The Marshall Plan

by Benn Steil

  The only hiccup was that Hoffman did not want the job. Truman, however, would not take no for an answer. Nor even maybe. Before Hoffman could confer with his wife and colleagues at Studebaker, Truman announced that he had accepted the post. Hoffman was stunned, but later professed admiration for Truman’s method, which he himself had used in the business world. Hoffman was sworn in on April 9. He started his new job—paying $20,000 a year, an 80 percent salary cut—immediately, announcing the first expenditures that day. He quickly became, in Life’s words, “the busiest man in Washington,” fielding ten thousand job applications on his first day—before he had been given an office.

  Harriman Committee economist Richard Bissell became his first hire, taking the title assistant deputy administrator, and would become the main architect of the structure for directing Marshall aid. Shortly after, Hoffman appointed Harriman himself to run the new Office of the Special Representative (OSR) in Paris—the Marshall Plan’s headquarters in Europe. Hoffman politely rebuffed the president’s recommendations for ECA appointments, insisting there could be no whiff of politics in the staffing. Truman earned Hoffman’s enduring regard for respecting the edict. British Treasury official Sir Richard (Otto) Clarke would call Hoffman’s staffing of the program “a most elevating spectacle.” 70

  Hoffman was equally adamant that funds would be distributed in strict conformity with the law and the aims of the ERP. Some American companies, he would tell his new staff, had “come to consider [the ERP] a bonanza in which everyone can share as an exporter who has anything to sell.” But it needed to be “understood that the full recovery program [actually] contemplates a lower rate of exports from this country.”71 This aim contrasted with Soviet caricatures of the program’s purpose.

  The first Marshall ships, each loaded with thousands of tons of food, fuel, chemicals, equipment, vehicles, and the like, set sail for the sixteen Marshall Plan countries on April 20. There would soon be 150 crossing the Atlantic at any given time. The first to arrive in France—in Bordeaux’s harbor, bedecked in Stars and Stripes, on May 10—was greeted with cheers from the dockers and a welcome speech by Ambassador Caffery. Monnet was elated, writing to Schuman that economic recovery was now, finally, possible in France, “thanks to the Marshall credits.”72

  U.S. and French officials were relieved that the Communists had left the ceremonies and unloading unmolested, but they were not silent. They blasted Harriman and his incoming horde of Marshall administrators as “the new occupying power” and “La 5e Colonne américaine en France.” In Italy, Togliatti pledged that the country’s “2.5 million Communists would wage an all-out fight against the ERP.” “The sun rises in the East,” proclaimed a banner at a Communist rally in Vienna, “and no Marshall Plan can change or stay it.” The Soviets and their Communist allies in Europe condemned the plan as “an instrument of preparation for war.”73 Truman told Canadian prime minister Mackenzie King that the situation was now as serious as in 1939.74

  Protest against the Soviet blockade of Berlin, September 9, 1948. In the background, the Reichstag.

  * * *

  ELEVEN

  * * *

  SHOWDOWN

  GEORGE KENNAN WAS WORRIED. STILL Believing in the Marshall plan, still believing that containment was working, he was convinced Washington was overreacting to Soviet provocations.

  The Czech coup had been predictable—indeed, Kennan had predicted it. So the surge of support it unleashed for a western defense pact was, he felt, setting the stage for a dangerous escalation of tensions. In a Policy Planning Staff paper written during the coup, he suggested that the success of the Marshall Plan might even help bring the Soviets to the table. Shortly after, he gave an off-the-record press briefing in which he opined that a “spectacular retreat of Soviet and Communist influence in Europe may be expected” within six months.1

  Determined to help it along, Kennan advised a quiet démarche to Moscow in March. Truman approved it late the following month, and Marshall instructed Ambassador Smith in Moscow to approach Molotov with a carefully drafted oral statement. After warning Molotov at length that Moscow would be making “a tragic error” in assuming Washington would not defend its interests, Smith was to tell him that “the door” was nonetheless “always wide open for full discussion and the composing of our differences.”2

  Molotov agreed to receive the “old spy,”3 as he called the general. Armed with intercepts of French cables from Berlin to Paris, he was aware of Franco-American tensions over the pace of West German unification and suspension of reparations to Moscow.4 The meeting was thus a golden opportunity to rupture Allied solidarity. Molotov greeted Smith on May 4, 1948, in a manner the latter described as “grave, attentive and courteous.”

  Chief of staff to Eisenhower during the war, Smith was able, orderly, candid, straight-talking, “all business.” He had a harsh, powerful voice, intimidated subordinates, and made little effort to personate a diplomat. Upon learning that Smith would be sent to Moscow in the spring of 1946, Eisenhower remarked that it would “serve those bastards right.”5

  Script in hand, Smith assured Molotov that America’s “entire history was [a] refutation of any suspicion of a policy which involved aggressive war.” But he stressed his country’s concern over Soviet behavior in Czechoslovakia. The Czech government had accepted the ERP conference invitation, and withdrew it “immediately following [the] visit of Masaryk and Gottwald to Moscow.” The United States, he said, “did not oppose Communism because of its Marxian ideology, but purely and simply because we had seen repeated instances,” as in Prague, “of Communist minorities coming into power by illegal means and against the will of the majority. . . . The US remained convinced that these minority coup d’etat would have been quite impossible without the moral and physical support of the USSR.”

  “No one,” Molotov responded in a May 9 follow-on meeting, had “been able to find any facts to prove these false allegations. Nor can anyone state with authority that the Communists have used illegal means.” The fault lay instead, he said, with “rightist circles . . . that wish to induce changes by violence.” As for the United States, “it was well-known that the western European and American press were saying openly” that the military alliance and bases it was establishing “were directed against the USSR.” And “events in Greece are not the only example of [its] interference in the internal affairs of other states.”6

  The two agreed on nothing, though Smith fulfilled his mission by transmitting the open-door message. Molotov ran the text up to Stalin, who read that part with delight—scribbling “Ha-ha!” in the margins.7 Here, he saw, was a chance to undermine Truman with American allies and voters. Kennan had been wrong. “Spectacular retreat” was not on Stalin’s agenda.

  Though Molotov had agreed that the talk with Smith would be private, TASS published the Soviet version of it on May 10.8 The State Department was caught unprepared.9 Stalin, it concluded, was trying “to create the impression . . . that the US had been forced to appeal to the USSR for a settlement.” This, he hoped, would “undercut US leadership . . . by sowing distrust among our friends who were not consulted in advance.”10 Indeed, two days later an angry Bevin was, thanks to the TASS release, himself subjected to angry questioning in Parliament over what he had known and when he had known it.11

  But Stalin wasn’t finished. “We do not conduct any cold war,” he wrote in a rare note to himself that month. “The cold war is being waged by the U.S.A. and its allies.”12 On the propaganda front, he was fighting back.

  Stalin had an accomplice in the U.S. presidential race. According to Gromyko’s memos to Stalin from Washington,13 Henry Wallace began telling him of his plans to travel to Moscow sometime before April, using Czechoslovak U.N. ambassador Vladimír Houdek as a secret intermediary. Meeting face-to-face on April 2, Wallace and Gromyko first discussed Stalin’s questions about prospective U.S. presidential candidates—including Wallace himself, who would shortly be chosen by the Progressive Party and e
ndorsed by the Communist Party.14 They then turned to Wallace’s agenda.

  Wallace wanted “a statement on the major questions of Soviet-American relations” to be delivered “by Generalissimo Stalin, or by Wallace in agreement with Stalin.” It should emphasize, similarly to Smith’s later message, that “in relations between the USSR and USA there are no . . . differences that could not be resolved peacefully.” Such a statement, Wallace said, “would be important from the perspective of influencing general opinion in the USA.” He stressed that “the information spread about Czechoslovakia [in Washington] is a lie,” but that there was a “necessity of undertaking something from [Moscow’s] end with the aim of convincing [the American] public.”

  Stalin was intrigued. Though “a trip” by Wallace “would do harm,” he scribbled in the margins of the transcript, “a statement would be helpful.” As for delivery, it would be “better if it’s done by Wallace,” Stalin wrote, “with Stalin stating he’s in solidarity.”15

  On April 27, Gromyko cabled Molotov that he had received, through Houdek, a draft of Wallace’s proposed “Open Letter to Premier Stalin.” Stalin reviewed it line by line, scribbling “yes” next to the material he agreed with and edits elsewhere.

  Headlining a campaign rally before nineteen thousand at Madison Square Garden on May 11, the day after the TASS publication of the Smith-Molotov dialogue, Wallace read out the “letter,” complete with Stalin’s edits. Disparaging Smith’s message for demonstrating “the same self-righteousness which has led to international crisis,” he declared that the open-door part nonetheless vindicated his long-standing claim that peace was in reach. To bring it about, however, Washington needed to change its policies. He called for the Marshall Plan to be “converted” into a U.N. effort to create an “economically unified Europe,” as opposed to the divided one Truman was creating. He further called for the “re-establishment of a peace-loving German government in charge of a united Germany which is obligated to the strict fulfilment of the Yalta and Potsdam agreements.” This was a swipe at American actions in western Germany.16

  On May 17, Moscow radio broadcast Stalin’s effusive reply. The New York Times published the translation. Wallace’s “important document,” Stalin declared, had rectified “the inadequacy of the statement of the United States Government of May 4”—the Smith message—by providing “a concrete program for peaceful settlement of the differences between the USSR and the United States.”17

  Stalin’s duplicity blindsided the State Department yet again. “The distorted publication of the Smith-Molotov exchange,” U.S. chargé Elbridge Durbrow cabled Marshall from Moscow, “successfully confused Europe.” Now, “Stalin’s open letter is primarily designed to confuse America, lend the appearance of substance to the vacuity of Wallace’s declarations on foreign affairs and thus emasculate American policy.”18 Kennan would later tell Smith that the department “unwittingly ran head on into a neat little arrangement between the Kremlin and some of the people in the Wallace headquarters.” Wallace, however, kept his Houdek-Gromyko channel to Stalin a secret, shielding himself from allegations that he was operating as a Soviet agent.

  Kennan was “horrified by the ease with which the press [was] taken in by the Russian maneuver.” He was also distraught that there had been something so “seriously wrong with my analysis.”19 When he made the prediction that communism would stage a “spectacular retreat,” he had failed to foresee how the political tectonics would be shifting in Stalin’s favor. In Greece, Communists assassinated Justice Minister Christos Ladas on May 1; the panicked government declared martial law. In China, Mao’s Communists were gaining ground on Chiang’s Nationalists.20 And in West Berlin, the Soviets were tightening their chokehold. Soon enough, Stalin reasoned, the Allies would abandon the city or their planned West German state.

  THOUGH STALIN AND MOLOTOV WERE trying negotiators, the Americans would repeatedly mistake their temperaments and tactics for genuine barriers to resolving the standoff in Germany. The problem was not personalities, but the untenable foundation of the Yalta-Potsdam accords: the idea that the other’s understanding of joint power in Germany could be changed through persuasion, coercion, or new circumstances. This foundation was now in rubble, owing to the urgency of dealing with the German economy. And at the heart of the conflict over how it should operate was the institution of money.

  In the capitalist West, money and banking allowed autonomous individuals to make informed decisions on working, saving, investing, and exchanging. In the communist East, they allowed the state to direct resources without interference. After 1945, the Soviet Union used state direction of money and banks to eliminate private enterprise, stop unwanted spending, and prevent foreign trade from disrupting domestic economic plans (through inconvertible currencies).

  In Berlin, now, there was no form of currency or banking regime that would accommodate western-style free enterprise without disrupting Soviet control of the city’s economy and that of the eastern zone more widely. Soviet transportation blockages and currency demands were, therefore, two sides of the same coin. Free Allied movement into and out of the city, together with central bank co-powers, meant uncontrolled commerce, and therefore an uncontrolled communist polity.21 This was not only unacceptable but a contradiction in terms.

  The issue of Germany’s postwar currency had emerged as a source of contention as early as 1944, when FDR’s treasury secretary, Henry Morgenthau, unwitting as to the lengths his deputy would go to support Soviet economic interests, put Harry Dexter White in charge of organizing the German occupation notes. In overruling the director of the Bureau of Engraving and Printing, Alvin Hall, who opposed Soviet demands for copies of the American currency plates, White lied in claiming that the Combined Chiefs of Staff had “directed” that such copies be handed over. The Soviets, who he said had to be “trusted,” went on to print up over 78 billion occupation marks—eight times what the Americans did. Notably, the mass of marks injected by the Soviets was almost identical to the number of reichsmarks put into circulation by the Nazis, while the smaller number of American marks was consistent with estimates of the number of reichsmarks that would have kept prices stable.

  The Truman administration halted White’s generosity in July 1945, making the Soviet marks—fortunately distinguishable by a dash in the serial number—invalid in western Germany. The Soviets, who knew the marks were worthless, denied their soldiers the possibility to convert them to rubles. Red Army troops therefore bought what they could with them from American GIs, typically paying on the order of 10,000 marks for a $4 watch. The lucky watch seller would then convert the marks to dollars with the U.S. Treasury at the official rate, established by White, of 10 to 1, thereby netting himself a handsome $996 profit. The total cost to the American taxpayer, in current-dollar terms, was as high as $6.75 billion.22

  In 1946, Clay’s currency experts called for the creation of a new western mark, the deutschmark, to replace the old one. A new currency would achieve maximum psychological effect. Clay proposed to the Allied Control Council that the notes be printed up under quadripartite control in the American sector of Berlin, and subsequently issued by a new central bank. The Soviets, who wanted the ability to print and issue notes at will to cover occupation costs, proposed a two-plant solution—with one in Leipzig, in their zone—that would allow them to evade western oversight.

  Wrangling between the two sides went on into 1948. Each suspected the other’s intentions for a shared arrangement, and each worried about the cross-zonal impact of the other issuing its own notes. But by March 1948, separate Germanys seemed unavoidable in Washington. West German inflation was running at roughly 10 percent a month: at the official exchange rate, a carton of American cigarettes cost about $2,000, and would rise to $2,300 by June.23 Royall thought the administration had been patient enough waiting for Soviet cooperation on reform. The time had come to act. “We have tried to maintain an ‘open door’ to the Soviets in all our actions in Germany,” he wrot
e to Stimson, “but we cannot permit continued stagnation in that country and still hope to revive Western Europe’s economy in keeping with the objective of the ERP.” Deputy Assistant Secretary of State Frank Wisner wrote to Lovett on March 10, advising that Clay be told that quadripartite currency reform was no longer a U.S. policy objective. This was, he acknowledged, a “definite move toward recognition of the East-West partition of Germany.”

  Accepting the Army’s verdict that the currency stalemate was playing into Soviet hands, Lovett directed Clay to engineer a break-off in talks.24 Sokolovsky obliged on March 20, storming out of a meeting in choreographed pique. This served both sides’ purposes. Sokolovsky issued new orders “strengthening control on the external borders of Greater Berlin,”25 and State stepped up transition to the deutschmark.

  On May 18, the Soviet government approved a plan to counteract western currency reform. In the event the Allies went ahead, the Soviet Military Administration would have its own East German currency at the ready, and would “allow circulation in the entire area of Greater Berlin exclusively to the new banknotes of the Soviet occupation zone.”26

  Facing Soviet pressure, Washington struggled to keep its coalition together. Bidault and his prime minister, Schuman, had to maneuver the London Accord through the French Assembly, roughly half of whose members, mainly Gaullists and Communists, opposed an independent West Germany—or even a West German currency.27 Knowing, as Clay put it, that “the French . . . have no air transport worthy of the name,” the Russians ratcheted up road, bridge, and railway blockages with an eye to boosting the “no” vote on June 16. “French non-acceptance,” Clay worried, “will be interpreted [as] unwillingness to face [the] USSR.”28 It was, in the end, a close-run affair. But with the Socialists coming on board at the last moment, the vote was 297–289 in favor of the London Accord and 300–286 for the deutschmark.29 Allied unity had held, for now.