lation rates were at lower levels. In July 1985, when it became clear that there was no other choice, the government decided to adopt an economic stabilization policy, taking extreme steps, some of which are considered "reactionary" in economic thought. Ordinances were issued compelling a total freeze of prices of all goods and services in the economy, including all wages, public budgets, exchange rates and linked prices specified in various agreements. This policy, in fact, was a temporary suspension of the linkage mechanism. Indeed, in 1986, the inflation rate dropped by more than half (to 185%), and in 1987 it dropped to about a tenth of this rate (19%). In the ten years since then, annual inflation has never surpassed 20%, and there were a few years during this period in which inflation was even single-digit. In 1997, inflation was 7%. The linkage mechanism was reinstated (with stricter monetary supervision by the central bank), and the waves of criticism and doubt expressed by many economists worldwide with regard to the steps taken in the summer of 1985 turned into applause. The "economic stabilization policy" and the determination shown in implementing the policy won admiration as an extraordinary achievement of the Israeli economy and today they are studied in economic faculties worldwide, as is still the case with the linkage mechanisms.Private Consumption and SavingsIt would have been reasonable to assume that in a national economy such as that of Israel, which had to withstand the burdens described above and at the same time maintained one of the world's highest rates of economic growth, there would be no resources left over for individuals to use to raise their standard of living, i.e., their private consumption. In fact, if the Israeli economy only had at its disposal the means resulting from its own product, the tremendous level of public consumption and the savings required to finance the investments necessary for continu...
