How Did Israel Fund Its War Of Independence?

Photo Credit: Saul Jay Singer

When Ben Gurion announced Israel’s Declaration of Statehood in Tel Aviv on May 14, 1948, the nascent Jewish State faced innumerable problems, with historians and commentators focusing primarily on Israel’s dire military situation, as it was immediately invaded by five Arab nations determined to wipe it out. However, an equally urgent problem, seldom discussed, was how Israel financed its War of Independence.

The story begins on October 2, 1947, when Minhelet Haam, Israel’s provisional government authorized to act on behalf of the Yishuv, announced a security regulation designed to prepare the Yishuv for war after the end of the British Mandate, its first effort toward military mobilization. Part of that effort involved economic preparation and fundraising, technically overseen by the Yishuv’s Security Committee but practically under the auspices of the Economic Committee. The Committee decided to introduce a fund to raise 500,000 Israel pounds through a “Security for the People” fund that was officially declared on November 25, 1947.

The first of two systems established for the campaign was a tax on the wealthy, including business owners, professional unions, individual professionals and affluent capital owners, based upon an estimate of the professional income generated by unions to which they belonged and with the tax was to be collected by various economic organizations, such as the Industrialists’ Association and the Artisans’ Association. Second, a sum ranging between two and six pounds was assessed against each member of the public and collected based upon the citizen’s ability and voluntary agreement to contribute, with volunteers, mostly youths, going door-to-door to collect the money.

During the nine-day period beginning December 3, 1947, when the Security for the People Fund commenced collection action, the program met its goal and raised half a million pounds, with 70 percent collected from the wealthy and 30 percent from the general public. (Some 325,000 pounds were collected in Tel Aviv alone.) However, according to Eliezer Kaplan, then treasurer of the Jewish Agency for Israel (and later a signatory to Israel’s Declaration of Independence and Israel’s first Minister of Finance), only about 100,000 of the 270,000 eligible donors – some 63 percent – contributed to the Security for the People Fund. The Fund’s Executive Committee examined several ways to increase participation, including sending warning letters to non-contributors and following up with summonses to account for themselves at the Executive Committee offices in Tel Aviv but, because it lacked the legal authority of a sovereign state, raising funds depended on the organizational and voluntary structure of the community and there was ultimately little they could do to compel contributions.

Next, in February 1948, the Vaad Leumi (National Jewish Council, the national executive organ of the Assembly of Representatives of the Yishuv) determined to launch another publicly funded operation, Tax for Our Defense, to raise 2.5 million pounds. Again, the payment by independent business owners would be determined by the evaluation by executive committees of the economic organizations and the professional unions, which were responsible for the tariff and the collection. However, this time, in a plan to broaden the participation of employed laborers, a mandatory assessment was leveled on laborers and clerks: a one-time fee of 10 percent of their monthly salaries (but no less than three pounds) for those earning less than 50 pounds a month; 15 percent for those earning 51-80 pounds monthly; and 20 percent for those earning 80-110 pounds. This fund began operation on March 1, 1948, with announcements in the press and with posters placed in public gathering places, some featuring the slogan “Neither War Front, nor Home Front; the entire Community is a Single Front, Every Jew is a Soldier and Defender. Let Our Mobilization be Full – Both in Body and through our Pockets.”

Although some 4,000 volunteers – again, most of them Yishuv youth – went house-to-house collecting money from the public, the Tax for Our Defense failed to meet the goal of raising 2.5 million pounds within a month. (However, collections continued and the target was met by September 1948). Again, the primary reason for the failure was that many refused to pay the assessment. Moreover, a furious conflict erupted between the Labor and Revisionist movements, with the Revisionist Etzel, the Irgun Zvi Leumi, promoting the Iron Fund, a separate campaign to finance its own operations. Sadly, on February 26, 1948, with the country at war, a violent confrontation ensued when the Hagana used force to try to halt the use of loudspeakers by Etzel fund-raisers in Mugrabi Square in Tel Aviv to solicit contributions to the Iron Fund. (The Hagana thereafter decided not to interfere with fundraising for the Iron Fund provided that Etzel refrained from violent acts, and Etzel went on to successfully raise over 60,000 pounds.)

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Finally, the Yishuv decided to adopt a new approach to fundraising: rather than imposing a tax, which had proved wildly unpopular and largely unsuccessful, Israel would create a national loan program to fund the war effort. On December 18, 1947, Minhelet Haam proposed such a “national loan” and, at its second meeting on April 16, 1948, it decided to launch a five-million-pound (over $2.7 billion in today’s dollars) HaMilve HaLeumi program (National Loan Program). The Jewish Agency held a ceremonial announcement of the program on May 9, 1948, at the Habima House in Tel-Aviv in the presence of, among others, Ben Gurion, then leader and executive head of the World Zionist Organization, and Eliezer Kaplan:

Participation is not a tax payment, but an investment of funds on a secure banking basis… Every Jew will see the provision of the necessary means for the struggle for our existence and our future as an absolute necessity. Every Jew will participate in the national lender to the fullest ability.

An army announcement prompting the public to participate in the National Loan Program proclaimed:

You, the citizen on the home-front, who has not been called yet to give your blood on the front – must donate your money to uphold the Israeli army, to secure the existence and maintenance of the force guarding you day and night.

National loan certificates (see exhibit) were offered, and the public was asked to purchase these certificates from the banks beginning May 11, 1948, pursuant to which the purchaser would lend his money to the Jewish Agency for five years at an annual interest rate of three percent, with the loan secured by real estate assets in Eretz Yisrael owned by the Keren Hayesod and the Jewish National Fund. As such, the public was called upon to participate in the Program as an economic investment rather than as a tax payment.

The issuers of these certificates, a tradeable asset, promised a link to the exchange rate of the U.S. dollar, then at three dollars per pound. According to Moshe Naor writing in Voluntary Funds to National Loans: The Financing of Israel’s 1948 War Effort, a primary source for this article, the National Loan Program, which required extreme economic and political coordination, was an important development that led to the evolution of Israel’s centralist power in general and government control of the national economy in particular.

Exhibited here the May 2, 1948, announcement (front page and inside text) issued in Tel Aviv by Minhelet Haam laying out the National Loan Program:

TO ALL THE JEWS IN THE LAND

The end of the British regime is near: it is crumbling and declining before our very eyes. The matter compels us to prepare and establish the tools and means for a regime of full independence. The hour is pressing. It is incumbent upon us to hurry and to fill the empty space of the exterminating regime, in the midst of a brutal war into which we were maliciously thrown.

It is incumbent upon us to guard the foundations of our economy to strengthen them and prepare them for additional creative drives.

And overall: It is incumbent upon us to be well equipped in the military campaign. All our property has no value if we will not know how to protect it and its very existence. This last position requires enormous financial efforts. One of the ways to mobilize the necessary means is the National Fund in the amount of 5,000,000 Israeli pounds.

The lender will place large and small risks at our highest disposal under the auspices of the offices of the Jewish Agency of Eretz Yisrael.

Participation in the loan does not constitute the payment of a tax but rather an investment of funds on a secure banking basis.

The national assets and current experiences of the levied funds will be used as a guarantee for the partnership of the national funds: Keren Hayesod and Keren Kayemet L’Yisrael.

Partnership in the loan provides important benefits to the Jewish Agency of Eretz Yisrael to ensure them. The details of these advantages will be publicized through the leadership of the loan fund upon the finalization of the signature.

Please, every Jew, see the provision of the necessary means to fight for our existence and our future as an absolute necessity.

Let every Jew see the provision of the necessary means to struggle for our existence and our future as an absolute necessity.

MINHELET HAAM Tel Aviv, Nissan 23 (May 2), 1948

The Jewish Agency Of Israel
The National Loan Program

(3% – 1948 – 1953 – in the amount of 5,000,000 Israeli pounds)

The Final Signature Will Open All The

Banks And The Credit Cooperatives

The Goal: The National Loan Program – its certificate is to help fund the campaign upon which the Yishuv stands. This campaign mandates the generation of large sums of money, which the Jewish Agency cannot raise through the regular revenue.

The Borrower: The Jewish Agency of Israel, which will return the loans from its annual income during the coming years.

Guarantors: Keren Hayesod and Keren Kayemet guarantee for the national lender with its property and coverage.

Repayment. The full amount of the loan will be returned in five years. The responsibility of the Jewish Agency of Israel will be to return each year one million, constituting less than 9% of its revenue for the year 1946/7 and constituting less than 5% of its revenue for the year 1947/8.

Interest. 3% per annum to be paid each time along with the principal.

The guarantee of the value of the guarantee. A guarantee is provided against the depreciation of the Israeli pound to less than three dollars. By doing so, a certain stability of the money invested in the National Loan Program is ensured.

Payment in Dollars. The signatory to the National Loan Program may also receive as payments due to him dollars to pay for imports to Eretz Yisrael – in the amount of not less than three dollars for each Israeli pound.

Bankable documents. The transfer of loan certificates to others will be effected in a proper manner. Yes, it will be possible to transfer the right to use dollars for import purposes to someone else.

Popular loan. The National Loan Program is addressed to people across all fields. Business owners, industrial and commercial people can secure for themselves by signing on to the National Loan Program. It will shrink even further in the near future after the country has been cut off from the sterling area. The duty of the Jewish Agency of Israel to provide the dollars that will be available to the holders of the national lender certificates – guarantees the businessmen an import duty in dollars at a limited and guaranteed rate. Capitalists and investors will view the National Loan Program as a safe investment for the medium term.

Wide public holidays, for workers and clerks for those with free professions – the lender uses the effective amount method, which earns a fixed interest rate, guarantees against a significant devaluation of the pound and the possibility of receiving a benefit for the right to use the generations for imports.

“The life of the country begins with its accumulated credit.” This rule is particularly true for our nation, which is beginning to shape its independence through brutal battles that endanger our lives and all our property. The success of the first National Loan Program is a crucial condition of the success of our wars.

Also exhibited here is a selection of six mini broadsides promoting the National Loan Program. From top to bottom:

1. Tens of thousands of soldiers have sworn their loyalty to the State of Israel. Their oath: blood and life on the altar of the Homeland. The citizen on the home front! You, who is not sacrificing blood and life – have you fulfilled your national obligation regarding the State and its defense? Sign on to the National Loan Program!
2. Woman of Israel! Join the effort for the National Loan Program. The National Loan Program saves the blood of your sons and daughters, and it fortifies positions and delivers equipment in time, preventing disaster. The National Loan Program, like a blood transfusion that saves lives in Israel. Sign! Sign!
3. If your son asks you: Father, mother, have you signed on to the National Loan Program?

Tell him with a pure conscience, we fulfilled our obligation – for your sake, and for the sake of your future!

4. You are responsible to the generation that merited to the rebirth of Israel. Before your very eyes – an army of the brave rose that is worthy of the historical tradition of the Israel military forces. Fulfill your obligation to the army and the state – Sign on to the National Loan Program!
5. Citizen of the home front! Please consider if your conscience is clear with respect to the state and its protectors? Have you already signed on to the National Loan Program?
6. The Yishuv and the nation in the Diaspora are waiting for the National Loan Program to succeed. Four and a half million have been signed for. The final half million is standing in the queue and waits for you. Participate in the final effort.

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However, despite a broad campaign in support of Israel’s first national loan program, including public proclamations published by Tel Aviv Mayor Israel Rokach and by Israel’s new army, its progress did not meet the expectations of the organizers. By early June 1948, the gap between projected revenue and actual receipts became plain, with only three million pounds – two million from the general public and one million from institutional donors – having been collected by June 6, 1948.

Many on the Israeli left placed the blame squarely on the wealthiest citizens of the Yishuv for failing to pay their “fair share”; for example, in a bitter article published in the June 22, 1948 issue of Hapoel Ha’tzair, Israel Cohen, an Anglo-Jewish Zionist leader, writer, and journalist, who served as secretary of the World Zionist Organization, wrote:

Approximately five weeks have passed since the loan was declared, and it still brought no more than three and a half million Israeli pounds of the desired five million. On the one hand, therefore, there are young people who sacrifice their lives and people who leave their families without any livelihoods and join the army, and on the other hand there is the middle and substantial affluent people, hording their money and defying the state order, unwilling to part with even a tiny fraction of their capital.

In response to the criticism, the government decided to increase its involvement in pushing the loans, including having bank branches extend their hours of operation. When loan activity officially ended at the end of July, Kaplan conducted a press conference at which he announced that the Program had raised 5,050,080 pounds.

According to Naor, the failure of the National Loan Program to raise the funds needed to finance Israel’s War of Independence on a timely basis resulted in significant political criticism of the new government, questions about its ability to transition from the Yishuv under the British Mandate to statehood, and uncertainties regarding the public zeal to make personal sacrifices to support of the new Jewish state. Once again, the bitterest and most vociferous critic of the loan program’s failure was the Mapam (United Workers Party), which characterized it as an example of class inequality with the working class bearing the burden of the war while the well-to-do dodge their national and social responsibilities. In a June 3, 1948 speech, to the national council, Berl Repetur, Mapam’s representative in the state council (and later a signer of Israel’s Declaration of Independence) stated:

One of the major questions of our strength at the front is the question of dividing the burden between all parts of the Yishuv. The war occurs in all parts and nooks of the country, and there are naturally differences between city folks and people of the Moshavot, the settlements and the fronts, but there is a duty to increase the community’s mutual responsibility and help… [the] government must hurry in taking decisions and making arrangements for a new taxation system and distribute the load among all those who have the ability to pay, to increase our strength both at the front and at home.

The criticism increased as the war raged on, with many calling for not only equality of sacrifice but also for a strategic change in the strategy for funding the war via a transition to a broader use of the state’s authority, including funding the war through tax revenues, particularly on the wealthy. While, as discussed above, a taxation plan had been tried and failed, that had been at a time when the contributions were voluntary and the Minhelet Haam lacked enforcement authority, which had changed when governmental authority became vested in the State Council. At an August 29, 1948, Council meeting, the government discussed drafting a new income tax law that would impose a war duty tax on the public at a rate of between five and twenty-five percent and an income tax at a rate of up to 75 percent of employees’ monthly salary.

The Ministry of Finance argued that the economy could collapse and the new State of Israel could not survive were the government to fail to endorse the tax plan. When many members of the council objected to the proposed tax plan, Kaplan, the new Minister of Finance, explained that the tax would be limited to a six-month period until April 1, 1949, at which time a public committee would review and address the entire tax question. The State Council ultimately decided to table the decision until the Israeli public was afforded the opportunity to weigh in and be heard, but after the close of the comment period, the government approved the Income Tax Act and the War Duty Act on September 16, 1948.

At its August 29, 1948, meeting, the government had decided to annul the Mobilization Fund and, at its final session on October 20 (after the Income Tax Act had become law), Ben Gurion, who delivered the keynote speech, spoke of the significance of the end of the Mobilization Fund and the transition from Yishuv to state:

With the succession of this fund, the substantial historical transformation that has occurred is revealed: we have become a nation that rules itself, that does not resort any longer to collection through a fund. Rather, we are self-sufficient, resorting to methods of funding that fit a sovereign state: taxes, loans, and property tax. We therefore cancel the collection fund, since we have risen to a higher rank on the ladder of our national existence, a stage of stately independence. This does not mean that from now on we will only do things through coercion, on the contrary, in a state we will need voluntarism no less than we needed it before; without the good will, the devotion, the loyalty and the pioneer-like compliance of the people, we will not accomplish.

Because of the termination of the Mobilization Fund, and notwithstanding the new income tax and war duty law, revenues proved insufficient to fund the war. In a September 20, 1948, government meeting, Avraham Zbersky, head of the Ministry of Defense’s financial division, presented details of a two-million-pound shortfall between receipts from October 1, 1947, to September 1, 1948 (25 million pounds) and security expenses accumulated during that period (27 million pounds). Kaplan, rejecting the imposition of a property tax because he feared severe adverse repercussions to the flow of capital into Israel, argued that it was necessary to cut security expenditures, obtain an external loan, and impose an additional voluntary national loan, and the nation’s economic institutions committed to secure the cooperation of their members and to raise the necessary funds from the wealthy.

Kaplan’s creative approach striking economic compromise, which facilitated cooperation between the warring Mapai and Mapam factions, between employers and employees, and between the leadership of the working class and the urban middle class, enabled the nation to eliminate political strife and turn its full attention to the war effort. Nonetheless, Mapam undercut the arrangement by demanding that the government impose a compulsory loan and a property tax. In response, the Ministry of Finance assured Mapam that if voluntary donations and loans failed to generate the required funds, it would enforce mandatory measures against the economic circles.

At the end of the day, the common perception is that Jewish donors across the world, including particularly in the United States, led the effort to finance the new Israeli government during its War of Independence. As Moshe Naor explains, however, the Yishuv and the Jews of Eretz Yisrael provided about two-thirds of the funding through taxes, government bonds and the National Loan Program.