by Benn Steil
Now, for the first time since the conference began, the State Department laid down terms for the program. It would have to result in “a workable European economy independent of special, outside aid” within four years. It would need to demonstrate progress over that period in achieving production targets on “items essential to European recovery, especially food and coal.” It would have to focus on rapid “reactivation of the most efficient existing productive facilities,” and finance any desired new “long run development projects” only with funds sourced “outside this program,” such as through the new IBRD.
A European plan would, Clayton continued, further require unanimous commitment to “the progressive reduction and eventual elimination of barriers to trade within the area, in accordance with the principles of the ITO Charter.” It would also involve participants “mutually undertak[ing] . . . to stabilize their currencies. . . and restore confidence in their monetary systems.”
Noteworthy was the absence of any mention of the role that adjustable exchange rates might play in facilitating a rebalancing of either European or transatlantic trade. The emphasis was entirely on “maintain[ing] proper rates of exchange.” As at Bretton Woods, the Americans were determined to avoid mass competitive devaluations against the dollar, such as those in the 1930s. But even the IMF, whose American blueprint was hostile to devaluation, had just concluded in its Annual Report that “the maintenance of present parities may . . . impose an unduly contractionist influence . . . and adversely affect the flow of world trade.”77
Finally, Clayton explained, a European plan would necessitate the establishment of a new “multilateral organization” to monitor progress and ensure compliance with these conditions. This last condition was one which Clayton would be only too eager to water down, having been forced onto the list by the “planners” in Washington.
Franks pushed back. It was unrealistic, he argued, to expect the European economy to recover sufficiently by 1952 such that it would not require further external assistance. As regards the U.K. specifically, recovery could not occur without three conditions being met: a return to “complete convertibility of currencies,” such that “export receipts from one part of the world could be transferred to other areas to meet dollar needs”; new markets opening up for export surpluses; and a rise in the prices of exports relative to those of imports (that is, an improvement in the terms of trade). Alphand said that Europe’s “viability” depended on its ability to meet production and export targets, which was highly uncertain, and would probably require the establishment of trade relationships with eastern Europe
The Norwegians, backed by the Swedes, voiced strong objection to the requirement for a new aid-recipient body to oversee performance, arguing that oversight could be done by existing organizations such as the U.N. Economic and Social Commission for Europe (ESCE). Norwegian journalist, and future U.N. ambassador, Hans Engen had told the Soviet embassy back in July that the governing Workers’ Party only supported the Paris talks because Norway needed foreign exchange and feared, as a small country, the terms Washington would demand in bilateral talks.78 Kennan, not surprisingly, put the Scandinavian position down to their being “pathologically timorous about the Russians,”79 whom they did not want to provoke through participation in a grouping established by Washington. Six of the ESCE’s seventeen seats were controlled by the Soviet Union and its satellites.80
The Americans gave no ground. Kennan put back that if “a balanced position” in western Europe were unlikely by 1952 then a “reconsideration” of the entire exercise would be necessary. Franks’ “expectation that deficits will persist,” he said, was “based on a higher standard of living than Europe’s productivity [would] support.” The message was that Britain needed to bring its consumption into line with its production capacity rather than its aspirations. This meant greater austerity in Britain, and not greater demands on the United States. As for Alphand’s conditions, most of them related to “objectives the attainment of which primarily depends on the Europeans themselves.” They were not the responsibility of the United States. As regards the Scandinavian objection, he insisted that there had to be a direct correspondence between those monitoring the joint enterprise and those participating in it. No existing “international organization [was] in a position to perform this work.”
Clayton pointed out that both the “national requirements and production goals” laid down by the conference had failed to take account of what western Europe as a whole could support. As regards steel, for example, the conference was assuming that each of the sixteen countries would produce at its maximum capacity, despite the fact that insufficient coal and coke would be available to accomplish this. The group needed, therefore, to go back and identify the most efficient plants from those available among them, “without regard to national boundaries,” to maximize output from scarce inputs.
Clayton’s demand represented precisely the sort of sovereign intrusion that the committee had deliberately avoided. Franks defended the group’s work by highlighting instances in which country reports had been amended under peer pressure, but pointedly reminded Clayton that the conference’s terms of reference specified that participant countries would suffer “no diminution of sovereignty.”81 A big gap thus remained between the American federalist vision for western Europe and Franco-British commitments to national planning. Still, the two sides agreed to plow on with a revised deadline of September 15.
THE TENSE, THREE-HOUR EXCHANGE HAD an air of unreality about it. The Americans were demanding of weak and embattled European governments a level of political boldness and planning precision that Kennan, at least, knew to be ridiculous. “This conference,” he wrote in a ruminative and frank memo following the meeting, dated September 4, “reflects, in short, all the weakness, the escapism, the paralysis of a region caught by war in the midst of serious problems of long-term adjustment, and sadly torn by hardship, confusion and outside pressure. . . . We must not look to the people in Paris to accomplish the impossible.” The conference could not and would not, he said, meet Clayton’s demands.
Kennan had been posturing in his chiding of Franks over British inability to commit to “viability” by 1952. Kennan in fact saw Britain’s circumstances as not merely dire, but near-hopeless—“tragic to a point that challenges description,” he called them. “[A]s a body politic, Britain is seriously sick.”82 A secret State Department report to two House committees, written at the same time, said the country was “in grave financial crisis,” and “no longer an ‘equal’ member of the Big Three.”83
For decades, the British Labour Party had pined for the opportunity to usher in its grand socialist vision for national revival, but had now come to power at a time when it was unrealizable. The country’s traditional markets had disappeared. The national psyche had failed to adjust. Clayton had admonished Franks to lower his expectations for the British standard of living in the coming years, but Kennan believed that Britain would face “genuine hunger by winter” without immediate American assistance, well before Congress would be able to act on any elaborate, multiyear plan. As for France, its wheat crop was the smallest in 132 years, its dollar reserves nearly exhausted.
The conference was also dancing around the critical issue of Germany’s future. The United States was as much at fault here as anyone. While rapping European knuckles over failure to subject national policies to multinational scrutiny, Washington had thus far refused to subject its German plans to the requirements of the European plan being forged in Paris.
Politically, it could not have been otherwise. “French inhibitions and fear of communist criticism would alone have prevented that,” Kennan said. As Bidault had warned, France had “180 Communists” in its National Assembly “who say [that] the Marshall Plan means Germany first.” If they were not shown otherwise, the French “government will not survive.” But the end result was that all the parties in the room were “inhibited . . . by the consciousness of what seem to them Herculean
differences among the great powers over Germany and by the consequent feeling that the necessary center of any real European planning is beyond the effective scope of their activity.”84 That is, planning the creation of a West European economy without knowing whether Germany was all-in, all-out, or something in between was a charade.
Kennan called for a clean break with the department policy of mere “friendly aid” in the drafting of a recovery plan. Two things now had to happen. First, State should take the best report that can emerge from the conference as no more than a “basis for further discussion.” They would subject it to executive branch scrutiny, and then “decide unilaterally what [to] present to Congress.” Essentially, State “would just tell [the Europeans] what they would get.” Second, “without solicitation from the Europeans,” State should initiate immediate financial and material assistance where it was necessary. Call it “ ‘Food and Fuel for Europe’ or some such slogan.” An emergency “short-term aid program,” administered by State, he wrote, “would buy us time in which to deal deliberately and carefully with the long-term program.” Without such immediate aid, the result, certainly in Britain, will be “a catastrophe.”85
A lesser writer might never have budged his bureaucracy from its settled plans and benchmarks, but Kennan had an ability to persuade readers that they were glimpsing hidden truths—truths that did not diminish them by highlighting errors in their thinking, but truths that the writer himself experiences in the telling, with his readers, giving them intellectual cover to adapt their views. And so whereas Kennan did not demolish Marshall Plan shibboleths on his own, he made the demolition easier. Over the next several days, Marshall and Lovett sent cables to Europe calling for concessions to British political obstacles;86 a bending of policy in Germany to the needs of a European program;87 acceptance of an imperfect Paris report “as a basis for further discussion”;88 and creation of an emergency “interim assistance program as a first element in the Marshall plan.”89
Lovett told Clayton and Caffery to push the conference to produce its final report—this time, a report “correct at least as to major policy lines”—by September 21. But the Europeans chafed at what Bevin called the “clumsy American intervention.” It gave “the impression . . . that the work of the conference has been unsatisfactory and is now having to be done again under American pressure.” Delaying the ministers’ receipt of the committee’s report beyond the once extended deadline of September 15 would cause public “dismay” over a seemingly failed conference. Bidault called the intervention “intolerable.” The Americans, he said, needed to make “concrete offers of substantial assistance [before] they [could] legitimately expect to discuss terms and conditions.”90
Franks and his fellow Executive Committee members stressed that American pressure for yet deeper changes to the Paris request would be seen as a threat to “national sovereignty”—one that could be extremely dangerous politically, given the fear engendered by Soviet threats against the conferees (such as withholding coal from the Scandinavians). He warned that the State Department’s integration agenda smacked of “dirigisme,” as it suggested that some “control agency would plan and regulate the basic economic activity of the individual countries.” The CEEC could go no further down this route without changing the conference’s “terms of reference” and possibly losing some of its participants.
The report, Franks warned, would ultimately fall “short of US essentials in some cases.” The committee was willing to accept that certain “adjustments” might be made to the report after being “mutually review[ed]” in Washington, but was unwilling to indicate publicly that the report was in any way only “tentative or preliminary,” as this would have serious negative “political repercussions in Europe.” It could be a “first” report, but not merely a “temporary” one, subject to correction from Washington.91
Entering the endgame, the embedded American negotiating troika of Clayton, Caffery, and Douglas maneuvered adroitly, shrinking the gap between Paris and Washington by playing the Congress card with the delegates and the socialism card with Lovett. The Europeans, unwilling to face down Congress with so much money at stake, agreed to sugarcoat the report’s preamble with paeans to flexibility, cooperation, and self-reliance. As for Lovett, the troika prodded him to drop his long-standing demands for a powerful supranational oversight organization, arguing that it promoted “international cartels” and “a planned economy.” It would, they argued, be “more prudent and much wiser” just to get the Europeans to commit to “reduc[ing] trade barriers,” among themselves and with the United States, and to fix “appropriate exchange rates.”92 At the eleventh hour, the deal was done.
THE TWENTY-THREE-NATION GENERAL AGREEMENT ON tariffs and trade (GATT) would be completed in Geneva a few weeks later, after which Clayton would write his sixth and final letter resigning from the State Department. He was disappointed that Britain’s imperial preferences remained largely intact; Marshall had prevailed in this regard to save the Paris talks. Still, Truman would rightly hail the conclusion of the GATT as “a landmark in the history of international economic relations.”93
Praise for Clayton’s efforts was effusive. “This vast project [the GATT], which makes all previous international economic accords look puny,” wrote The New York Times on October 15, “is the realization of Mr. Clayton’s dream: that a group of like-minded democratic nations could deliberately reverse the historical trend toward the strangulation of world trade. It is a big step that nobody but Mr. Clayton and a few of his colleagues thought would ever be taken.” Relentless but humble, Clayton was seen as “both the symbol of and dynamic force behind the most constructive aspects of American international economic policy.”94 Tributes in the British and French press were also warm in spite of—in some cases because of—Clayton’s relentless pressure on European governments to cooperate more and nationalize less. “A champion of liberalism,” Le Monde called Clayton. “Our diplomats . . . will deplore the absence of one of the Americans who knew best European affairs.”95
A CHEF’S SALAD OF QUESTIONABLE data and projections, over which the oil and vinegar of European and American prose was poured, the two-volume 690-page Paris report submitted by Bevin to Marshall on September 22 was hardly what the State Department had hoped to receive. It made no substantive breakthroughs on Germany or economic integration. It provided no satisfactory roadmap to European self-sufficiency, either in terms of timing or cost to the United States. It envisioned a trade deficit with the dollar area at $19.3 billion over the coming four years, or roughly 20 percent more than what the department considered the largest digestible request. Yet it deemed aid at that level still insufficient to free the recipients of dependency on external support.
The report left Clayton’s vision of economic federation at just that, a vision. It offered nice words regarding his cherished customs union, padded out with perfunctory descriptions of efforts within the Benelux and Scandinavia to operate little ones. But it concluded that a broader-scale effort would require “complex technical negotiations and adjustments” over many years. Without naming Britain, it also called attention to her “special problems” in cooperating with such an effort.
Prior to the conference, nothing as bold as Clayton’s customs union had been contemplated in Europe. Though the concept would become “orthodox” by the 1960s, Dutch delegate Ernst van der Beugel explained years later, in 1947 it belonged “to a very imaginative set of far-reaching ideas.” It had wormed its way onto the agenda owing to the impression, which Clayton did much to create, that it would “catch American opinion and imagination.” Yet even taking “full account . . . of the boldness of such a step at that time,” van der Beugel concluded, one could not “escape the conclusion that a great opportunity was lost.”96 The European Economic Community would not create a customs union until 1968.97
The report’s appendix on Germany was, in the acid words of historian Alan Milward, “a splendid compilation of all possible conflicting vi
ews, sometimes in the same sentences.”98 The German economy, the committee concluded, “must be fitted into the European economy so that it may contribute to a general improvement in the standard of living.” Yet it must also “not be allowed to develop to the detriment of other European countries as it has in the past.”99 Not surprisingly, no formula was put forth by which Germany might be developed to the benefit of all and the detriment of none.
This would not be possible unless and until the country was re-rooted in a different political and security context, the creation of which was beyond the powers of the conference. Yet the decision to incorporate western Germany into the plan, however hazily, affirmed its political status as an integral part of an emerging western bloc. Such a bloc had begun to cohere at the conference. “A group of international-minded men,” van der Beugel observed, “was formed on many administrative levels.” The conference served as “the primary school for many . . . who would play a major role on the post-war European scene, with additional loyalties to a broader entity than their own government.”100
Their report, notwithstanding its conspicuous failings, also served its most critical immediate political purposes. The Europeans paid obeisance to the American vision of economic federation. They acknowledged the importance of each nation carrying out the necessary measures to “create or maintain its own internal financial stability.” They committed to specific production targets, such as increases in output for coal, electricity, refined fuel, and steel ranging from 33 to 250 percent of prewar levels. They rejected a “shopping-list” approach to requesting American aid, emphasizing that the countries involved would address, individually and collectively, the current state of “maladjustment” in their economies. They pledged to seek private and IBRD financing, and not to rely wholly on the United States. They committed themselves to “the establishment of a joint organisation to review the progress made in carrying out the recovery programme.” And they expressed their willingness “to deal with any amendments which appear desirable” through publication of “supplementary reports.”101