On 14 May 1948, Israel declared independence while immediately facing wartime spending, disrupted trade, and urgent needs for food and basic supplies. These pressures shaped early fiscal policy, because the new government needed workable taxes, budgets, and a stable means of payment to run the state and support a rapidly growing population.
The Bank Notes Ordinance (effective 17 August 1948) gave legal authority for banknote issuance through a charter between the government and the Anglo-Palestine Bank. This decision created an emergency framework for money issuance before a full central bank existed, helping the state pay salaries, purchase imports, and collect revenues in a recognized legal tender.
Starting 18 August 1948, the Anglo-Palestine Bank issued banknotes for use in Israel, still denominated in "Palestine Pounds" because the state and currency names were not yet settled when printing was arranged. Replacing prior currency notes helped the government establish practical control over the payments system during the state’s first months.
By the end of October 1948, the swap from older currency-council notes to the Anglo-Palestine Bank’s notes was completed. This reduced confusion in daily transactions and improved the government’s ability to manage cash payments and accounting during a period of major military and civilian expenditure.
In January 1949, Israel received a $100 million Export-Import Bank loan, according to a U.S. government summary. Such external financing helped fund agriculture, industry, and infrastructure needs at a time when domestic tax capacity was limited and foreign currency (needed for imports) was scarce.
In spring 1949 the government adopted an austerity policy (tzena) that used rationing and controls to stretch scarce supplies and conserve foreign currency for critical imports. The policy aimed to stabilize basic consumption while Israel absorbed large numbers of immigrants and managed war-related economic damage.
A Ministry of Rationing and Supply was created to run the austerity system and supervise rationing. Centralizing rationing helped the state manage shortages, but it also increased administrative burdens and encouraged black markets as citizens tried to obtain goods outside official channels.
In December 1950, Israel received a second Export-Import Bank loan of $35 million, as recorded in U.S. documentation. Continued reliance on external borrowing reflected the gap between urgent spending (especially for resettlement and development) and the state’s still-limited ability to raise revenue domestically without deepening inflation.
On 1 May 1951, the Anglo-Palestine Bank’s assets and liabilities were transferred to a new entity, Bank Leumi Le-Yisrael. This reorganization supported a more permanent financial structure for a sovereign state, even before a formal central bank was established.
On 10 May 1951, Israel Bonds (via the Development Corporation for Israel) were launched publicly in New York to raise long-term funds from investors, especially abroad. Bond finance became a major early tool for funding infrastructure and development when domestic savings and tax revenues were not enough to cover rapid state-building costs.
On 9 June 1952, the Israeli pound (Israeli lira) replaced the Palestine pound as Israel’s currency. A clear national currency name and issuing framework reduced uncertainty in contracts and pricing, supporting more stable fiscal administration during austerity and large-scale state spending.
On 10 September 1952, Israel and West Germany signed the Luxembourg Agreement (Reparations Agreement). For Israel’s finances, the agreement promised large, multi-year transfers mainly in goods and services—resources that could ease foreign-exchange shortages and support industrial and infrastructure investment.
The reparations agreement entered into force on 27 March 1953. With legal implementation underway, Israel could begin using reparations-backed purchasing arrangements to obtain imports and capital goods, strengthening the state’s capacity to finance development without relying only on short-term emergency controls.
On 24 August 1954, the Knesset passed the Bank of Israel Law (5714–1954), setting the legal foundation for a central bank. The law replaced earlier emergency-era arrangements for note issuance and helped modernize monetary and financial governance as the state moved from improvisation toward permanent institutions.
The Bank of Israel became effective on 1 December 1954, officially establishing Israel’s central bank. It then took over the note-issuing function from Bank Leumi’s Issue Department and absorbed key responsibilities previously held by the Ministry of Finance, marking a major institutional outcome of Israel’s early fiscal and currency-building period.
Economic Foundations: Currency, Reparations, and Early Fiscal Policy (1948–1954)