by Benn Steil
Though a revolutionary, Joseph Stalin saw himself as an heir to a noble Russian tradition of imperialist statecraft.1 He had supreme regard for the potentialities of brute force, yet took pride in his image as a diplomatic virtuoso who could change the course of events through guile and bluff. Chess books have reproduced a 1926 match in which he allegedly bested future NKVD chief Nikolai Yezhov; the match was clearly fabricated, possibly to show him as a man of strategic vision.2 Never a serious player himself, Stalin still supported the game and its Soviet grandmasters as a means of highlighting Soviet intellectual superiority.3
George Kennan was also a chess player of no particular note, one who saw himself engaged in a match against the Soviet leader. The doctrine of containment he propounded in 1947 was in fact developed with the image of chess in mind.
Since the Russian threat “is more than a military threat,” Kennan said at a War College lecture in October 1947, it could not “be effectively met entirely by military means.” It meant “marshal[ing] all the forces at your disposal on the world chessboard . . . in such a way that the Russian sees it is . . . in his interests to do what you want him to do.”4 The Marshall Plan was the centerpiece of Kennan’s thinking. Victory would be defined as the revival of a democratic, capitalist western Europe without military confrontation.
Using economic assistance as a vehicle, Kennan intended the Marshall Plan to change the psychology of the beneficiaries. It would convince them that they could regain prosperity and security without resorting to autarky or authoritarianism. It would, Kennan calculated, accomplish this feat partly by forcing Russia to set itself against such assistance and thereby undermine the standing of communism. In chess, such a move is known as a “sham sacrifice”: appearing to blunder into loss of a piece to gain tactical advantage.
Unlike Kennan, Benjamin Franklin was an accomplished chess player—one who conducted consequential diplomacy during actual games in Europe. In his essay “On the Morals of Chess,” published in 1786, he wrote that the game required foresight (seeing the long-term consequences of action), circumspection (surveying the landscape and recognizing hidden possibilities), caution (avoiding haste or blunder), and perseverance (continually looking to improve one’s position).5 So success with the Marshall Plan would require the United States to exhibit such capacity over many years.
It would mean making, in chess terms, controversial “real sacrifices,” such as the loss of Poland and Czechoslovakia to the Soviet bloc, to strengthen America’s long-term position in the West. Though the Presbyterian-moralist side of Kennan anguished over the loss of these noble nations, the Bismarckian side argued as early as 1944 that a successful American endgame would require conceding pawns in the East early on. He predicted the Prague coup four months before Stalin instigated it, advising no preventive countermeasures.
To Harriman’s contention that Washington could not accept “that the Soviet Union has the right to penetrate her immediate neighbors for security,” Kennan responded that it was not “realistic” to expect Moscow to concede its security belt, given the price it had paid during the war. There was no use in giving Stalin pretexts to challenge America’s own Monroe prerogatives in the Western Hemisphere. The object must therefore be to establish “the line beyond which we cannot afford to permit the Russians to exercise unchallenged power,” and to be “friendly but firm” in laying it down.6
That line was drawn with the Marshall Plan. It was consistent with Kennan’s argument, made in a letter to Bohlen at Yalta in 1945, that the United States needed to “divide Europe frankly into spheres of influence—[to] keep ourselves out of the Russian sphere and keep the Russians out of ours.”7 But this division did not mean conceding permanence; it meant waiting patiently for Moscow’s defenses to crumble.
BY 1947, DEAN ACHESON AND will Clayton considered the FDR vision of a postwar recovery underpinned by U.N., IMF, and World Bank action “thoroughly discredited.” The executive branch, they concluded, would have to “eat practically every word [it] had uttered before Congressional Committees during the past three years.”8 The Marshall Plan took a different approach, aiming to generate a rapid and robust European recovery through unilateral U.S. economic intervention.
By any reasonable standard, such a recovery did occur. Between 1947 and mid-1952, when Marshall aid officially ended, industrial output in the Marshall countries increased by 60 percent. (By way of comparison, the EU-27 industrial output index increased by 15 percent between January 2003 and January 2008, the years preceding the financial crisis.)9 There were wide variations—growth ranged from 24 percent in Sweden to 241 percent in West Germany—but gains were generally significant and widespread.10 (Comprehensive macroeconomic and Marshall aid data can be found in Appendix C.)
To what extent, however, was recovery driven by the Marshall Plan itself? Aid may improve a country’s standard of living while it is being consumed without improving the country’s ability to provide for itself. So what we should ask is whether West European economies actually performed better than they otherwise would have in the absence of Marshall aid.
It is useful first to consider the situation Marshall planners inherited. In 1945, industrial production was a mere 34–46 percent of prewar levels in the Netherlands and France, and 20 percent in Germany and Italy. Only a small portion of the collapse, however, was attributable to bombing and displacement of production facilities. Most of it related to an inability to move raw materials, food, and goods. Damage to transport infrastructure—roads, bridges, rail, and ports—was immense. As such infrastructure underwent repair from mid-1945 to late 1946, recovery was strong.11 The bitter winter of 1946–47, and the subsequent horrendous harvests, dealt Europe a setback; shortages of food, fuel, and industrial materials reverberated throughout the production chain.12 This setback was temporary, however. Industrial and agricultural production picked up again by late 1947 and carried over into 1948, when Marshall funding began.
Between 1948 and 1952 (four and a quarter years), the United States transferred $13.2 billion to the sixteen Marshall Plan countries. Accounting for inflation over those years, the total was $14.3 billion (that is, in 1952 dollars). The aid was front-loaded, with 31 percent coming in 1948, 30 percent in 1949, 20 percent in 1950, 12 percent in 1951, and 8 percent in 1952. The largest recipients were the U.K. ($3.2 billion, or $32 billion today), France ($2.7 billion, or $27 billion today), Italy ($1.5 billion, or $15 billion today), and West Germany ($1.4 billion, or $14 billion today). Austria and Norway were the biggest beneficiaries per capita ($130, or $1,300 today). The transfers equaled, on average, 2.6 percent of recipient-country output over the period.
In today’s dollars, total Marshall aid was worth $130 billion. But if the United States had run a Marshall Plan of equivalent size as a proportion of GDP (1.1 percent) from 2012 to 2016, this would have amounted to a vastly higher $800 billion. The total aid figure is higher still if we account for non-Marshall military and other assistance.13
*Gross domestic product for Belgium, Denmark, Greece, Netherlands, Norway, Sweden, and the U.K. Gross national product for Austria, Luxembourg, France, Iceland, Ireland, and Portugal. For West Germany and Turkey, GNP is used to 1949 and GDP thereafter. For Italy, GNP is used to 1951 and GDP thereafter.
Data sources: Bohlin (2010); ECA (1948–1951), Reports to Congress, June 1948–June 1951; Mitchell (2007), Europe; Mitchell (2007), Africa, Asia and Oceania; Mutual Security Agency (1951–1952), Reports to Congress on the Mutual Security Program, December 1951 and June 1952; OEEC (1957); Reinhart and Rogoff (2009).
Given that recovery was under way in Europe when Marshall aid started flowing, however, it is challenging to estimate its effects. We know that growth was generally higher in those countries that received more aid, as a percentage of GNP. But to isolate the specific impact of aid on growth, economists have run statistical simulations using historical data, comparing actual growth rates after 1948 with what might have been expected in its absence. The most widely c
ited estimates suggest that Marshall aid did have a significant positive effect—that is, even after controlling for other factors that might have contributed.14 In France, Germany, Denmark, and the Netherlands, output growth in 1948–49 attributable to the Marshall Plan appears to have been a full 2 to 5 percentage points higher than it would have been in its absence. In Austria, it was 7 percentage points higher.15
These growth rates represent remarkable rates of return on U.S. aid—100 percent or more. How might the Marshall Plan have accomplished this, if indeed it did? The primary analyses underlying the congressional case for Marshall aid, such as that carried out by Bissell for the Harriman Report, contended that Europe was experiencing a shortage of working capital that was holding back recovery. They argued that if the dollar gap could be closed, local capital could be liberated for reconstruction.16 The simulations examined three possible “Keynesian” channels through which this might, in the end, have happened.17
One was higher investment, under the logic that the aid supplemented deficient savings in Europe. Broadly, the evidence supports the argument that Marshall aid did stimulate investment, and that such investment boosted growth. But given that the aid amounted to only 2.6 percent of recipient output, on average, increased investment would only account for about half a percentage point of growth. Such growth is not insignificant, but hardly enough to justify the Plan’s legendary status.18
Another possibility is that the aid reduced constraints on critical noninvestment components of government spending—spending for which private capital could not have been mobilized. This seems plausible, given that war damage was enormous, and that European governments were limited in their ability to finance repairs while meeting immediate social needs. Budget deficits in 1946 were huge—around 10 percent of national income in the U.K., France, Italy, and Belgium.
Yet by the end of that year, nearly six months before Marshall’s Harvard speech, the worst of the damage holding back production—damage to electricity and transport—had been repaired, and industrial output (save in Germany) had returned to 1938 levels. Furthermore, recipient-government spending as a share of national income actually declined, on average, during the Marshall years. This fact is consistent with State Department pressure for market-led growth, and contrary to GOP fears of Marshall aid financing “socialism.”19 There is, further, no evidence that such spending had a significant impact on growth.20 In short, the Marshall Plan did not aid recovery by boosting government spending.
A third possibility is that the aid removed constraints on the ability to import. European countries ended the war with meager reserves of dollars and gold, which were by then the only internationally accepted forms of money. Against the background of the 1930s, when two thirds of U.S.-held foreign securities issued in the 1920s went into default, private lending from the United States was not an option this time around. Current account deficits—which were large in Germany, France, the Netherlands, and Austria—could only be sustained with foreign aid. The Marshall Plan provided this.
But how important was the aid? The evidence shows that Marshall countries were able to run larger current account deficits, but the effect is modest—roughly 12 cents larger for each dollar of Marshall aid. This could still be important, however, if the imported materials were bottlenecks for other processes, such as steel production. Coal was one such critical import; without it, Marshall country output might have been as much as 3 percent lower.21
Such estimates may overstate the importance of foreign exchange in the Marshall Plan, however. We know, for example, that recipients abjured currency devaluation until 1948–49 (even Keynes had opposed it in Britain), and that this tool was successful in boosting dollar reserves; it could therefore have assisted more if it had been undertaken earlier. Economists such as Gottfried Haberler, Jacob Viner, Fritz Machlup, Friedrich Lutz, and Henry Hazlitt made this argument at the time. Yet American ambivalence about devaluations, driven by traditional concerns not to undermine U.S. trade competitiveness, contributed to delaying these necessary steps.
Altogether, then, the Keynesian-stimulus lens for explaining the apparent economic success of the Marshall Plan is not very useful. Kindleberger, among the more prominent Keynesian implementers of the Marshall Plan at State, became much more circumspect toward the approach in later decades, and would not have been surprised by these results.
“The first use of Keynesian analysis in a major governmental document that I recall is that of the Harriman Report, largely drafted by Richard Bissell,” he wrote in 1984. “It was a brilliant use of the links running from investment to national income, both for short-run business cycle analysis and for growth.” Yet Kindleberger ultimately “deal[t] a low grade to a Keynesian point of view,” at least in explaining the problems of Italy—a major Marshall beneficiary with which he worked. He ultimately concluded that its unemployment problems were structural (“from wrong factor productions”) and not cyclical (“from lack of demand”), as American Economic Cooperation Administration economists held.22
It is important to recognize, however, that the Marshall Plan’s most important early architects and advocates never put their faith in narrow stimulus channels. Such faith came only later, with the arrival of Bissell and the ECA planners. Indeed, the whole exercise of trying to isolate the impact of resource transfers from the United States to explain Europe’s recovery is to misapprehend the Plan’s motivations. The funds themselves were not originally intended to be more than a pump primer.23 The Plan’s architects, Kennan and Clayton in particular, believed that a multiyear program of assistance was necessary to establish confidence in a long-term American commitment to European recovery and security, to reduce political and social resistance to vital structural policy reforms, and to ease the reintegration of Germany into Europe’s economic architecture.24
Kennan had argued from the outset that Europe’s problems were “psychological,” and that the primary stimulative effect of the Marshall Plan would come from beneficiaries seeing that the United States was committed to helping restore them as free and independent nations. Even in Kennan’s earliest formulations, immediate aid—to alleviate hardship and remove production bottlenecks—was intended only to “gain time to deal with the long-term problem” of establishing confidence, cooperation, and reform.25 It meant, as Acheson said in Senate testimony in 1949, that “sickness [could] be better cared for; the aged [were] no longer neglected; there [were] textbooks for the schools; teachers and judges no longer need[ed to] live meanly on the edge of despair; cities [could] be kept clean again; [and] transportation and utilities systems [could] supply the needs of people in carrying on their daily work.”26
For his part, Clayton argued that, even in the short run, recovery would still have to be driven by structural policy change. On his return from Europe in May 1947, he drew attention to the breakdown in the European division of labor, both within and across countries, occasioned by the war, and the role that national policies were playing in exacerbating the problem. Food shortages in France had been created by government-imposed price rollbacks and controls in a misguided attempt to prevent an inflationary spiral. Farmers hoarded food for themselves and their livestock rather than sell it in the cities, knowing that the proceeds would just get eaten up by soaring prices before they could find consumer goods—which were in short supply for the same reason.
Marshall aid was itself insufficient to make up for food and goods not being produced or sold. Policy change was needed to allow prices of scarce goods to rise, thereby encouraging production. And whereas the policies on which the United States conditioned its aid were not always coherent, public finances and monetary policy shifted in a more prudent direction.27 Food prices in France and Italy, which had begun their steep rise well before the harsh winter of 1946–47, began declining sharply after announcement of the Marshall Plan. West European inflation in the early post-Marshall period, 1952–58, would fall to levels as low as they would be for the next fifty years.28
Marshall funds provided a buffer that may have helped market-friendly reforms take hold without being undermined by mass labor and social unrest.
But to what extent were such reforms actually driven by Marshall funds? Would different policies have been pursued without them? These would be awkward questions for the American ECA planners, who liked to maintain that their assistance in the design of European policies was just “friendly”—even as they privately cajoled and threatened to get the ones they wanted. American control of so-called counterpart funds provided them the means to influence policy—at least in theory.
AID PROGRAMS INEVITABLY INVOLVE DEGREES of wastage and misallocation. Hoffman and Bissell took this seriously, and devised market-oriented mechanisms and controls to keep them to a minimum. The first six months were devoted largely to relief efforts, but thereafter the focus shifted to recovery and integration. Kennan had feared that operational control of the Marshall Fund outside the State Department would lead to “confusion, contradiction, and ineffectiveness.”29 Yet in the end, according to the ECA’s Robert Oshins, “the major difficulties which were expected . . . never did occur.”30
The most innovative of the Marshall Plan mechanisms, designed by Bissell, was the use of counterpart funds. Hoffman, who began operating them in September 1948, called them “the single greatest tool we have for recovery.” When the press, which was generally laudatory of the Marshall Plan, failed to mention counterpart funds often enough for Hoffman he scolded them. “You mustn’t get the idea that you are too perfect,” he told the American Society of Newspaper Editors; “you have not explained how counterpart funds are used.”31