The economic response of the Israeli government to a rapid influx of immigrants by the founding of the state, 1948–1953: Expansionary fiscal policy and rationing

ABSTRACT

Israel was founded in 1948, and immediately afterwards, numerous immigrants came to the country. The Israeli government decided to provide provisions to these immigrants, along with trying to develop the country and investing in the military. This fiscal expansion was funded by seigniorage, and the government attempted to restrain inflation by imposing price controls and rationing food and other consumer goods. This policy failed to stop inflation, and there were persistent shortages of many goods in the country, except for bread which was not rationed. There were even shortages of eggs, which were all produced domestically and whose output increased on a per capita basis by more than 250% in comparison to the number of eggs produced prior to the founding of the state. This indicates that the shortages in the stores were due to the rationing. The shortages led to a flourishing black market, and a reduction in consumer welfare. The rationing made a difficult situation worse and the government began to end the rationing in 1952.

KEYWORDS:

• Price controls
• economic development
• government intervention
• foreign aid
• inflation

JEL CODES:

• F35
• N15
• N45
• O2
• O53 and P22

Acknowledgements

I thank Daniel Schiffman, Oded Shenkar and two anonymous referees for their comments on earlier drafts of the paper. Also, I thank the participants in the session on Israel’s economic history at the 33rd annual Israel Economic Association meetings in 2017 and the participants at the conference on ‘Uses of the Past in International Economic Relations’ at St. Hilda’s College, University of Oxford in 2019 for their comments on earlier drafts of the paper.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 This definition of the term austerity differs from the common understanding of the term in the twenty-first century as referring to a retrenchment of government finances.

2 The sources for this estimate are British Mandatory officials and Jewish statisticians whose work focused more on the Jewish sector of the economy than on the Arab sector. Consequently, in this period, there is less data on the Arab sector of the economy than on the Jewish sector. If one examines just the economy of the Jewish sector in Mandatory Palestine, which would become the core economy of Israel, then according to Metzer (1998, 242) the annual growth in its per capita output from 1922 to 1947 was of a similar magnitude to the growth in the overall economy, and also superb: 4.81%.

3 The number of refugees has been estimated at 525,000 (Peretz 1954) to 600,000 (Segev 1986, 64) to 726,000 (Brand 1988, 9). These latter estimates are roughly similar (differences of 5% to 15%) to the number of Jewish immigrants who came to Israel from 1948 to 1951.

4 According to Bolt and van Zanden (2020). Their study is the source for all references to per capita data in this paper, except for the percentage change in Israel’s per capita GNP in 1950. Their study does not provide data on Israel for 1948 or 1949.

5 Gene Currivan, ‘Israel Issues New Currency Today’, NYT, 17 August 1948.

6 Ottensooser (1955, 121) notes, ‘The monetary inflation was chiefly the result of the Government’s deficit spending’. Ottensooser also notes (122), ‘The banks and credit cooperative societies were accommodating the Government without contracting the volume of credit to the private sector of the economy. On the contrary, the regulation whereby the money creating institutions were entitled to consider their holdings of Government securities as legal assets, enabled them to expand this credit’ (italics in original).

7 On the other hand, The Economist (‘Can Israel pay its way?’ 4 June 1949, 1045) noted the ‘disappearance of fancy chocolates’ very shortly after the government began rationing goods.

8 The letter was published in Haaretz (‘A young Israeli soldier’s long-lost account from the doomed ’48 battle for Jerusalem’s Old City’, 18 April 2019) by the soldier’s daughter, Shevi Govrin.

9 Data from A Survey of Palestine (1946, 323) and ICBS (1950, 47).

10 For the agricultural years 1950–53, on average 90% of the wheat in Israel was imported (ICBS 1953, 46; 1954, 78, 82; 1955, 102).

11 Patinkin (1967, 111) notes this was one example of a ‘considerable misallocation of resources’ due to the price controls and rationing.

12 The government attempted to promote the production of very simple domestically produced goods, which were called lacol (‘for everybody’, Hebrew), by making their prices very cheap, but this plan was unsuccessful. These goods were of low quality; for example, it was claimed that the lacol clothing only lasted a few weeks (Rozin 2011, 21).

13 Slogan quoted in The Economist, ‘Bagehot: The night-watchman welfare state’, 12 November 2022, 32.

14 Julian Meltzer, ‘Socialists strong in Israel regime’, NYT, 12 September 1948. See also Gross (1990).

15 If this hypothesis is correct, then following Higgs’ (1985) suggestion concerning all governments, maybe the Israeli government desired for there to be an immigration crisis to justify its intervention in the economy.

16 For example, the NYT (‘Israel purchases three more ships’, 23 November 1949) refers to ‘Israel’s fast growing merchant marine’.

17 ‘Ben-Gurion Hails Israeli Plan’, NYT, 8 November 1949; Segev (1986, 320, 321).

18 Barkai 2006, 527; Easterlin 1961, 78, quoting an anonymous Agricultural Minister.

19 For the period 1949–52, the Israeli government also received around 100 million USD from the British government from funds accrued in the Mandate period which had initially been blocked by the British; see ‘Israel and Britain Sign Fund Accord’, NYT, 31 May 1949.

20 Wallich (1955, 355) writes that the total aid to West Germany post-WWII was 4.4 billion USD, of which 1.7 billion USD was Government Aid and Relief in Occupied Areas (GARIOA) aid. Judt (2005, 235) writes that West Germany’s population in 1950 was 47 million, and then the calculation above is 2.7 billion USD divided by 47 million. According to Barkai (2009, 446) and Michaely (1975, 200), the Israeli government received 329 million USD from world Jewry in the years 1949–52, and this figure was divided by the average of Israel's population for the years 1949–52 (data from Table 1). This calculation does not include the aid Israel received from the US government in the period.

21 As noted by Higgs (1992), the discrepancy between the official inflation rate, which does not account for the black market prices, and the actual inflation rate which includes the higher black market prices, leads to measurement errors with regard to other values which are based on official prices. Hence, we present data on the actual number of eggs produced and on the quantities of milk and vegetables produced.

22 Data from ICBS (1949/50, 83; and 1951, 83). The ordinary budget excludes the secret budget for defence spending and the development budget.

23 Sydney Gruson, ‘Israel Undergoing Worst Food Crisis; Health Imperiled’, New York Times, 4 September 1951, 1,14

24 ‘Bonn Signs Pact with Israel for 822,000,000 Payment’, NYT, 11 Sep 1952.

25 ‘Israel Eases Rationing’. NYT, 3 June 1952; ‘Cabinet of Israel to be Reshuffled’, NYT, 23 June 1952. In December 1952, Yosef was replaced as the Minister of Commerce and Industry and became a Minister without portfolio; Dana Adams Schmidt, ‘Ben-Gurion forms coalition cabinet’, NYT, 23 December 1952.

26 ‘Israel Lifts Controls’, NYT, 14 November 1952; ‘Israel to End Most Textile Controls’, NYT, 20 November 1952.

27 See data in Easterlin (1961, 77).

28 From 1950 to 1953, the average unilateral transfers per capita were 94 USD, and from 1954 to 1959, they were 129 USD (Tables 2 and 4).