opping when prices rose. Linkage received formal approval when the government began linking its contractual payments to suppliers as well as its receipts from various taxes to the CPI. Even the income tax brackets are updated according to increases in the CPI. Hence, while large and powerful economies worldwide were straining under the havoc caused by annual inflation of 2%-7%, Israelis went about their business almost undisturbed despite inflation rates dozens of times higher than this. For almost forty years, Israelis were completely protected by the linkage mechanism, something that can be seen as an impressive achievement in itself. Indeed, the standard of living (per capita private consumption) rose by an annual average rate of almost 4% during this period. The Israeli economy has witnessed inflation for all 50 years of its existence. In the early years, when burning problems led the captains of the economy to disregard the need for a monetary policy, inflation was high, reaching 66.4% in 1952. The "new economic policy" introduced in that year brought, among other things, a reduction in the rate of inflation, to a level of 19.1% in 1953. From that point on, for a period of eighteen years until 1970, inflation remained single-digit, with a 2.1% low in 1959 and a 10.2% high in 1962. The annual rate of price rises turned double-digit in the 1971-1979 period, and in the 80s, this became triple-digit inflation, which reached a peak of 445% in 1984, and threatened to reach four digits. This is where the party ended. It became evident that under this type of hyperinflation, the linkage mechanism could not provide a sufficient solution. Too high a price was being paid, in terms of the national product, on the daily adjustments required to use (and attempts to improve) this mechanism. In addition, the linkage mechanism itself was adding fuel to the fire of inflation, something that had always been true, but with a negligible effect when inf...
