyet Halk Partisi—CHP) was a highly centralized party. It benefitted enormously from the late-Ottoman Tanzimât-era reforms to the bureaucracy, which provided a capable state infrastructure. Much of this bureaucracy, located as it was in İstanbul, defected to the National Movement after Allied forces occupied the city. Officers and civil servants gathered in Ankara, and the CHP’s centralized organization was well placed to capitalize on this. The suppression of the opposition meant there was no need for Atatürk to pursue a popular mobilization; he could simply rely on the coercive institutions he inherited.
The downside to this centralization was that CHP had a difficult time engaging rural Turkey (read: most of it). When Ankara became the capital, Atatürk grouped the Ottoman kaza (districts) into provinces and appointed friendly governors. The CHP had a few provincial branches that it controlled through party inspectors. Beyond this, however, the CHP was not particularly interested in opening more than necessary, and its control of provincial branches remained low. Consequently, Atatürk’s reforms were mostly restricted to the major cities, and had far less penetration in rural Turkey.
I’ll use an example to demonstrate the bigger problem. In November 1925, the Grand National Assembly passed the Şapka İktisası Hakkında Kanun—the “Hat Law” that banned fezzes and other traditional headgear in favour of European-style hats. This triggered a series of “hat riots” across Turkey. Even in Erzurum—not exactly a rural backwater, but distant enough from the centres of power—a riot forced the government to declare martial law.
These forms of resistance were a consistent response to Atatürk’s secularizing laws. In response, Atatürk ensured they were implemented despite this by using the coercive state structures inherited from the Ottoman Empire and expanded during the single-party era.