Toward the end of 1950, Israel faced difficult economic times. Government debt was mounting. The economy was deteriorating into an abyss. Israel needed an infusion of cash to save its economy and its government. Compelled by the dire economic situation, then-Prime Minister David Ben-Gurion sought loans and grants from the U.S.; floated Israeli bonds to Jewish consumers worldwide; and invoked economic austerity and controls. These actions, however, were insufficient. Something else was needed.

Ben-Gurion sought a novel, yet controversial, revenue stream. Ben-Gurion appealed to the West German government for reparations due to Nazi atrocities during the Holocaust. If successful, Israel would receive an influx of cash, thereby pulling the Israeli economy out of a rut. However, accepting “dirty” German money, especially as part of an economic strategy, would be a difficult sell to the public just a few years after the Holocaust. For this reason Ben-Gurion, who clinched a reparations deal with West Germany after protracted negotiations, appealed to the Knesset to accept German reparation funds in place of Holocaust-era looted Jewish property and to help Israel absorb a half-million Holocaust refugees. However, Ben-Gurion did not publicly claim that his plan was part of an economic strategy. In April 1952, with a 61-50 Knesset vote supporting Ben-Gurion, Israel signed a reparation agreement with West Germany. Through the reparation agreement, Israel’s economy was saved.

In fact, the Bank of Israel credits the reparations as the catalyst for significant economic activity between 1953-63. The reparation money funded approximately one-third of investment in Israel’s electrical system, helping it to triple its capacity. In addition, Israel purchased German-made rolling stock, tracks, and signaling equipment with reparation funds, constituting almost half the total investment in Israel Railways. Reparation money was also used for to develop Israel’s heavy machinery infrastructure, which included German-made machinery for developing the water supply; machinery for oil drilling; mining equipment for use in the copper mines of the Timna Valley; combines and trucks for agriculture and construction. Additionally, 30 percent of that money went into buying fuel, while 17 percent was used to purchase ships for the Israeli merchant fleet, which eventually comprised of two-thirds of the Israeli merchant marine. In all, the Bank of Israel linked the reparations to 15 percent of Israel’s overall GDP and the creation of 45,000 jobs during that period.

This infusion of German cash was labeled reparation money to recover looted money and to help immigrant absorption. In actuality, it was an unethical ploy to stimulate Israeli economic activity and keep the ruling party in power. In the U.S. during the same 1950s post-war period, the U.S. made a strong shift from an agrarian to a manufacturing economy. American farmers faced tough economic times while weapons manufacturing increased to fill the demand caused by the Cold War. The growing use of air conditioning triggered a housing boom in Sun Belt cities such as Miami, Atlanta, Houston, and Phoenix. In contrast, the Israeli economy did not shift from its socialist-Zionist roots; it remained firmly entrenched in its agrarian/kibbutz model, which its ruling Mapai party sought to keep at all costs. Hence its need for “reparation” money.

Recently, counter to its socialist-Zionist foundation, Israel fully embraced capitalism. Ironically, the current leader of the labor faction, the original ardent socialist-Zionist political party, is the capitalist corporate lawyer Yitzchok Herzog. The leader of the Bayit HaYehudi political party, an outgrowth of the religious Zionist and socialist Mafdal, is the capitalist entrepreneur Naftali Bennet. Former Bank of Israel Governor and capitalist Stanley Fischer employed various capitalistic strategies, including currency devaluation, to stimulate the economy. Even the kibbutz model has adopted capitalist changes.

The current Israeli capitalist model diverges from its original socialist model. In 1950, instead of embracing capitalism like Israel currently does, the ruling party used “reparations” for economic and political gain. Today, however, Israeli economic policy employs capitalistic strategies to open new markets. The good news, it seems, is that Israel has moved on from socialist-Zionism despite Zionism’s original vision.