It took Israeli Prime Minister Benjamin Netanyahu 10 days, but he has finally responded to President Barack Obama's speech in Cairo. On June 4, Obama challenged both Israelis and Palestinians to work toward a two-state solution. On Sunday, Netanyahu responded with an assent wrapped in so many preconditions as to render it virtually meaningless. Obama also demanded that Israel freeze the growth of its settlements in the West Bank. To this Netanyahu responded with defiant rejection.

Diplomatic entreaties over the two-state solution will continue in closed rooms. The dispute over the settlements, however, is likely to remain public. In that dispute, Obama is working for the classic Zionist goal of a thriving democratic state with a Jewish majority. Netanyahu is undercutting that strategic goal by sticking to a Zionist tactic that became obsolete decades ago.

A look at the history of settlement shows why. Before 1948, settling the land was one method used by Zionists in building a new Jewish society and working toward independence. "Settlement" normally referred to an agricultural community. The idea was that Jews must return not only to their homeland, but to the soil itself. The intellectuals sent themselves to the countryside. Most settlements were either communes—kibbutzim—or cooperative farming villages—moshavim. Both were intended to be the foundation of a socialist society.

Settlement was also—perhaps primarily—a tool in the struggle between two national movements, Jewish and Palestinian Arab, over one homeland. Particularly after the first proposal to partition Palestine between a Jewish and an Arab state, in 1937, the placement of new settlements was intended to stake a claim to more of Palestine and to determine the borders of the Jewish state-to-be. In the 1940s, kibbutzim also served as the base for the Palmah, the nascent Jewish army. Settlement was the tactic of a revolutionary movement.

In 1948, the revolution succeeded, and the state of Israel was established. Settlement, like the secret weapons caches under kibbutz cowsheds, became an anachronism. The state had an army. Its borders were set by armistice agreements. Romantic ideals notwithstanding, Israel developed as an urban, industrial society. The elected government set economic policy and eventually left socialism behind. The state's pressing challenge was not to extend Jewish hegemony over the land but to integrate the Arab national minority into its democracy.

And yet, in the words of Jared Diamond in Collapse: How Societies Choose To Fail or Succeed, "The values to which people cling most stubbornly under inappropriate conditions are those … that were previously the source of their greatest triumphs." Diamond's dictum was born out after Israel's conquests in the unexpected war of June 1967.

Israeli leaders deadlocked on what to do with the newly occupied territories, especially the West Bank. They regarded it as part of the Jewish homeland and valued it for making Israel more defensible. Yet some officials warned from the start that giving citizenship to the Palestinians of the West Bank would turn Israel into a binational state—and that ruling them without giving them rights would be seen as colonialism. "My government has decided not to decide," Prime Minister Levi Eshkol told President Lyndon Johnson in 1968.

In the absence of considered policy, leaders and activists fell back almost reflexively on the obsolete tactic of settling the land. With no agreed overall plan, each new settlement asserted a permanent claim to rule a bit more territory. Initially, Labor Party governments established kibbutzim and moshavim. When the right-wing Likud party took power in 1977, it jettisoned that approach. Instead, it subsidized bedroom communities in the West Bank.

Thus did the suburban dream replace the socialist dream. Some politicians opposed settling in a particular area, but virtually none rejected settlement as such. It was, after all, a Zionist value.

This time, though, settlement did not build the state. It undermined the state. In October 1967, the government stopped printing maps with the prewar borders. In the countryside portrayed by those maps, settlements blurred the border between Israel and occupied territory. Legal changes allowed settlers to live under Israeli law while Palestinians lived under the law of military occupation. Whatever it is called, this two-tiered legal system undercuts democracy.

The settlements became Israel's largest ongoing public project. But the costs are scattered through the national budget, woven into outlays for the ministries of Defense, Housing, Education, Interior, and others. There is no overall total available. The lack of transparency not only prevents informed debate of the costs, it is another blow to democracy.

From the start, settlement activists and supportive officials have put their cause above the law. A Cabinet minister funded the very first settlement in occupied territory—in the Golan Heights in 1967—with money designated to give jobs to the unemployed. A recently leaked Israeli army database shows that more than 30 government-approved settlements are built partly on privately owned Palestinian land. Since the mid-1990s, in a massive rogue operation, more than 100 so-called "outpost" settlements have been established without legally required government approval—but with funding and other assistance from multiple government agencies.

Through settlement, the state of Israel has reverted to an acre-by-acre struggle between Jews and Palestinians for control of land. The settlement enterprise has reversed history, turning Israel from a state into a national movement. And the dilemma remains: Israel cannot be a democracy with a Jewish majority and at the same time rule the West Bank. The solution today, as it was when the United Nations debated the Palestine question in 1947, is partitioning the land between two states.

Netanyahu, looking backward, does not see this. Settlers, he said Sunday, are a "pioneering, Zionist community with values." His choice of language is revealing: It was during the pre-independence struggle that "pioneering" was the highest ideal. Obama, looking forward, recognizes that an end to settlement growth is an essential step toward division of the land. When that division takes place, it will not only bring the establishment of a Palestinian state. It will bring the re-establishment of Israel.