The Marshall Plan

by Benn Steil

  This was Caffery at his best, playing the long game, shunning flashy diplomacy or bullying. Guarded, measured, he liked to keep matters the way he kept his swept-back iron-gray hair: undisturbed. With French policy headed in the right direction, he was determined to give Bidault space to maneuver and to keep pride and egos at bay. Asked by a reporter to describe his approach to diplomacy, Caffery said “Getting things done. That’s about all it amounts to.”19

  Over at the State Department, Office of European Affairs official H. Freeman Matthews concluded it was time to “force Clay to . . . view our operations and policies in Germany in light of our over-all interests in Europe.”20 Clayton assistant James Stillwell blasted Clay for his obsession with German “economic self-sufficiency ideas,” when the “main objective of our occupation policy [must be] to direct the German economy so it will be able to play its rightful share in the Marshall Plan.”21 Lovett appealed to the top War Department officials “to keep in mind the concept of Western Europe rather than the individual countries.” As for “the three Western zones of Germany,” they “should be regarded not as part of Germany but as part of Western Europe.”22

  Marshall tried to contain the War Department revolt by agreeing, on July 28, to a seven-point written understanding with Truman’s new secretary of war, Kenneth Royall, prohibiting any third country—that is, France—from participating in bizonal decisions on German industry. But after heading to Berlin to brief Clay on the “treaty” with State, Royall fueled the crisis by disclaiming publicly the existence of any “agreement by the War Department to consult with France” over plans “to raise the level of industry in Western Germany.”23 An enraged Bidault accused the State Department of duplicity. As Lovett in Washington then tried, unsuccessfully, to calm French ambassador Henri Bonnet by suggesting (falsely) that Royall was misquoted, Clayton tried to keep the Paris talks in a holding pattern.24

  Marshall determined he had to change course to save the talks. Consultations with the French over Germany, he told Royall at a cabinet meeting on August 8, would begin in London immediately. The “treaty” with Clay was null and void.

  In Berlin, Ambassador Murphy feared the fallout of a Clay resignation. “He may feel obliged to make certain public statements of his views and disagreements,” he warned Marshall.25 And no one at State wanted a loose cannon like Clay rolling around the deck in a diplomatic storm. But Marshall would have been happy to replace Clay with Bedell Smith, a close friend and State Department man. Moving Smith would put the administration’s German policy where it belonged, subordinate to America’s interests in Europe as a whole.26 Royall promised Marshall “to give [Clay] orders and drop further discussions.”27

  Clay backed off the resignation threat, but still had to be coaxed to London for critical talks with the French and British on Germany. He objected in principle to accepting any French say over German production levels, and in protocol at being subordinate to the dapper Douglas—his former financial adviser on Germany, now ambassador in London. “Whenever we go into a conference on Germany,” lamented a State Department official, “we first have to negotiate a treaty with General Clay.”28

  On August 14, Clayton and his colleagues reached a breakthrough agreement with the French and the British to create an “International Board composed of representatives of the UK, U.S., France, Benelux and Germany with power to allocate Ruhr output of coal, coke and steel between German internal consumption and exports.” This vague new American commitment to internationalizing the Ruhr would acquire greater significance in the coming years, as French policy groped for means of accommodating German reconstruction in a manner consistent with French concerns.

  The first important offshoot would be the Schuman Plan of 1950: the French foreign minister’s scheme, devised by Monnet, for French and West German steel and coal production to be placed under a single authority. This would form the basis of a wider European effort in 1952, with the addition of Italy and Benelux, in the form of the European Coal and Steel Community, and the European Economic Community (the “Common Market”) in 1958. The price France paid for the American concession on the Ruhr was a secret pledge, first, not to object to revised bizone output levels when these were made public after the Paris talks, and, second, to negotiate over the merger of their occupation zone with the bizone. The latter would begin only after the scheduled November Council of Foreign Ministers (CFM) meeting in London, allowing the Western Allies to frame it as a response to unreasonable Soviet conditions for a quadripartite unification of Germany.29

  Clay returned to Berlin, and Bidault to Paris—each man satisfied. After a few false starts, Marshall had maneuvered masterfully.

  THE BENELUX COLLABORATION ON GRAND display at the conference had for some time been viewed with suspicion, at times hostility, in France. At Bretton Woods three years earlier, future prime minister Pierre Mendès-France insisted on a French IMF quota higher than the combined Benelux quota, just in case the latter were to create a political union and outvote them.30 And now, here in Paris, the Benelux were fighting to keep the Americans from financing the Monnet Plan. They opposed the French using Marshall funds that would allow France to modernize its industrial plants at the expense of Benelux exports, which were manufactured with older capital stock.31

  The Benelux also took a keen interest in currency reform, which they saw as central to their export interests. The Benelux delegate on the Executive Committee, Dutchman H. M. H. Hirschfeld, complained about the refusal of the U.S.-U.K. Joint Export-Import Agency of Military Government in Germany to allow greater German trade with the rest of Europe, which owed to fear of accumulating soft currencies. He provocatively accused the British and Americans of creating a “currency curtain” around the country. Benelux support for a European payments union was driven in particular by Belgium’s concern that its export growth was being stymied through the stultifying web of bilateral arrangements that had come to control European trade since the 1930s. These aimed at balancing trade between all pairs of nations, as any deficits had to be compensated by scarce gold or dollars. Since Belgium—which had been liberated early, in 1944, and became a supplier to its devastated neighbors—was running current account surpluses with the rest of Europe, its trading partners were unwilling to take more of its exports. Belgium therefore wanted dollar aid directed not to supporting its neighbors’ industrial strategies but to supporting their credit lines to prod them to import more.

  Other delegations were, however, hostile to this aim. The British Labour government saw no merit in altering its economic program to accommodate more imports from Belgium, and objected to dollar aid being used to finance French policies that were producing runaway inflation (50 percent that year)32 and large trade deficits. The U.K. interest “lies not so much in tight and rather artificial obligations of convertibility to a group—arbitrarily chosen from the economic point of view—of countries inside the Marshall Europe,” pronounced a committee led by Treasury official Sir Richard (Otto) Clarke, “but in expanding the international use of sterling throughout the world as a whole.”33 The State Department opposed this view, but shared British concerns about financing French monetary imprudence. It was moreover, at this point in time at least, unwilling to ask Congress to support a European payments scheme whose alleged need would indict the new American-made IMF as a failure.34 The Norwegians thought the Belgian scheme nonsense, arguing that it would take many years before most European currencies could be made convertible again.35 This would turn out to be factually correct, though logically flawed.

  By August 1, the embryo of a European payments union was taking shape, with participating countries agreeing in principle to eliminate exchange controls among themselves for goods and services transactions. The aim was to make their respective currencies fully convertible within the union at fixed, “realistic” exchange rates and, ultimately, to make net accruals of the currencies convertible into gold or dollars. An enthusiastic Dutch delegate went further, suggesting to Clayt
on that the program being developed in Paris might “prove to be a powerful catalytic agent in welding the western European economies into [an economic and political] unit.”36 The conference agreed to establish a committee on payments to continue study of the issue after its conclusion and, though few if any could have anticipated it at the time, its deliberations would ultimately lead to the creation of a successful European Payments Union in 1950. In spite of most European currencies remaining inconvertible until 1958, the EPU would come to play a critical role in reviving intra-European trade.

  Italy’s obsession at the conference was labor migration—specifically, the desire to export Italians as a means of reducing its legions of underemployed. But France had agreements with Italy to allow limited migration, and had no desire to go further. Britain had its own imperial arrangements for labor importation and, as in so many other areas, was uninterested in Europeanizing the matter.37 The delegates could therefore agree on nothing more than a follow-up labor conference in January, to be held in Rome. Little progress would be made there either.

  Britain brought to the conference a different set of problems. In spite of the leading roles played there by Bevin and Franks, its government was ambivalent about the enterprise. Churchill’s legendary devotion to the empire notwithstanding, he was supportive of initiatives to create a “United States of Europe.”38 Yet a British inter-ministerial committee on the Paris talks observed that Britain was “not economically part of Europe.” Europe accounted for only a quarter of British trade. Under the country’s long-standing policy of imperial preference, it traded twice as much with the Commonwealth as it did with Europe—and moreover did so in its own currency. “The recovery of continental Europe,” the committee concluded, “would not itself solve our problem; we depend on the rest of the world getting dollars.”39

  For Britain, being compelled to abandon its position at the center of an empire, even a fraying one, in favor of becoming a mere spoke in a European wheel, meant dishonor, disruption, and a drain on dollar reserves. At a time when nationalization of industry, rather than promoting competition within and across borders, was central to the Labour government’s plans for reviving output and lowering unemployment, dismantling trade barriers with Britain’s neighbors seemed misguided. But for Marshall, the British were demanding the impossible, wanting to “benefit fully from a European program . . . while at the same time maintaining the position of not being wholly a European country.”40

  GETTING EUROPEANS TO COOPERATE WAS proving more difficult than the Americans had anticipated. The six-foot-three Will Clayton, assigned the task of keeping the conference on track, did his best to stay unseen—traveling from capital to capital using aliases in hotels, and walking miles between meetings. But as Washington’s “ambassador to Europe,” as The New York Times called him,41 his presence was keenly felt wherever he went.

  It was not, however, always welcomed. In London, feelings were still raw over his role in the 1945 negotiations setting the terms of American postwar financial assistance, during which he demanded a hard deadline for ending trade discrimination and the monetary paraphernalia supporting it. He tangled, at times roughly, not only with Franks in Paris but Sir Stafford Cripps, the Board of Trade president, in Geneva, where parallel talks were under way on creating an International Trade Organization (ITO). Cripps took an unyielding stand over Clayton’s familiar demands for an end to imperial trade preference.

  Clayton’s mission in Europe was much less well known in his own country, where half those polled had still not even heard of the Marshall Plan. Those who had, had little idea what it was. It seemed like a sort of “flying saucer,” one State Department official wrote. “Nobody knows what it looks like, how big it is, in what direction it is moving, or whether it really exists.” Whatever it was, half of those polled also said they would be unwilling to pay more taxes to support it.42

  To produce a “European” plan, the CEEC needed data: lots of it. Lengthy questionnaires were distributed for completion in each national capital, within two weeks, covering all aspects of the country’s economic and financial affairs, going back to 1929 and projecting forward to the end of 1951. As national income accounting barely existed in most of the world at this point, the exercise was at times little more than educated guesswork.

  Or less, in some cases. After a long day of deliberations, British delegate Eric Roll, preparing to head off to bed at 2 a.m., saw lights on in the Greek offices. An official there was filling out his country’s questionnaire. “But this is not for you,” Roll remonstrated him; it needs to be completed in Athens. “You don’t think anybody in Athens will know anything about this,” the Greek snorted. “I will just invent the figures myself.”43

  His nonchalance owed only partially to his country’s legendary fiscal and bureaucratic deficiencies. Greece, as well as Turkey, resented having its aid tied to an American-dictated European integration agenda in which no one envisioned that it would have a role. It was not an enthusiastic participant.

  The State Department intended for the various national policies, plans, and requirements to be subjected to vigorous mutual scrutiny, eliminating inaccuracy, duplication, and ineffectiveness. But this was not to be. Each nation guarded its prerogatives, and refrained from probing too deeply into its neighbors’ affairs, for fear of having the favor returned. Washington behaved little differently. The Americans running Germany approached the task of providing projections to Paris in the same way as the other governments, conceding to the conference no authority to change their policies.

  Upon learning of the existence of the questionnaires, the Soviets were determined to get hold of them. “The answers to [the] questions will provide important information for the American industrial and financial monopolies,” the head of the Soviet foreign affairs ministry’s economic department, Vladimir Gerashchenko, wrote to Vyshinsky in a “Secret” memo dated August 13. These entities were “interested in occupying such positions in the economy of these countries from which it would be possible to impose their programs of economic development, hinder them from selling their goods, and thus position their economies at the mercy of U.S. interests.” The explanation neatly highlighted the blending of ideological fixation and pragmatism underlying Soviet diplomatic analysis. To give the USSR “the opportunity to judge the state of the economies of Western Europe more fully,” Gerashchenko concluded, “it should be entrusted to comrade Bogomolov44 [in Paris] to try to get the questionnaires already filled out by countries.” Vyshinsky underlined these words in blue pencil.45

  Though the State Department took pains in official and public communications to stress European ownership of the planning venture, back-channel communications, for which Clayton was the point man, were vital in shaping expectations in Paris and London of what the United States would ultimately support. Clayton insisted that any request must have three critical components to have a chance of succeeding in Washington: an explanation for “the man in the street” as to why European recovery was not progressing “in spite of large sums already made available” (about $10 billion); a three- to four-year production program to rectify this failure; and a rough blueprint for “a type of European economic federation” that would “be designed to eliminate the small watertight compartments into which Europe’s pre-war and present economy is divided.”46

  The French hosts had their own ideas about what the Marshall Plan should be. Monnet pleaded for some form of “stabilization fund” to support “massive imports of consumers’ goods,” French shortages of which could not be alleviated owing to inflation and “disorder” in public finances. Clayton acknowledged the reality of the consumer goods problem, but insisted that inflation control required “budget balancing.” Hervé Alphand, director-general of economic and financial affairs at the Foreign Office, sought assurance that accommodation would be made under the International Trade Organization charter for the web of bilateral arrangements that European nations were using to balance their trade. Clayton
made clear that such would be frowned upon in Washington, not least by himself, but that a customs union along the lines of that operated by the Benelux since 1944 would be most welcomed.47

  A zealous believer that free and nondiscriminatory trade made for prosperous and peaceful peoples, Clayton saw the creation of a West European customs union as an essential step in the creation of a democratic federation that could resist the Sovietization that had befallen the East. His idea of free trade, however, did not come naturally to the intended beneficiaries. When Spaak, the Belgian PM, pressed him as to how the increased production resulting from the plan would be allocated among the participating states, a polite but exasperated Clayton told him that distribution would always “best be effected by elimination of trade barriers and adherence to principles of multilateralism,”48 and not by horse-trading.

  Progress proved painful. The French and Italians were enthusiastic supporters of a customs union, though only as a commitment in principle, with details to be worked out later. The British were willing to see the concept studied, but only as a way to talk it to death. They threw up insuperable barriers to their own participation, arguing that it infringed economic sovereignty, was incompatible with Commonwealth commitments, and interfered with the special U.K.-U.S. bilateral relationship (existence of which the State Department did not recognize). The Benelux were unwilling to move forward without the British as a counterweight to the French and Italians, while the Scandinavians were ready to move forward, but only amongst themselves.

  Franks said that the delegates were also “honestly perplexed” as to how the Americans expected them to produce a program of reducing intra-European trade barriers that did not violate the draft ITO charter. Clayton assured them it would be adapted to accommodate a European plan providing for a steady reduction of tariff barriers, culminating in a zero-tariff customs union.49