Michael J Cohen. Journal of Israeli History. Volume 30, Issue 2. September 2011.
Palestine’s strategic importance for imperial Britain, after both world wars, has been the subject of much research and debate. But the issue of Britain’s economic relations with and benefits from the Palestine Mandate has received less attention; two major works have been published on this field: Barbara J. Smith’s work, The Roots of Separatism in Palestine, as indicated by the title, is essentially about the separation of the Zionist and Palestinian economies, with some references to the British exploitation of Zionist revenues movement for its own imperial purposes; Jacob Metzer’s work, The Divided Economy of Mandatory Palestine, is a macro-economic study of the entire Mandatory period. The focus of this article is on Britain’s economic policies towards Palestine during the first years of its Mandate in that country.
World War I left Britain impoverished and overburdened with an empire that had expanded beyond its planning and beyond its ability to sustain. In Palestine, the windfall of Zionist-generated capital and revenues enabled it not only to maintain its administration in the country but also to expand its imperial presence in the region. At the same time, the British Exchequer, headed from 1924 to 1929 by Winston Churchill, acted with the greatest parsimony towards the Zionist project. This was hardly what the Zionists had anticipated from the authors of the Balfour Declaration, which had promised to facilitate the establishment in Palestine of a Jewish National Home.
By the end of the nineteenth century, Britain had fallen behind its two major rivals—the United States and Germany—both economically and industrially. The British Empire survived until World War II thanks to the “invisible income” generated by invested capital and services, which filled the gap in Britain’s trade balance. The immense costs of the 1914-18 war eroded British confidence. It emerged in 1918 owing huge debts to the United States. The punitive reparations imposed by the victors upon Germany and its allies at Versailles were designed to cover their debts, but the vertiginous inflation of the German mark in the 1920s emasculated the reparations in real terms and put paid to any hopes of a quick economic recovery in Britain. In 1922, the service of its debts still accounted for one-third of its gross annual expenditure.
Since the closing decades of the nineteenth century the British had expected their colonies to be financially self-supporting. One study of British imperialism has described the “classical objectives of Victorian imperialism” as follows: “the creation of a compliant local regime which would preserve Britain’s political and strategic interests while relieving her of the trouble and expense of ruling directly over an alien and unpredictable society.” But during World War I the empire had expanded to its zenith, due largely to the unplanned conquests of huge territories in the Middle East. The costs of the war made it quite apparent that the mother country could not sustain any further increase in imperial burdens.
There was a gaping discrepancy between the vast, largely arid expanses of new territories that Britain acquired in the Middle East and the paltry means at its disposal to control them. The military’s estimates of the troop levels that would be required to hold on to the new territories were dismissed out of hand. The cabinet accepted without question Lloyd George’s decree that the armed forces budget must be reduced to prewar levels. Indeed, in the twentieth century Britain’s imperial doctrine stipulated that the empire should be a source of income, not expense, for the British Exchequer. Britain arrogated to itself the right to assert direct economic control over its various colonies. It prevented the erection of tariff walls behind which local industries might develop and barred discrimination against British goods. Without protective tariffs, there was little chance that colonial economies would free themselves from dependence upon European manufactures, to be paid for, hopefully, by locally produced primary commodities. Britain applied many of its imperial strictures to Palestine.
Palestine was basically a poor country, lacking growth potential. Apart from a limited reserve of minerals in the Dead Sea, it had no known natural resources, no significant agricultural potential or local consumers’ market, and no obvious outlets for British capital investment. Customs duties—considered to be a tax on the wealthier urban population—did not reach the usual two-thirds of colonial governments’ total revenue until the end of the 1920s. Income tax was introduced only in September 1941. Sir Herbert Samuel, the first British high commissioner to Palestine, believed that government aid to Jewish industry would stimulate the general industrialization of Palestine on modern European lines. But most of his proposals were quashed by the Colonial Office. The country was flooded with imported goods that were “dumped” at very low prices on to a domestic market unprotected by tariff walls.
Britain’s primary interest in Palestine was strategic. But thanks to the Zionists, it came into a unique windfall—significant imports of Jewish capital, donations to the Jewish National Home. During the entire period of the Mandate, the Palestine administration’s entire budget never reached the level of Jewish capital imports. During the first 10 years of British rule, these imports totaled P£44 million, about twice the government’s expenditure. Some 73% of this capital was private.
The British Treasury retained strict control of the local currency. The Palestine pound benefited from the prestige and stability afforded by the backing of sterling, a recognized international currency. There were never any foreign exchange shortages, and no barriers to large imports of capital, which was expended largely on Zionist enterprises. But the local banking system consisted mainly of short-term deposits, as the large inflows of capital were usually spent immediately on colonization and the establishment of new businesses. There were no controls over or direction of investment, nor any restraint on the re-export of profits. By force of British law, all colonial reserves were held in Britain, by the Crown Agents for the Colonies. These reserves constituted a virtual loan.
The Palestine Loan
The government in London did not manage to assert full budgetary control over expenditures in Palestine until 1922. Since the country had been a part of Ottoman Syria until World War I, the Foreign Office remained in nominal control until February 1921, when, at the insistence of the incoming colonial secretary, Winston Churchill, Palestine was transferred to his jurisdiction.
In 1918, when General Allenby’s army conquered the country, Palestine was a neglected, rural Ottoman backwater. He had to pave a number of military roads for the army’s use. When Samuel arrived, he embarked upon a series of projects to establish basic infrastructures—i.e. road construction, swamp drainage, improvements to water supplies, urban sewage and irrigation systems, and a telephone network. Given that the Palestine administration itself was legally unable to issue government bonds to fund these projects—until September 1922, when the League of Nations awarded the Mandate to Britain—Samuel went into deficit spending, to the tune of some £2 million. In 1925, a Colonial Office official recalled the anarchy that had prevailed during that period: “The actual fact is that the approval of the Colonial Office was in those days neither sought nor given for expenditure on capital account and the result was that the Palestine Government succeeded in spending more than a [£] million and a half of money before the Colonial Office woke up to the true facts and succeeded in applying the brake.”
Given that the home government was determined not to expend British taxpayers’ money on the colonies, the Palestine administration had to raise a loan on the international money markets. This was needed not only to cover the deficit already incurred but also to pay for future development and capital expenses—and Britain’s own imperial projects in the region. Since Palestine itself was unable to offer sufficient security to raise a loan, the administration was forced to fall back on London to provide an imperial loan guarantee. Until the loan could be floated, Palestine’s deficits had to be covered by the British Treasury, which drew the funds from reserves held by the Crown Agents for the Colonies—funds accumulated from Britain’s other colonies. Negotiations to finalize the terms of the loan guarantee would take just over five years to complete.
Britain’s anticipation that Jewish capital would finance the development of Palestine was a key factor behind the decision of the Conservative government in July 1923 to retain the Mandate. On the eve of the government’s decision, the Duke of Devonshire, the Conservative colonial secretary, briefed his cabinet colleagues on the significance of the Zionists’ contribution to Palestine:
They have spent nearly [£] five millions in developing the country, and are prepared to spend much more. It is they alone who are both able and willing to supply capital, enterprise and additional labour. Palestine is a poor country and unlikely to attract capital from the outside world on its own merits. The Zionists have a special incentive, unconnected with calculations of profit and return, to devote their brains and resources to the development of the country.
Chaim Weizmann, the Anglophile Zionist leader, was quite aware that Zionism held out material attractions for the British and did not fail to seize any opportunity to remind them of it. In October 1928, in a letter to William Ormsby-Gore, the under-secretary of state for the colonies, arguing that Haifa harbor should be built exclusively by Jewish workers, he wrote:
The harbour-works are being financed from the proceeds of the Palestine Loan. It is no exaggeration to say that Jewish colonisation has been largely instrumental in placing Palestine in a position to raise a loan of these dimensions on the strength of its taxable capacity, as measured by its financial record during the past few years. Similarly, the revenues on which the service of the loan is charged may fairly be said to be revenues which are directly or indirectly dependent to a very considerable degree on the development of Jewish enterprise and the influx of Jewish capital; it is self-evident that if Jewish activity came to a standstill, or suffered a serious check, the security for the loan (apart from the British guarantee) would be materially impaired.
Weizmann would hardly employ such arguments with American Jews during his fundraising tours of the United States! Diaspora Jewry was willing to donate funds only to the Jewish National Home—not for the welfare of the Palestinian Arabs, and hardly in order to relieve the British taxpayer of bearing the costs of empire. It is to be doubted if American Jewry appreciated the extent to which they were also helping to finance British strategic projects in the region: the construction of a network of military roads in Palestine, the deep-water port at Haifa, and the railway/oil pipeline link that would be built in the 1930s between Kirkuk and Haifa.
But the import of Jewish capital into Palestine was always a contentious issue. Zionist leaders claimed, with some justice, that the import of their capital and skills would benefit all the inhabitants of Palestine—even if only indirectly. Initially, their claim received support from the Colonial Office. In September 1921, Pinhas Rutenberg, a Russian-born Zionist, was awarded the concession for the production and supply of electricity to all of Mandatory Palestine west of the river Jordan—excluding Jerusalem. In January 1922, when Sir John Shuckburgh, head of the Colonial Office’s Middle East Department, was asked why the government should agree to the electrification of Palestine’s railways, when France and Great Britain still used steam locomotives, he explained:
The Rutenberg concession has always been regarded as the more practical example of the policy of setting up the National Home for the Jews. It is so regarded by the Zionists themselves. We are always trying to divert the attention of the Zionists from political to industrial activities, and preaching to them from the text that their best chance of reconciling the Arabs to the Zionist policy is to show them the practical advantages accruing from the Zionist enterprise.
Imported Jewish capital, invested exclusively in Jewish enterprises, did create numerous jobs for Arab workers (at bargain wages). However, the official Zionist policy of pressuring Jewish employers to hire only Jewish labor actually led to job losses among the Arabs.
Initially, Colonial Office policy towards the Palestinian Arabs was marked by imperialist hubris, by a patronizing approach towards the “natives.” During negotiations with them in late 1921, Shuckburgh commented: “Experience has shown that they [the Palestinian Arab Delegation] are a hopeless body to deal with…. Being Orientals they will understand an order, and if once they realize that we mean business, may be expected to acquiesce.” The Palestinian Arabs never conceded the claim that they too would benefit from the Zionists’ largesse. From the outset, they protested that the Jewish National Home was the main, if not the sole beneficiary of Jewish capital. They asserted that most of the new roads were paved to serve the Jews and that the unprecedentedly high taxes were needed to maintain a bloated administration that was required to serve the expanding Jewish population. Colonial Office officials also failed to take into account the special interests of British industrialists and bankers. While opposed to the expenditure of the taxpayers’ money on the empire, the latter regarded the contracts for and the financing of colonial developments as their own natural and exclusive prerogative. At the very least, they expected that British companies would be given the opportunity to compete for all development concessions in Palestine via public tenders (see also below).
Samuel, formerly a member of the Zionists’ inner councils, was a Liberal by party affiliation and a liberal by ideology. His belief in laissez-faire economics meshed in nicely with British imperial doctrine. As Jacob Metzer has noted:
The liberal approach of non-intervention in economic matters, and the retention of traditional socio-economic structures (primarily in the rural Arab community) fitted in well with the colonialist posture of maintaining socio-economic stability in colonized areas and encouraging their continued concentration on the production of primary products, thereby providing for colonial economic activity complementary to (and not competing with) the industrial “mother country.”
Samuel believed that in lieu of government subsidies, wealthy Jewish notables could be persuaded to finance the building of the Jewish National Home. At a meeting with Jewish magnates and Zionist leaders in June 1920, on the eve of his departure for Palestine, Samuel was reassured that they would help to raise a Palestine Loan. One of Samuel’s biographers has returned an acerbic verdict on his initial euphoria, asserting that after lengthy legal and technical delays had been overcome “the awful truth was revealed: the Zionists had been guilty of what amounted almost to a confidence trick in which they had deceived themselves as well as others. The ‘leaders of Jewish finance,’ it turned out, were not at all eager to perform the role assigned to them by Samuel and Weizmann.”
This oversimplifies and distorts a complex issue. Many Anglo-Jewish notables did oppose Zionism and refused to contribute to the cause. But others were pro-Zionist and willing to help to raise a Palestine Loan. However, there were numerous problems involved, many of which were inevitable, given the conflicting interests and intentions of the British and the Zionists. The following extract from a lengthy, confidential memorandum sent in 1924 by Samuel to J.H. Thomas, the Labour colonial secretary, represents the most generous limits of British imperial thinking on Palestine. The memorandum, complaining of the excessive financial burdens imposed by the home government on Palestine, is worth quoting at some length:
I have a dual capacity. I have to act as the spokesman of the people of Palestine with H.M.G…. At the same time I am an official of the British Government, and one who is fully conscious of the urgent need for the utmost economy on its part in all forms of expenditure that are not essential….
In our case a Loan is needed in order to repay the temporary borrowings from the Crown Agents, who have advanced monies deposited with them that belong to various Colonies; it is needed to enable an Agricultural Credit Bank to be established for the assistance of cultivators; to provide stud farms for the improvement of stock, and to supply other agricultural requirements; to complete the cadastral survey of the land; to allow the further development of the road system, of swamp drainage and other anti-malarial works, of water supplies and irrigation, of the telephone system, and of other works of improvement.
It is true that a considerable amount of capital is being introduced into Palestine by the Zionist Organization, and allied bodies and individuals. But these funds are almost all spent upon the development of Jewish agriculture, Jewish industries, and the Jewish quarters of the towns. They do not supply, to any large extent, the purposes that have been enumerated. Indeed, from a political point of view, they make it all the more necessary for Government works to be undertaken, since such works will principally benefit the Arabs because they form the great majority of the population.
Samuel’s views were too liberal for Whitehall, but hardly generous enough for the Zionists. They would not have agreed with his contention that the loan was needed to finance public works that would “principally benefit the Arabs.” They asserted that the National Home clauses of the Mandate required the government to provide the Yishuv with services commensurate with the revenues collected from it. Whereas the League Mandate stipulated legal and administrative equality between Arabs and Jews, article two required the Mandatory to place Palestine “under such political, administrative and economic conditions as will secure the establishment of the Jewish National Home.”
Those Jewish financiers who were willing to help float the loan were quite clearly motivated by Zionist sentiment. Had they not wanted specifically to help build up the Jewish National Home, they could have found more lucrative and safer avenues of investment. At the same time, they treated their investment in Palestine as a strictly business enterprise. They were not about to risk their capital on an unknown entity, especially not in the early, unchartered first years of the Mandate. The return on their investment in Palestine might indeed be lower than that which they could have secured elsewhere, but they expected it to be guaranteed. As such, a loan that the British government itself was unwilling to guarantee could not be regarded as a sound business proposition.
Until the end of July 1923, no one could guarantee that Britain would even remain in Palestine, let alone predict for how long. The British Treasury was unwilling to commit the British taxpayer to the repayment of any loan after the end of the Mandate. The Treasury insisted that the loan be treated as a liability of Palestine—not of the Mandatory. In July 1922, two months before the League of Nations awarded the Mandate to Britain, a Treasury official noted:
The great difficulties of a loan are that Palestine has no certain political future. Even if a final mandate were given to this country, which has not yet been formally done, that mandate might come to an end at any moment, which would leave the holders of a prospective loan without any security … a purely Palestine loan would not be a trustee security.
The Colonial Office had its own fears—that the administration and security of Palestine would become too dependent on Jewish capital. The department objected to the Treasury’s inflexibility. The latter’s parsimony towards Palestine during the 1920s would ignite frequent clashes between the two departments. Tensions peaked during the second Baldwin administration (1924-29), when Leo Amery, a Zionist supporter, and Winston Churchill, an erstwhile supporter, headed the Colonial Office and the Treasury respectively.
In February 1923, Colonial Office and Treasury officials met with the heads of the Economic Board for Palestine (EBP), a body set up recently by the pro-Zionist Jewish industrialist and financier Sir Alfred Mond and a council of prominent British Jews. The meeting was convened by the government, who hoped that the EBP would persuade Jewish banking houses—in London, New York, Amsterdam, and Paris—to join British Crown Agents in launching a Palestine Loan. The cabinet had yet to determine if Britain would retain the Mandate. The pall of doubt hovering over Palestine’s future hung also over the February meeting.
Mond offered to form a syndicate to take over the whole of the Palestine Loan. But this did not suit the Colonial Office, which feared that a purely Jewish syndicate would only intensify Arab hostility and increase Zionist interference in the Palestine administration. Treasury officials and representatives of the Crown Agents for the Colonies then explained the difficulty of granting a government guarantee for a loan to a country over which Britain’s tenure was temporary and indefinite. Leonard Cohen, a member of the EBP executive, explained that the loan’s prospectus as it stood would only discourage investors: “no private financial house of repute would undertake the issue of the Loan.” Mond conceded that most of the large financial houses, both in Britain and in the United States, were “definitely anti-Zionist.” He asserted that no Jewish investor would contemplate investing in Palestine until the doubts about the government’s future policy were cleared up: “the Mandate represented the policy of the late government, but not necessarily that of their [Conservative] successors. Unless the government publicly stated that they intended to continue the policy of their predecessors the issue of the Loan would be impracticable.” When asked by Shuckburgh if the loan might be floated successfully should the Treasury agree to restore the government guarantees, Mond remained skeptical. He believed that the most fundamental problem was the persisting doubt about Britain’s future policy in Palestine. Not only that, but there was no indication whether the proceeds of the proposed loan would be devoted to capital works that would appeal to the Zionists.
Mond believed that the Rothschild bank would be the most suitable agency for raising the loan as a private issue. But he also conceded the validity of Colonial Office fears of opposition if the loan was entrusted to a Jewish financial house:
By entrusting the whole issue to a Jewish house we would afford critics of Zionism a loophole for an attack on our present policy in Palestine on the score that the Jews are making profits out of the Loan at the expense of the British taxpayer. For this reason alone it was of great importance that the issue should not be of a purely Jewish character, and in order to avoid this it was, in his opinion, essential that the Loan should be issued by the Crown Agents.
The consensus among the Jewish magnates was that first there had to be a clear declaration by the government that it would adhere to the conditions of the League Mandate, i.e. that it would continue to pursue the policy of the Balfour Declaration; and second, they would require the government to give a clear assurance that it would “assume responsibility for the protection of the interests of the bondholders during the whole currency of the Loan.”
At the end of July 1923, the Baldwin cabinet decided finally to retain the Palestine Mandate. The Colonial Office now reminded the other ministries concerned that Britain itself stood to gain from the successful issue of the Palestine Loan; first and most important, the loan was essential in order to enable the Palestine administration to repay to the Treasury £2 millions of the money that had already been spent; second, the loan would enable the Palestine administration to borrow money at a lower rate than previously and, with the extra revenue, it would be able to administer the Mandate with a reduced grant-in-aid from London.
But the Treasury remained unwilling to involve the British taxpayer in any financial commitment to Palestine. Prior to winning the elections in October 1922, the Conservative Party, especially its right wing, had been among the most vociferous and violent opponents of the Lloyd George coalition’s support for Zionism. The right-wing Opposition habitually employed anti-Semitic stereotypes—indeed, one group in the Commons was known as the “anti-Semitic party.” One of the most vociferous leaders of the Opposition in 1922 had been Sir William Joynson-Hicks, whose public speeches since 1908 had earned him notoriety as an anti-Semite. At the time of the parliamentary debates on the 1922 Palestine White Paper, he had played a key role in opposing the government’s support of Zionism, both in the Commons and in the press. In particular, the government’s decision to award the electricity concession to Rutenberg had aroused scathing criticism. The right-wing establishment was outraged that the concession had not been awarded to a British company. At the end of May 1922, Joynson-Hicks published a cynical, vitriolic protest in the Times, one of the main organs of the opposition:
Now we see what we conquered Palestine for; now we know what soldiers died for, and what our taxpayers are now spending £300,000 a year for; and a suggestion that any man exploiting Palestine should purchase his goods in Britain is a flagrant violation of the whole principle of mandates. If this is so, the sooner we get rid of the mandates the better.
The matter cannot stand where it is. No wonder the Arabs are sullen to the verge of revolt. If the House of Commons has any spirit at all, it must insist on a full discussion of the whole matter.
Two days later, the Times published an editorial entitled “Rutenberg monopoly.” It castigated the concession, an award that was indeed highly unusual, if not unique, in the annals of the British Empire:
The disquieting feature of the Rutenberg scheme is that by it a monopoly is created on behalf of interests that are not British. Since Great Britain is responsible for the political control of Palestine, why has a step been taken which signifies the transference to other hands of such a large share in the economic control of the country?
From all accounts of the scheme … it is clear that the British administration in Palestine is placing itself in the very ambiguous position of transferring to others the essence of power while retaining an embarrassing responsibility.
Not even Churchill’s statement in the Commons in July 1922 that Rutenberg had been thrown out of Russia by the Bolsheviks in October 1917 could dissuade the opponents of the concession to desist from allegations that he had been involved in the assassination of the Tsar. In 1948, Frances Newton, a long-time British resident of Jerusalem, would publish a book asserting that Rutenberg had been a “ruthless revolutionary, responsible to a great extent for the elimination of the cousin of our King George V from the throne of Russia.”
Fate would have it that during the summer months of 1923, Joynson-Hicks occupied an influential position at the Treasury in the first Baldwin administration. His nominal position was financial secretary, but in May, when Chancellor of the Exchequer Baldwin replaced Bonar Law as prime minister, Joynson-Hicks became acting chancellor, until the end of August. Much of consequence had happened since the Conservatives’ 1922 campaign. The 1922 Palestine White Paper had been passed into law, and in September 1922 the League of Nations had awarded to Britain the Mandate for Palestine. But Joynson-Hicks remained opposed to any British financial commitment to Palestine. He cautioned that pending some “effective settlement of the Arab versus Jew question” he would be reluctant to assume responsibility for piloting through Parliament a bill for a Palestine Loan guarantee:
I am still far from satisfied that it is desirable [and] in the taxpayers’ interest to guarantee a loan to Palestine. I am, however, certain, that any Bill for that purpose, would, at the present time, receive violent opposition in the House of Commons, probably from the Liberal Party, the Labour Party and certainly from the right wing of the Tory [Conservative] Party. You would get united against the Bill the anti-Expansionist party and the anti-Semite party and the Government might find itself in a very awkward position….
Nor did he forget British industrial interests: “It will not be forgotten that the Rutenberg concessions are being exploited for the benefit of German and other industrialists and the English taxpayer would rightly be furious if a loan guaranteed by him was spent at Krupps….” In conclusion, he recommended that “If the Loan is to be guaranteed, I would make it up to five millions and clear off the whole of Palestine’s debts and give her money to develop, but it would, of course, be a condition that the development money other than labour, should be expended in Great Britain.”
It was left to the short-lived Labour government (January-November 1924) to grant the imperial guarantee for the loan—although not before the Treasury and the Colonial Office had haggled at length about how much debt it was fair or possible to impose on Palestine. In April 1924, the Treasury agreed to increase the original sum of the loan, from £2.5 million to £4 million. The increased amount was calculated to enable the government to recoup the debt of £2 million already incurred by the Palestine administration, and in addition, to enable it to pay for the construction of a deep-water harbor at Haifa (£1 million), and for the fixed capital assets—railways and rolling-stock—left behind in Palestine by the French (£1 million). Although the Colonial Office feared taking on the extra debt, it agreed to the raise. Recouping what were referred to as “book debts” was a paramount consideration for the Treasury. At times, this involved some complicated bookkeeping. For instance, the Treasury offered to increase Palestine’s annual civil grant-in-aid, in order to enable the administration to repay its debts more quickly: “to meet the deficit resulting from the suggested increase in the debt charge, such a grant-in-aid being treated as a loan repayable out of future surpluses.”
The Colonial Office baulked at the prospect of increasing Palestine’s budgetary deficit still further. However, the department jumped at the Treasury’s offer of a further “sweetener”—to reduce Palestine’s debt to the Treasury if Palestine made an immediate cash payment to the government from the proceeds of the loan. This opportunity to reduce Palestine’s deficit was deemed by the Colonial Office to be “too good to refuse offhand.” Since the extra cash payment would require paring down the Palestine budget, the Colonial Office adjured Samuel to balance his books by reducing expenditures, including those on services such as health and education: “We must in fact make up our minds that Palestine is too poor a country to be given public services of the scale and standard we should like to see established.”
In the period preceding World War II, the Palestine administration spent 10-12% of its budget on health and education—largely on the Arab population. This proportion was comparable to Britain’s other colonies, but not to the amounts spent by British governments at home, where an estimated 66% of their budgets went on social services. Due to the Arab-Zionist conflict, the British government spent some 60% of the Palestine budget on security, compared to some 11% at home.
In November 1924, Winston Churchill was appointed chancellor of the exchequer. A staunch sponsor of the 1922 White Paper, he was now in a unique position to improve the fortunes, or at least to alleviate the economic misfortunes, of the Jewish National Home during the last three years of his tenure.
In 1920-23 Jewish immigration into Palestine was fairly stable, at an annual rate of about 8,000. In 1924, immigration from Poland surged (over half of all the new immigrants), due both to restrictive economic policies in Poland and to new restrictions on immigration into the United States. The largely middle-class Polish Jews concentrated in Tel Aviv, whose population mushroomed from 2,000 in 1920, to 20,000 in 1924, to 40,000 in 1925. In 1925, more than 70% of all investment in Palestine was spent on the construction and associated trades. But in 1926 the construction “bubble” burst and the Yishuv entered an economic recession, whose main feature was a high unemployment rate (see also below).
As chancellor, Churchill was preoccupied exclusively with revitalizing the British economy, still in a postwar depression. In Britain too, the most serious feature of the recession was mass unemployment. Churchill’s efforts at solving Britain’s economic problems were not an unmitigated success. His decision to return the pound sterling to the Gold Standard proved to be a mistake. It led to a steep rise in the value of sterling, which crippled British exports and hampered any economic recovery. In addition, when the trade unions declared a general strike in 1926, Churchill was appointed editor of the weekly propaganda bulletin that the government issued in defiance of the unions. At the “khaki” elections in July 1945, the working class would remember his role in defeating the strike.
Churchill adhered rigidly to the Victorian imperial orthodoxy that the colonies must be self-supporting. His veto on all British expenditures on imperial development projects—including in Palestine—had a direct and prejudicial effect on the Jewish National Home. Under Churchill, the Treasury imposed on Palestine a change from “public investment and deficit financing … to fiscal conservatism.” Churchill was responsible for holding up the government guarantee for the Palestine Loan for a further three years—notwithstanding the fact that the loan was needed as much by the British Treasury as by Palestine: “the overriding reason for guaranteeing the loan was to enable Palestine to repay its ‘debts’ to HMG and to satisfy the Imperial need for a deep-water harbour at Haifa….”
Initially, Churchill tried to argue that the Labour government’s agreement to guarantee the Palestine Loan was not binding on the Conservative government. He was soon corrected by the colonial secretary. Amery pointed out that Lord Arnold, the Labour under-secretary of state for the colonies, had already announced the government’s agreement to grant the loan guarantee, in the House of Lords, on 2 July 1924. Any reversal now would incur “very grave charges of a breach of faith.” Amery also reminded Churchill that it would be impossible to raise the loan without the British guarantee, and that the loan was needed “in the first instance to pay off the advances made to her by the Crown Agents for the Colonies. These advances represent the money of various Crown Colonies and Protectorates lent to Palestine … in anticipation of the Palestine Loan…. the issue of a Palestine Loan to enable the advances to be repaid became absolutely necessary.” The Treasury and the Colonial Office haggled further over the size of Palestine’s debt. Churchill criticized as “exceedingly liberal” his predecessor’s agreement to reduce by 50% the amount due for the payment of the capital assets left in Palestine—from just over £2 million to £1 million. Field-Marshal Sir Herbert Plumer, the high commissioner (1925-28), criticized the government for making Palestine pay for railways that had been built in 1918 to meet the requirements of the Palestine campaign, but did not meet the country’s industrial and agricultural needs. The Treasury insisted that the roads built by the army would be of permanent benefit to Palestine. Churchill also demurred at his predecessor’s agreement to accept the payment in bonds of the proposed loan, rather than in cash. He also refused to waive the interest payments for a further five years, but directed that if Palestine was not in a position to begin the repayment of the interest immediately, then the equivalent should be added to the principal of the loan. That would mean an addition of some £12,000-15,000 to the annual payments, when they began in five years time.
Amery rejected Churchill’s proposal, refusing to “impose a liability on Palestine” that he was advised it would be unable to meet. He proposed therefore that they return to the original “book debt” of £2,106,864. He advised that Palestine would begin repayments as soon as its finances permitted which, he warned, might not be until the distant future. Further to another reassessment of Palestine’s debt to the Treasury, the sum of the loan was increased yet again—to £4,740,000.
When Churchill finally approved the government guarantee, he appended the condition proposed by Joynson-Hicks in 1923—all contracts for development projects in Palestine financed with the proceeds of the loan would have to be awarded to British companies. This caused yet another contretemps between the two ministries. Amery objected that article 18 of the Mandate stipulated that there should be “no discrimination in Palestine against nationals of any State Member of the League of Nations.” He added that in practice, British companies would be in a position of some advantage over their foreign competitors. Churchill insisted that the fact that the British were guaranteeing the loan placed them in a special position.
They agreed to refer the issue to the government’s law officers. The latter chose to ignore the relevant articles of the League Mandate and gave their opinion that: “the attachment to the British guarantee … of a formal condition that non-local expenditure should be in the United Kingdom would not be inconsistent with the terms of the Palestine and East African Mandates.” On 3 March 1926, the cabinet approved the loan guarantee, together with the appended condition that development contracts would be awarded to British companies. The Palestine Loan stock issue, now set at £4,740,000, yielding a 5% interest, was published in the Times on 30 November 1927, some 18 months later. It was fully subscribed immediately.
Palestine Subsidizes Trans-Jordan
Not only did Churchill refuse to allow any of Palestine’s budget surplus (£1.5 million in 1926) to be spent on any local public works projects, but he targeted the surplus as a convenient milch cow with which to balance Trans-Jordan’s budget. Trans-Jordan had never been solvent. Ever since Churchill had created the desert emirate east of the River Jordan in 1921, the British Exchequer had been forced to keep it afloat with an annual subsidy. At the end of 1926, in order to reduce the annual subsidy to Trans-Jordan, Churchill directed that Palestine’s budget surplus should be used to meet one-half of the administrative costs of Trans-Jordan. Amery demurred, but bowed to the persuasive powers of Montague Norman, the influential governor of the Bank of England. But Plumer did not agree. With Palestine’s economy in recession, he treated the Colonial Office to a sermon on the inequity of treating Palestine and Trans-Jordan as a single unit:
I hold the view that it is neither just nor politic to regard Trans-Jordan as a dependency of, or an annex to Palestine, and to levy contributions from the latter in support of the former based on that principle. I gather that HMG … consider that Palestine has a material interest both in the preservation of order in Trans-Jordan and in its economic development and that it is consequently equitable that she should contribute towards both objects. In that case it is a matter for careful consideration to what extent it is justifiable, and how far it is to their interest to mulct the taxpayer of Palestine for what may be described as an “insurance” in the one case and an “investment” in the other…. As regards “insurance”… Palestine … is practically secure no matter what may happen in Trans-Jordan and other adjoining territories….
Natural expectation of Palestine is that any surplus balances of revenue would be expended on services which would be of value to the people of the country…. It has been found necessary to curtail the funds allotted to Extraordinary Pubic Works and to postpone several important services. The public are aware of this and it is certainly not the time to incur avoidable extraneous expenditure.
Churchill remained unmoved. Matters came to crisis point in 1928, when he insisted that Palestine also cover half of Trans-Jordan’s share of maintaining the recently formed (1926) Trans-Jordan Frontier Force. In comparison, when the Palestine gendarmerie had been set up in 1922, the Palestine administration had been asked to meet the entire cost of the force. The Frontier Force, which would eventually become the Arab Legion, was established primarily in order to patrol the emirate’s vast desert expanses. Since the force was regarded formally as an imperial unit for service in both Palestine and Trans-Jordan, Plumer proposed that each country pay one half of its costs. Since Trans-Jordan would clearly be unable to pay its share, Plumer applied to London for an imperial grant-in-aid to cover it, on the grounds that “it would be quite unjust on the Palestine taxpayers to call on them to pay for the security of Trans-Jordan by requiring them to meet the cost of the Frontier Force.”
Not only did the Treasury dismiss Plumer’s request for an imperial grant-in-aid for Trans-Jordan, but it also rejected his suggestion that each country cover half the costs of the force. Instead, the Treasury insisted that Palestine pay not only two-thirds of the costs, but also one half of Trans-Jordan’s one-third, i.e. five-sixths of the total! Plumer fought a rearguard action. He conceded the demand that Palestine pay two-thirds of the cost of the force, but he drew the line at Palestine being required also to pay one-half of Trans-Jordan’s share. But the Treasury refused to budge. Eventually, Amery agreed to yet another accounting compromise with the Treasury. He justified his decision on the grounds that the extra payment required of Palestine was a kind of insurance premium against disorder in either territory. He justified the five-to-one ratio of their respective payments by arguing that Palestine’s revenues were roughly ten times those of Trans-Jordan.
Plumer feared that under existing economic conditions, Palestine’s current budget surplus could not be maintained, and that it would be unable to bear Trans-Jordan’s expenses indefinitely. He regarded the home government as ultimately responsible for the security of both Palestine and Trans-Jordan, and insisted that Palestine had no need of the Trans-Jordan Force—that its own security forces were quite adequate to maintain security in the country. He not only rejected the London agreement on the financing of the force but demanded that by the end of 1928 Palestine be relieved entirely of its maintenance costs.
The officials in London had no more respect for the elderly (aged 71 in 1928) Field Marshal’s knowledge of finances than they had had for Herbert Samuel’s. In January 1928, in protest at the rejection of his demands, Plumer offered his resignation, arguing that
to impose on the taxpayers of Palestine the burden of the cost of the Trans-Jordan Force would be unjust. I am certain that the people themselves will so regard it.
I cannot acquiesce in a policy which I believe to be unjust, and have therefore no alternative but to ask the Government to appoint some one to take my place.
The threat of a colonial high commissioner resigning—in protest at his own government’s policy—was a rare, if not unique occurrence in the annals of British colonial history. It prompted something close to panic at the Colonial Office. With the colonial secretary abroad on an imperial tour, William Ormsby-Gore, his under-secretary, took the unusual step of appealing over Churchill’s head direct to the prime minister, with a copy to the Treasury. Ormsby-Gore warned of the serious domestic political consequences should the High Commissioner resign. But Churchill refused to waive Palestine’s share of the costs of the Trans-Jordan Force.
When Amery returned to London, he took up the issue personally with Churchill, asking him at least to waive the charge on Palestine of £30,000 that the two had already agreed to—towards the costs of maintaining British troops in Trans-Jordan. He warned that the government’s opponents might exploit any political crisis in Palestine. This would be particularly inopportune at a time when they were about to embark on the railway/pipeline project from Kirkuk to Haifa—another imperial project that was to be funded in part by Palestine’s budget.
Churchill paid scant consideration either to the moral considerations raised by Plumer, or to the political issues raised by Amery. He was preoccupied with the new annual budget that he was about to present to Parliament. He replied to Amery that the £30,000 he was asking for was already included in his budget estimates and he could not at this late stage add a supplementary estimate. There is some irony in the fact that when Churchill did present his budget to Parliament, on 24 April 1928, he announced with evident gratification that he had been fortunate in receiving two unanticipated windfalls—one of which was the repayment of loans by Kenya and Palestine to the tune of £4.5 millions. Amery had little choice but to bow once again to the senior department. He turned his powers of persuasion on Plumer, appealing to his conscience not to resign. He warned him that his resignation would make public property of the government’s internal dissensions, thereby supplying ammunition to the enemies of Zionism. His appeal might well have been drafted by the Zionists:
The Beaverbrook-Rothermere press would joyfully seize the occasion for a renewed attack on the whole Mandate and urge us to clear out of Palestine altogether…. Palestine would lose far more than the amount now at issue. Arab agitation would naturally fasten upon your resignation to make trouble in general, and more particularly to put out that all this military expenditure imposed on Palestine is only in order to force Zionism on an Arab world struggling to be free and united.
You have done such a splendid Imperial service in Palestine … I do most earnestly implore you not to let your very natural dissatisfaction and disappointment prompt you into doing something at this moment which can only harm the cause for which we both care in Palestine itself and elsewhere, and add greatly to my own difficulties in the continuous struggle I have to wage to secure any kind of consideration for Imperial interests at this time of great financial stress at home.
One final attempt by Amery to secure some gesture from Churchill was rebuffed. The latter remained unmoved by the high commissioner’s resignation threat. Plumer stayed on for four more months, resigning in August. The official reason given for his premature departure was ill health. No official receptions were held in his honor.
British imperial dogma required that no colony should fall a burden on the mother country. But this did not mean that Palestine should not be coerced into relieving Britain of the fiscal burden of subsidizing its maintenance of Transjordan. Nor was Churchill inhibited from vaunting in public his own personal role in the creation of the desert emirate back in 1921. In a speech in the House of Commons in March 1936, upon his return from a private visit to the Middle East, he stated that “The Emir Abdulla is in Transjordania [sic], where I put him one Sunday afternoon at Jerusalem. I acted upon the advice of that very great man Colonel Lawrence, who was at my side in making the arrangements.”
The Zionist Loan
In 1926, Palestine found itself in an anomalous economic situation. On the one hand, the administration’s budget was in healthy surplus, thanks largely to revenues generated by taxes and customs duties derived primarily from the Zionists’ enterprise and commerce, and to the import of Jewish capital. But on the other hand, the Yishuv suffered an economic recession. The short-lived economic boom, fueled by a steep rise in Jewish immigration, largely from Poland (from 7,000 in 1923 to 33,000 in 1925), had been based precariously on the construction sector, primarily in Tel Aviv. The 1926 recession was triggered by a steep decline in the Jewish immigration from Poland (and in the capital they were able to bring with them), a poor harvest and cattle disease. In 1926 construction declined by 60%, and by a further 56% in 1927. The number of Jewish unemployed more than doubled in one year, from 3,000 in 1925 to 8,000 in 1926. At the peak of the crisis, during the first eight months of 1927, one-third of the total Jewish labor force was unemployed—over half of that number in Tel Aviv alone.
Colonial Office officials drew up estimates for a public works program to occupy the Jewish unemployed. High Commissioner Plumer expressed guilt feelings about the high rate of Jewish unemployed, since he had not “resisted the insistent demands of the Zionist Executive and the specious pleadings of Jewish supporters all over the world.” He suggested that the administration encourage Jewish emigration. The Colonial Office proposed its own “solution”: that the administration cease paying unemployment benefits, that Plumer direct the Jews to hard manual labor, and that any who refused should be dismissed and “encouraged to leave Palestine.” The Treasury rejected out of hand any suggestion that government revenues in Palestine should be used to provide work for the unemployed. When Churchill learned that part of Palestine’s budget surplus was being used to subsidize public works to employ Jews, he penned the following irascible note to Leo Amery:
There is no excuse whatever for Palestine being a burden on the Exchequer of this country. It is quite capable of paying its own way in every respect as most Crown Colonies. I cannot understand why the idea of keeping Palestine in a dole-fed condition at the expense of our taxpayer attracts you. I should have strained every nerve to secure solvency and independence at the earliest possible moment. There is no credit in making one country swim at the expense of the other. The credit is to make it self-supporting.
As seen already, Churchill had no compunction about making Trans-Jordan “swim at the expense” of Palestine.
Whitehall supported Plumer’s proposal that unemployed immigrants should return to the countries whence they had come, even if the officials were quite aware that the very concept of re-emigration was anathema to the Zionists—not only was it uneconomical, but quite obviously it was bad for morale. In 1926 and in 1928, the number of Jews who emigrated from Palestine exceeded the number that arrived. The Zionists were quite aware of the government’s reticence about spending British taxpayers’ money on Palestine. They realized also that the Palestine Loan, issued only after years of protracted negotiations, was not going to be spent solely, or even mainly, on their own colonization projects. Therefore, at the end of 1927 they tried to raise their own loan on the international money markets. The anticipated proceeds—£2 million—would be spent on projects designed specifically to alleviate Jewish unemployment. Once again, international securities would be required. The Zionists hoped that the British would put up part of the international guarantee required, under the auspices of the League of Nations.
In February 1928 Weizmann submitted to the government an official request for a loan guarantee. He explained that the Zionist Loan was required to promote further Jewish colonization in Palestine. He discussed the loan several times with Ormsby-Gore and Shuckburgh. Both men expressed sympathy but doubted if the Treasury would agree to pledge a government credit—unless the Zionists themselves could provide sufficient security. Weizmann confessed to his own colleagues that this would be very difficult, since they could not “offer any security of a bankable nature.” But he told the officials that the real justification for the loan lay in their mutual interest in the continuation of Jewish immigration and development—the current depression also meant a drop in the government’s revenues. He advised that both the Zionists and the government needed to initiate a new period of Zionist colonizing activity as soon as possible.
Weizmann confessed to his colleagues that the current unemployment in the Yishuv was “a disease … very difficult to cure” without a large loan. In late 1927 he had sounded out European statesmen to take on a part of the proposed loan guarantee. In January 1928, he met with Raymond Poincaré, the French prime minister, and secured from him a commitment to guarantee up to £250,000 of the loan, provided that Britain took the initiative with the League of Nations. In March 1928, Weizmann departed for the United States on a fundraising campaign of several months duration. During this visit he would initiate moves to raise a Zionist Loan on Wall Street, to be launched by several American Jewish magnates and Lord Melchett: the goal was to establish a Zionist settlement company with a share capital of $2-3 million, to be subscribed 50% by non-Zionist American Jews and 50% by non-Zionist Jews around the world—including Edmond de Rothschild. (Given the precariousness of the Yishuv’s economy, Weizmann apparently wanted to impress London with his ability to mobilize substantial donations from affluent American Jews who were not members of the Zionist Organization.) The directors of the new settlement company were scheduled to assemble in London on 10 June. The company was to raise double the amount of the proposed League loan, under a British or League guarantee. However, as Weizmann admitted to his confidante, Blanche Dugdale (Balfour’s niece), the main purpose of the meeting of the Jewish magnates in London was to apply pressure on the government to return to full support of the Jewish National Home, as provided for in the Mandate. He believed that the meeting would “assure the British Government that the American non-Zionist Jews would be ready to produce a considerable amount of capital for the upbuilding of Palestine if the Government would on its side carry out the Mandate in the spirit as well as in the letter.”
The British found themselves in an insoluble paradox; on the one hand, faced with local Arab opposition, they had been retreating from the 1917 declaration; but on the other, those concerned with the administration of Palestine knew that Jewish immigration held the key to the economic welfare of the country. The colonial secretary’s assessment of July 1923 of their financial contribution has already been mentioned (p. 117 above). Three months later, Foreign Secretary Curzon told an imperial conference: “Palestine needs ports, electricity, and the Jews of America are rich and would subsidize such development.”
Nothing had changed by 1928, when T.K. Lloyd of the Colonial Office noted in an internal memo: “The Jews have contributed disproportionately to the revenues [of Palestine]. Immigration of Jews and increase in revenues are in direct ratio. Surplus balances have only been accumulated owing to Jewish capital, as the High Commissioner has admitted. Loans, similarly, have been made possible by Jewish influence and activities.” Officials in London also conceded, in confidence, that Britain itself was partly to blame for the current economic recession in Palestine; it had not drawn up a well-considered fiscal policy, had failed to make land available for colonization, and had not yet revised the oppressive Ottoman land taxation system. Lloyd expected an improvement in the Palestinian economy within the next two to three years and drew up a series of proposals for helping out the Zionists in the interim: a program of public works (including the expedition of plans to build the harbor at Haifa), preferential treatment for Jewish workers, and a revision of the Turkish land-taxation heritage.
Some efforts were made to ease the plight of the Jewish unemployed. When the Zionist Executive found itself unable to keep up the payments to support the Jewish unemployed, it managed to secure Plumer’s agreement to the construction of a road from Jaffa to Petah Tikva, to be financed in part by Zionist funds. The government did not put out the project for open tender and the road was built exclusively by Jewish labor. It has been estimated that the administration’s expenditure on public works rose by over 500% during the period April-December 1927. The official administration report for 1928 recorded the expenditure of some E£76,500 on public works. But, as seen already, the Treasury was against any expenditure whatsoever on welfare for the Jews. Its official line was articulated by A.J. Harding, a member of the Palestine Currency Board. In a letter written in April 1928, in which he dismissed Plumer’s assertion that it was the government’s Zionist policy that made the administration of Palestine so expensive, he rejected
the theory that Jewish immigrants in Palestine have the right without any effort of their own to look to the Palestine Government and failing them to His Majesty’s Government to provide work for them, to establish hospitals and schools for them and their children and, in short, to provide all the amenities of western civilization and to spend money on the “modernization” of a country which, though backward is not more so than its neighbours. The Mandate does not place any such obligation on His Majesty’s Government nor have they ever imposed such a policy on the Palestine Government.
But whereas some officials showed empathy for the Zionists’ economic plight, none supported the issue of a government guarantee for the proposed Zionist Loan. This was due to two fundamental reasons. First, they had serious doubts about the Zionists’ financial stability—would they be able to meet the annual interest payments on the loan, to be repayable over the next 40 years? The collateral offered by the Zionists was the annual donations to the Zionist Organization—an unpredictable entity. The fact that two large British banks had recently turned down the Zionists’ requests for a loan of £400,000 did not help their case. Why should the Treasury step in where large commercial banks feared to tread?
Officials were also cynical about the Zionists’ own forecasts of Palestine’s economic potential, demonstrably skewed by their own political interests. The current recession provided a ready-to-hand object lesson. Lloyd recalled that in 1926 the Zionists had claimed that “the essential fact is that the Jewish urban population, by one means or another is making a living in its own way and is absorbing without serious difficulty a growing volume of immigration.” But within a few months of that forecast, the number of Jewish unemployed in Palestine had soared to 8,000, proving that “the volume of immigration in 1925 had outrun the economic capacity of the country.” Moreover, Lloyd observed cynically, “human nature being what it is,” Jewish donations would decrease once the £2 million had been raised. But second, and most important, it was self-evident to all those who had anything to do with the administration of Palestine that Britain could not permit the League of Nations to audit the obscure idiosyncrasies of British bookkeeping there—a specter raised by the possibility that the Zionists might default on their international commitments.
If the Zionists failed to meet their interest payments, other powers would be highly critical, not only of them but also of the British. This might lead to demands for an investigation into Palestine’s finances and a demand that all income from taxation derived from the Zionists and their colonies should be set aside and remitted directly to the international debtors. The Colonial Office, which had fought a vain battle against the Treasury’s use and misuse of revenues from Palestine, was acutely aware that their financial practices were unlikely to stand up to international scrutiny. Not only that, but any kind of international involvement might also lead to Zionist pressure that all revenues derived from the Yishuv be used exclusively for its own benefit. Lloyd warned: “I can imagine no better lever than an internationally guaranteed loan for the Z[ionist] O[rganization] to use in exercising pressure on H.M.G. and on the Palestine Government to obtain concessions and privileges which have not yet been given to them.”
In view of the opposition of the Colonial Office, there was little need for the Treasury to launch its own campaign against the Zionist Loan guarantee. Sir James Grigg, Churchill’s principal private secretary, reassured his minister that in any case there was no chance that the League would agree to guarantee a Zionist Loan. The League intervened only in the “most urgent and exceptional cases,” where loans were “part of general schemes for the financial and monetary reconstruction of countries likely, without League support, to fall to pieces.” It is quite clear that there was never any real chance that the Zionists would receive a government guarantee for their loan. On this, there was an across-the-board consensus among all the officials in the relevant government departments. But their ministers, each with his own political agenda, had yet to pronounce on the subject.
The Zionists’ request for a government guarantee did in fact reach the cabinet. This was due largely to the initiative of Arthur Balfour, namesake of the 1917 Declaration. By now, Balfour was the grand old man of English politics, still a member of the cabinet, but without specific ministerial responsibilities. In January 1928 Weizmann mobilized him much as he had done so in July 1921, to sponsor the Zionist cause. Balfour agreed to raise the issue in the cabinet, to which end he undertook to convene a preparatory, private meeting at his home of the ministers concerned—as soon as Colonial Secretary Amery returned from his imperial tour. Balfour convened the conference at his home on 27 February 1928. Apart from Weizmann and Amery, Churchill attended in his capacity as chancellor of the Exchequer. The colonial secretary and the chancellor were not about to discuss with Weizmann (or with Balfour, for that matter) their fears of an international scrutiny of Britain’s “accounting methods” in Palestine. Their overriding concern was with the potential damage to Anglo-American relations that might be wreaked by the anti-British propaganda carried on by American Jews. Amery had just had first-hand experience of this during his recent trip to Canada.
When the question of the American Jewish lobby was raised at Balfour’s house, Weizmann conceded that the Jews were wont to exaggerate. But he insisted that the Zionists did have grounds for complaint. He reminded the meeting of the inconvenient fact that whereas the Palestine government enjoyed a surplus of £1.5 million, the Yishuv was going through an economic and social crisis—which the administration was making no effort to relieve. He also reminded those present that whereas both Iraq and Palestine had been charged for the costs of the British military occupation regimes that had ruled them following the defeat of the Turks, Iraq had since been relieved of its share of the debt, whereas Palestine was still burdened with £30,000. Amery and Balfour affirmed the justness of Weizmann’s claims. Churchill made a vague comment that Palestine’s postwar debt might be adjusted. When Churchill agreed with Balfour’s remark that Palestine was becoming even more important to the empire than Iraq, Weizmann interjected, “if Palestine was so important, then why was it being penalized and overburdened financially?”
Churchill demurred that the grant of a government guarantee for the Zionist Loan might stimulate anti-Semitic feeling in the Commons. However, he surmised that the guarantee might secure parliamentary approval if their loan was presented as a League initiative. Those present agreed that the loan should be presented as a measure for financing definite constructive projects, not just to tide over current problems (i.e. Jewish unemployment). They decided first to secure the cabinet’s approval in principle, before taking the issue to the League. Balfour undertook to prepare a memorandum for the cabinet. Weizmann emerged from the conference convinced that Balfour, Churchill and Amery would all support the loan guarantee in the cabinet. He reported to a Zionist colleague in Paris that the meeting had been “most successful.” But Colonial Office officials were concerned at how forthcoming and encouraging Churchill had been. Amery regretted that he had adopted “an exceedingly encouraging tone, to the extent of leading Weizmann to believe that he had a real chance of securing a government guarantee.”
Churchill’s behavior can be explained by his long-standing conviction that American Jewry played a critical role in the formation of policy in Washington, and that the Zionists were able to turn the White House against Britain at their will. Simply put, Churchill wanted to gain time, to reassure Weizmann of the government’s benign intentions prior to the latter’s departure for the United States. This bargaining point was not lost on Weizmann himself. Ten days prior to the meeting at Balfour’s house, he had told Shuckburgh that one of the main reasons he was seeking an early governmental approval of the loan guarantee was that he was due to leave for the United Sates shortly and wanted to be able to report that their request for a guarantee was progressing and had been submitted to the cabinet. This is precisely the result that the ministers achieved at the meeting at Balfour’s house.
The first of three cabinet meetings on the loan guarantee was held on 13 March 1928. The discussion centered on a long memorandum circulated by Balfour, although he was unable to attend in person, having fallen critically ill. It asserted that any impartial investigation of Britain’s record in Palestine would reveal a lack of British generosity: “Far from being the spoilt child of the mandatory system Palestine has been its Cinderella.” His paper reiterated Weizmann’s claim that whereas Iraq had been relieved of its share of the Ottoman debt, Palestine—”a country far smaller and poorer”—was the only country of the former Ottoman Empire that had been required to bear a share of the former Ottoman debt. It added that Palestine was unique among Britain’s colonial possessions, in that it lacked neither capital nor settlers—both of which were supplied by the Zionists. He went on to stress the strategic importance of the country for the British Empire:
Palestine … lies at the very place where the Power primarily responsible for the security of the Suez Canal would wish to place it…. A mandated territory on the Asiatic side of the great waterway, prosperous, contented and quite impervious to Egyptian intrigue must add strength to the Empire at a point where additional strength may, in the interests of the Empire and the world, be most desirable.
The paper asserted that it was only the Zionists’ resources that enabled Britain to retain Palestine. Those resources might do nothing “to relieve the British taxpayer,” but their effects, indirectly, both morally and materially, must be beneficial. It recommended that the government approve the Zionists’ request for a loan guarantee, from a statesman’s point of view—even if, on purely financial criteria, it might not be approved by a banker or an accountant.
Amery opened the debate. He refuted the accusation that they had neglected Palestine, but he supported the Zionists’ request for a government guarantee, under the auspices of the League. With oblique reference to the Zionists’ influence in the United States, Amery pressed upon his colleagues the urgency of the matter, noting that “Dr Weizmann was leaving this week for America and hoped to have some indication of the cabinet’s policy before sailing.” Austen Chamberlain, the foreign secretary, warned that a League guarantee would involve a certain amount of control over Palestine’s finances. Amery interjected that the guarantee was for a loan to the Zionists, not to Palestine. Significantly, Churchill remained silent at the meeting. The cabinet concluded that it did not have enough information, and asked Amery to circulate a memorandum for the next meeting (the Colonial Office paper had been held up due to a technical mistake).
Churchill believed apparently that once Weizmann left for the United States he would remain ignorant of the top-secret cabinet proceedings. However, Weizmann was kept privy to the cabinet’s proceedings by Blanche Dugdale—a member of the Conservative establishment who had her own sources inside the cabinet. On the day after the first meeting, she sent to Weizmann her own prescient assessment:
In his [Balfour’s] absence your affair has gone badly…. Of course the technical advisers were all against it.—as we knew they would be. I have reason to think that A [mery] did his best to counteract their arguments, but single-handedly I suppose he was not enough. I fancy the other person who was present at your lunch party [Churchill] cannot have extended himself. We must remember of course that just at this time of year he has tremendous decisions on his mind [the budget]…. Not that I consider this a sufficient excuse … as things stand, its prospects are considered practically hopeless.
The accuracy of Dugdale’s assessment is confirmed by Amery, who vented his spleen into the confines of his private diary: “also the proposed Zionist loan for which Balfour and Winston in their enthusiasm had let me in for but which obviously Winston has now ratted on and Austen [Chamberlain] turned down on Foreign Office grounds. However, they were postponed in order to spare poor old Balfour a shock while he is ill.”
The next, decisive cabinet meeting took place some three weeks later, on 4 April, even though Balfour was still too ill to attend. The Zionists’ request for the loan guarantee was in effect rejected. Amery remained the only minister in favor. He suggested that the first step should be to approach the French, Italian, and other governments, to mobilize their support for raising the issue at the League headquarters in Geneva. But Churchill had circulated a memorandum to his cabinet colleagues that effectively demolished all chance of the government granting the guarantee. He leaned on the authority of an expert’s report that there was no prospect of the loan being issued under the auspices of the League. He next reminded his colleagues that they had “just got rid of the incubus of guaranteed loans” for the development of their own trade—and warned: “to open the door again to such concessions … would be disastrous.” Finally, he ridiculed the Zionists’ request:
The Zionist Organization claims to have a steady income of nearly £700,000 per annum. With such resources it is absurd to pretend that they could not raise a loan of £2,000,000 privately, without the assistance of the League or from His Majesty’s Government. Indeed, with so large an income, it is by no means clear that further provision by way of a loan is really necessary.
Churchill also dismissed Balfour’s [in effect, the Zionists’] claim that Iraq had received preferential treatment to Palestine; he protested that only the year before the government had approved the guarantee for a Palestine Loan. Finally, he warned that to guarantee a loan for one particular section of the population in Palestine would be bound to arouse “vigorous criticism.” No serious debate took place. However, in deference to the still-absent Balfour, it was decided to defer the formal rejection until the latter was well enough to attend the cabinet.
Weizmann, still touring the United States, was again kept apprised of the cabinet proceedings by Mrs. Dugdale. He was disappointed with Churchill and even with Amery. However, totally misreading the balance of power inside the British cabinet, he still hoped, anachronistically, that the invalided Balfour might yet save the day: “I am afraid that Winston has not lived up to his promise, and I wonder whether Amery has been supporting our case with the vigour which was required. However, I am still hopeful that when Lord Balfour returns it may be possible to obtain a satisfactory decision.”
On 20 June, at the third and final cabinet meeting on the loan guarantee, the Zionists’ request was formally rejected. Additional objections were now raised. The government could not consider committing credits to the Zionists before it had worked out the financing for another impending imperial project involving Palestine—the construction of the oil pipeline from Kirkuk to Haifa. Again, Churchill did not speak. Amery noted in his diary that “the Prime Minister and most of the Cabinet were definitely against it and it was turned down.” However, ever sensitive to and fearful of the Zionists’ alleged ability to incite American Jewry against Britain, the cabinet employed subterfuge with the Zionists. Amery was instructed to tell them that there were “very grave difficulties” in granting the guarantee and that without finally rejecting their request, the government was unable to support it for the present. At the same time, he was to tell them that the government was eager to do all it could “towards the support and development of Palestine.”
Balfour was the first to break the news to Weizmann. He too chose the path of subterfuge. He said that the cabinet had been sympathetic to the loan guarantee, and that he, Amery, Churchill and Birkenhead had all favored granting it. However, whereas all the financial objections had been swept aside, the issue had been deferred for the present, due to considerations of foreign policy. He advised Weizmann that the alternative they were considering—a British loan—would not secure parliamentary approval.
On 20 June Weizmann was received by Amery, who promised to give every possible help. Weizmann advised him that the American Zionists had undertaken to raise a loan of £600,000, if the English Zionists raised £300,000-£400,000. The total of £1 million or so would enable them to consolidate and place their financial institutions on a solid footing. Weizmann was unable to resolve the paradox—if there had been so much support in the cabinet, then why was its decision so negative? Weizmann’s efforts to establish a sound financial base for the Jewish National Home would wait until August 1929, when he succeeded in establishing an enlarged Jewish Agency that included non-Zionists.
By the late 1920s, two of the principal architects of the 1917 Declaration, Lloyd George and Balfour, were political has-beens. Lloyd George headed an emasculated Liberal Party, and the invalided Balfour was paid due respect with a symbolic but totally powerless seat in the cabinet. Two cabinet ministers exerted a key influence over Palestine in 1924-29: Leo Amery and Winston Churchill. Amery’s altercations with Churchill over Palestine, and his frustration with the chancellor’s veto on his various schemes for imperial development opened up a wide chasm between the two men—one that did not remain a secret from the Zionists. Amery had been one of the midwives at the birth of the Balfour Declaration. But at the Colonial Office, he was checkmated at every turn by the senior minister. In 1922, Colonial Secretary Churchill had waxed eloquent about the achievements of the Zionist settlers at Rishon le-Tziyon and pushed the 1922 Palestine White Paper through Parliament, against vigorous opposition. But at the Treasury he imposed a veto on all imperial spending. His parsimony towards the empire was applied nowhere with more severity than with the Jewish National Home in Palestine. He remained impervious to the special pleadings of Balfour and Weizmann, to the protests of the Leo Amery, and even to High Commissioner Plumer’s resignation threat. Churchill would win his Zionist laurels much later, in 1939.
The protracted negotiations that took place from 1920 to 1928 between British officials, Zionist leaders and wealthy Jewish magnates are instructive on Britain’s attempts to run its empire “on a shoestring.” They illustrate the way in which Britain, notwithstanding the pious intentions embedded in the Balfour Declaration, expropriated the flow of Zionist-generated Jewish capital into Palestine for its own imperial purposes.