How Levi Eshkol's Government 'Engineered' Israel's 1966-67 Recession

Already in late 1964, according to newly released archival documents, the PM was affected by political and other considerations and made a series of decisions that embroiled Israel in a recession that ended only after the 1967 war broke out.

Prime Minister Levi Eshkol visiting a factory in 1965.
Fritz Cohen / GPO

Prime Minister Levi Eshkol’s government deliberately created an economic recession in 1966-67, but hid that fact from the public so as not to lose the election that took place shortly beforehand, according to documents released on Monday by the Israel State Archives. The documents were released to mark the 50th anniversary of the onset of the recession in early 1966. It lasted until the Six-Day War broke out in June 1967.

On February 14, 1966, then-Finance Minister Pinhas Sapir presented the annual state budget to the Knesset. In his speech to the parliament, he said that one of Israel’s problems was the existence of “100,000 superfluous workers” whose employment contributed nothing to the country’s output. By the time the recession ended, 108,000 people had lost their jobs – 12 percent of the labor force in a country whose population was then 2.6 million.

The newly released documents show that the decisions that led to the recession were made in late 1964, more than a year before the public began feeling the pinch in their pocketbooks. Among the materials publicized are minutes from a series of meetings held by the Economic Affairs Committee starting on October 13, 1964.

At the first meeting, Sapir sounded worried. He told his colleagues about a factory owner to whom he had recently given a ride, who told him that one of his workers had decided to resign, and that no offer of a raise could make the man change his mind.

“A worker employed by him came to him and said, ‘I’m leaving my job,’” Sapir related. “He didn’t want severance pay or anything. [The boss] asked him, ‘What are you going to do?’ The worker answered, ‘I’m going to work in a job where I don’t need to work next to a machine Now there are machines, which you don’t control and can’t slow down as you please I don’t need anything from you, I’m leaving.’”

For Sapir, this story encapsulated a larger problem: the flight of investors, company owners and laborers from manufacturing and exports. He briefed the committee on the economy’s problems and stressed the need to reduce the growing balance of payments deficit, especially in light of the cessation of reparations payments from Germany.

Fifty days later, at another meeting of the economic affairs panel, then-Bank of Israel Governor David Horowitz said, “We aren’t against any rational arguments on this subject,” he said. “We have a sacred cow, a kind of fetishism: It’s permissible to do anything except slow down economic activity. Is that proper?”

Horowitz concluded his remarks by urging the politicians to think outside the box, adding, “A reduction in the pace of [economic] activity is what we need.”

In November 1964, Eshkol, who headed the economic affairs panel, made a series of decisions aimed at reducing construction, preventing increases in demand, postponing various projects and halting the growth in government subsidies. These decisions led to the recession that began more than a year later.

The archival documents show that these decisions were also closely connected to the political developments of those years: the fierce struggle between Eshkol and his predecessor as prime minister, David Ben-Gurion; Ben-Gurion’s ouster from the leadership of the ruling Mapai party (a precursor of today's Labor Party); and the Knesset elections in late 1965 and the subsequent formation of a new government.

“The Mapai leaders feared the recession would damage the party’s showing in the upcoming elections for the sixth Knesset,” the archives staff wrote recently, in remarks accompanying the documents. Therefore, the ministers were promised that “the public won’t feel the results of the decisions made in late 1964 until a year later.”

At a meeting of the Mapai secretariat on November 26, 1964, Eshkol denied the existence of a looming economic crisis. “I only wish that in another 50 years, we could be guaranteed an economic situation like that we have now in Israel,” he said. That statement, the archives staff commented, was “not the whole truth.”

The "engineered" recession hit the development towns especially hard, and unemployment in these towns soared. On May 1, 1966, when most of the country was celebrating May Day, unemployed people in Dimona held a demonstration where they waved black flags instead of the red ones of the official celebrations, and chanted “Bread and work!”

On May 3, the Economic Affairs Committee met again. According to the minutes, then-Welfare Minister Yosef Burg described the grim mood in the city of Beit She’an in northern Israel, and said the distress there also had an ethnic dimension. “Anyone whose name is Izikovich leaves; anyone whose name is Vaknin stays,” he said, using names typical, respectively, of the Ashkenazi and Sephardi communities.

Labor Minister Yigal Allon warned his colleagues of mass emigration from the country, especially by people with a university education – a prediction that indeed came true in 1966. “There’s a danger of mass emigration,” he said. “Rumor has wings, and it’s already delaying the return of Israeli students doing [degrees] in the U.S. and Western Europe.”

Allon charged that Israelis had become spoiled and were less capable of dealing with hardships than they were in the past: “The willingness to endure suffering today is smaller.” Back when immigrants still lived in transit camps, he continued, “They didn’t yet know it was possible to go to Europe. Today, people have already been absorbed and are more self-indulgent.”

For his part, Sapir demanded that "unproductive" organizations like the Jewish Agency and the Histadrut labor federation, which had many redundant workers, cut their workforce. A few months later, he insisted that the rise in unemployment wasn’t due to the recession, “but because the pus has come out of a wound that has existed for 18 years” – or, in other words, because of fundamental structural problems that had existed in Israel’s economy since the state was established in 1948.

The documents now publicized by the archives also offer a peek into many meetings where proposals for ending the recession were discussed. But ultimately, what reshuffled the deck in this regard was the regional security situation rather than any economic policy decision: The Six-Day War, which began on June 5, 1967, terminated the recession.

“In retrospect, some laud the recession for helping the Israeli economy to adapt itself to a reality in which there were no reparations from Germany, increasing the amount of dollars in the economy and helping to boost the competitiveness of exports to Europe,” the archives staff wrote. “On the other hand, there are some who criticize the heavy price Israel paid, in the form of unemployment and a drop in production.”

Some people also connect the recession to two other events: the establishment of a welfare state in Israel in the late 1960s and the political “earthquake” of 1977, when the rightist Likud party ousted the leftist Mapai from power for the first time in Israel’s history.