From Settlement to Statehood: The Yishuv Economy and Israel’s Socialist Foundations
(Part 2 of the History of Israeli Capital Markets Series)
When Israel declared independence in 1948, it already had the outlines of an economy — not a capitalist one, but a highly organized, state-aligned system born out of necessity. Decades before sovereignty, the Jewish community in Mandatory Palestine — the Yishuv — had built the economic and institutional framework that would define Israel’s early decades.
The Yishuv: Building Without a State
The Jewish communities in pre-state Mandatory Palestine were known as the “Yishuv,” derived from the Hebrew word for “settlement.” The Yishuv consisted of tens of thousands of Jews living in a largely heterogeneous community within the declining Ottoman Empire (the “Old Yishuv”) and, ultimately, under the British Mandate (the “New Yishuv”).
The Yishuv had neither robust institutional infrastructure nor recognized leadership. Its early leaders — largely Eastern European socialists — believed economic cooperation and collective enterprise were essential for national survival. They laid the groundwork for what would become Israel’s founding economic institutions, embedding ideals of social solidarity and self-reliance that shaped the young state’s economic DNA.
The Yishuv grew from roughly 56,000 Jews in the 1920s to 600,000 by 1948, driven almost entirely by immigration. With limited resources, the community had to build everything from the ground up — labor markets, cooperatives, industries, and welfare systems — before it had a government to oversee them.
At the center of this effort stood the Histadrut, the federation of labor unions founded in 1920 with about 4,400 members. By 1939 it represented about 75 percent of the Jewish workforce, with about 100,00 members, and had become the preeminent economic power in the Yishuv. It was effectively a “state within a state.”
The Histadrut: A State Within a State
Unlike many labor unions in other countries, where unionized employees organized to improve working conditions and pay, the Histadrut played a much more entrepreneurial role in the Yishuv, organizing cooperatives in almost every facet of economic life:
Operated as a union and as one of the Yishuv’s largest employers
Founded Bank Hapoalim (1921) and managed insurance and pension funds
Administered healthcare and education systems
Published the daily newspaper Davar and ran a publishing house
Managed cultural institutions, including theater groups
Supported the Yishuv’s defense arm, the Haganah
Through this vast apparatus, the Histadrut shaped not only wages and employment but migration, investment, and social services — consolidating an economy that prioritized collective stability over market competition.
Agriculture and Industry: Dual Engines of Growth
Early Zionist ideology placed agriculture at the center of nation-building. Kibbutzim and moshavim reclaimed land, developed irrigation, and produced food for a growing population. By the 1940s, agriculture was a major employer and a source of exports such as citrus and wine.
Yet British Mandate restrictions on land purchases limited agricultural expansion, pushing Jewish labor and capital toward industry. The Histadrut and private entrepreneurs created monopolistic enterprises across multiple sectors:
The First Securities Market
Capital formation began surprisingly early. In 1935, the Exchange Bureau for Securities was founded by the Anglo-Palestine Bank, marking the birth of organized securities trading in the Yishuv. Between 1933 and 1937, an influx of German-Jewish immigrants transferred wealth to Palestine by purchasing local securities — often at inflated prices — effectively turning the market into a channel for capital flight from Europe.
The Companies Ordinance of 1929, modeled on British corporate law, governed registration and disclosure, providing the first legal framework for public offerings. By the end of World War II, leading Yishuv companies were financing themselves domestically under this regime. Mandatory wartime rules requiring government approval for new issues remained in place after independence, influencing the early regulatory style of the new state.
Legacy: How the Socialist Past Still Shapes the Market
The Yishuv’s small population and rapid growth allowed this monopolized socialist model to function — but it also left a legacy of concentration that would later define Israel’s economic reforms. The same banks, unions, and utilities that once centralized power became the institutions transformed during liberalization decades later.
For investors, this history matters. Israel’s markets were not imported wholesale from the West; they were engineered under constraint — a blend of ideology, pragmatism, and necessity. The traces of that design remain visible today in the country’s market structure, regulation, and enduring balance between state coordination and private enterprise.
Next up: Statehood and Austerity — how a newly founded Israel managed mass immigration, rationing, and the struggle to stabilize its economy in the 1950s and 1960s.
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