by Benn Steil
Under the arrangement, a French farmer needing an American harvester would buy it from the French government in francs. The ECA would then pay the American exporter in dollars, while the francs were deposited at the French central bank to fund a recovery program devised in cooperation with the ECA. This structure comprised projects such as mine mechanization, railway electrification, and dam construction, but extended to fiscal and monetary stabilization.
The counterpart funds regime served multiple purposes. The farmer would not be getting a gift, but would be spending his own money on the equipment he needed most. As he would pay in francs, rather than dollars, there would be no negative effect on the French balance of payments. The French government then had the means to finance recovery spending without resorting to inflationary policies, as it had been for so long.
The ECA approved and monitored all expenditures, but Harriman emphasized that “95 percent of the program is European.”32 He neglected to highlight that recipient governments were required to match each dollar of Marshall aid with an equivalent amount in domestic currency, to be used for jointly approved purposes. Each dollar of Marshall aid therefore gave the United States influence over the allocation of two dollars’ worth of resources to recovery efforts.33
Yet the theory behind counterpart funds was always weak. If a recipient government wanted to spend the local currency it generated by the sale of goods donated from the United States, it could always offset a U.S. blockage of the funds through standard monetary policy operations called “sterilization.” Effectively, the central bank could print the equivalent new currency at home and spend it with no inflationary effect. Given that American economists were aware of this at the time,34 the ECA had to have been as well. Not surprisingly, it used the mechanism sparingly.
In Britain, the Attlee Labour government directed 97 percent of counterpart funds to retiring government debt, thereby depriving the ECA of levers it might, even in principle, have applied to change economic priorities in London. The only areas in which British policy was clearly steered from Washington were trade liberalization (which had been a condition going back to wartime Lend-Lease aid) and European Payments Union membership, both of which London initially resisted.35 The aid itself, however, amounting to 1.9 percent of GDP from 1948 to 1951, served to prop up a socialist program of nationalization and industrial control with which the Truman administration, not to mention Republican legislators, strongly disagreed. Economists have invoked this factor to help explain why the aid’s growth impact appears to have been much poorer in Britain than elsewhere.36
Yet in understanding the Marshall Plan, wider American political aims must not be ignored, and indeed cannot be separated from economic ones. “[T]he best way to serve U.S. interests in our relations with the USSR,” argued State Department official R. G. Hooker in September 1946, “is to [support] the non-communist left.”37 This dictum was more or less the department’s policy toward Britain throughout the Marshall years. “On the ideological level, the election of a socialist-labor government in Britain has strengthened that country’s domestic position vis-à-vis Soviet propaganda,” reasoned a June 1948 policy statement. “A government of this type is not so vulnerable with its own people as a conservative regime might be to charges of reactionary prejudice against the Soviets, and a socialist flavor to its policies is a good antidote to Communist appeal abroad.”38 The implication was that interference in British domestic economic policy might undermine American political aims, which in turn could stymie economic recovery.
In France and Italy, U.S. influence over policy was even more limited by the priority of keeping the Communists from power. The French and Italian governments, in return for excluding the Communists, had enormous leeway to pursue their own agendas, within broad confines renegotiated continuously with the United States.39 The contrast between the operation of the Marshall Plan in the two countries illustrates how powerful was the overarching objective of containing the Communists.
AFTER THE WAR, FRANCE AND Italy had a similar political complexion. Both saw the formation of tripartite coalitions of Christian Democrats on the center-right, Socialists on the center-left, and Communists on the far left. Both countries suffered from high deficits, inflationary pressure, and scarce goods, and focused political energies on keeping peace with Communist-led labor movements. Under pressure from Washington in the spring of 1947, however, both governments expelled the Communists.40 At this point, their policy paths diverged.
In France, where the left commanded a larger share of the vote, the Socialists became the leading party in the coalition. In Italy, the Christian Democrats assembled a cabinet with no representation from the left. In both cases, the door was left open for future Communist participation, but Stalin slammed it shut. With the creation of the Cominform in September, Moscow ordered the French and Italian Communists to abandon efforts at cooperation with parties supporting the Marshall Plan.
In France, the autumn rise of the Gaullist RPF party—committed to centralization of power, and opposed to American dollar diplomacy—bound the Socialists and Christian Democrats together in a difficult coalition, in opposition to both the Communists and the right. The Socialists dominated, however, and pushed forward with their state-led investment plan. Fiscal and monetary stabilization would take a backseat. Whereas Christian Democrat Georges Bidault remained France’s friendly face to the State Department, he was attacked at home, from the left and the right, for being in bed with the “Anglo-Saxons.”
In Italy, the economic agenda of the controlling center-right parties was dominated by the free market liberals, led by deputy prime minister, budget minister, Bank of Italy governor, and later president Luigi Einaudi. Einaudi scoffed at the Keynesian American idea that the country’s underemployment problems were a symptom of insufficient demand that might be revived with government investment.
Part of the difference between the two national approaches is history. Fears of revived Fascist corporatism, for example, influenced policy in Italy. Another part of the difference relates to a more developed bureaucratic infrastructure for statistics and planning in France. Even if the Italians had had “a Monnet Plan,” they would have lacked the capacity to implement one. The result was that the Americans were typically at odds with the French over their neglect of fiscal and monetary stabilization, and with the Italians over excessive zeal in reducing inflation and insufficient commitment to investment planning.41
THE MARSHALL PLANNERS SET UP operations in Europe in the summer of 1948, choosing Paris as their base.42 This was a time of rapidly rising tensions with Moscow, adding to the premium Washington placed on political stability in France. Trade unions from dockers to postal workers were permeated with Communist moles tasked with disrupting operations and communications related to transatlantic diplomatic and military cooperation. French Communists tarred the country’s government as a “second Vichy,” operating under the direction of imperialists in Washington. Against this backdrop, Ambassador Caffery was concerned not merely with Schuman’s ability to roll back the Communist threat but to survive a preemptive anti-Communist coup led by de Gaulle’s intelligence service (which continued on after he left power in January 1946).43 The general had blasted the provisions of the London Accord on Germany as a prelude to “the formation of a Reich at Frankfurt.”44
Approving Schuman’s program for fiscal and monetary stabilization, Washington released 25 billion francs ($108 million) of Interim Aid counterpart funds in April 1948, mostly for Monnet Plan projects. Undermined in part by Bidault’s signature on the London Accord, however, Schuman’s government was buffeted by strikes and threats of insurrection. It collapsed on July 19. Fearful of what might replace it, Washington blocked the release of further funds pending the establishment of a new coalition that could show actual progress on stabilization.
Toughness evaporated, however, in September, when Henri Queuille—a soft-spoken, intelligent, but temporizing country doctor—emerged as prime minist
er. Paris ECA mission chief David Bruce insisted that withholding funds, even if justified on narrow economic grounds, might “boomerang against ERP ultimate goals.” He successfully pleaded for their quick release. “The unpleasant fact,” Hickerson wrote in October, is “that there is no apparent alternative to our continuing for the present our policy of assisting the French government even though it seems to be losing . . . ground insofar as ECA objectives are concerned.”45 Conditionality was showing its limits. Washington prized a stable, non-Communist, non-Gaullist French government more than it did its own immediate economic objectives.
In January 1949, Paris-based playwright Samuel Beckett finished the script of his now famous Waiting for Godot. Throughout that year, ECA Paris would, too, wait impatiently for the man who would never come—the French leader who would bring stabilization. Concerned that Stalin was fomenting Communist violence to trigger a Gaullist coup, or worse, it reluctantly continued releasing aid until Queuille’s cabinet fell in October. Bidault’s new government returned to the wrangling, however, extracting its re-release. He succeeded not through concessions, but by subtly convincing the ECA that, without the funds, it would resort to even more inflationary financing to sustain investment.
Yet French macroeconomic indicators were improving. The budget deficit fell from 9.7 percent of gross national product in 1948 to 7.3 percent in 1949.46 Inflation fell from 58.6 percent to 12.7 percent; the current account deficit from 5.7 percent of GNP to 1.8 percent.47 And whereas the carrot of counterpart funds had not worked as the ECA had hoped, the funds had allowed a succession of moderate governments in France to continue cooperation with the United States on a politically sensitive program of western economic and security integration.
By 1950, the ECA had shifted its focus from badgering Bidault to stabilize the economy to badgering him to publicize the Marshall Plan’s success. In line with this lurch, strategy also shifted from threatening to withhold funds to telling Bidault how to use them. Among the more comical propaganda efforts proposed was creating a Marshall Plan Tour de France cycling team and a Tour de France board game, with players advancing over Marshall-funded roads and bridges. These efforts were dismissed by the French cabinet, which argued that they would be mocked by the Communists and do more harm than good if the bike team lost.
ECA efforts to shunt funds from the government’s beloved investment initiatives and toward low-cost housing, hospital, and school building, which might give Marshall funding more visible impact, were either refused or only accommodated grudgingly. The government had its own plans for stimulating house construction with private financing, and resented American interference.48 In May 1950, the ECA conceded defeat. “None of the technicians of the Mission are to insist on having any . . . project undertaken in his way nor is he permitted to employ the threat of withholding counterpart [funds] as a bargaining device,” the new directive said. “[A]ttempting to force our views . . . embroils us in French politics” and fails to achieve American aims.49
The surprise attack by Communist forces in North Korea on the South in June 1950 triggered fears in Paris that Moscow might initiate similar action in Europe, across the line dividing the Germanies. As French defense expenditures began climbing (they would soar 48 percent in 1951),50 Washington became concerned inflation would accelerate. The ECA looked again at withholding counterpart funds until Paris came into line on stabilization. In early 1951, however, the ECA-counterpart National Advisory Council51 concluded that such conditionality was ineffective, and indeed counterproductive. If “the French Treasury is forced to find other means of financing its expenditures, it would undoubtedly resort to additional borrowing from the Bank of France.”52
In short, Washington failed to buy French compliance with its stabilization demands, in spite of France having secured the second largest share of Marshall aid. It failed not because it had no leverage, but because financial stabilization was not an American priority. Political aims took precedence: in particular, securing French governments committed to resisting Communism.53
Queuille stressed to Marshall that he had crushed Communist-led strikes intended to sabotage the ERP. He had cracked down on Communist union racketeering. And he had kept wage increases from running ahead of price rises, even if the latter were higher than Washington wanted. Marshall must not, Queuille implored, lose sight of the big picture. “[I]n this battle between East and West,” he said, “France is yet one more time the front-line sentry of civilization.”54
It was not just the threat of losing Marshall aid that stiffened Queuille’s resistance to the Communist Party and its union arm. He knew that any return to tripartism, with the Communists back in government, would mean an end to French influence over the reconstitution of postwar Germany. The United States knew there was no better, more stabilization-friendly French government waiting to emerge. Gaullism or Communism were far more clear-and-present threats to French recovery than elevated deficits and inflation. In the end, then, the Marshall Plan did not institute the sort of robust policy conditionality that Clayton had envisioned in 1947, but, against the much worse Cold War backdrop that prevailed after the Berlin blockade, it did enough to satisfy the changed priorities in both Washington and Paris.
IN ITALY, THE ECA WAS at war with itself. Rome mission head James Zellerbach, a former paper manufacturing executive from San Francisco, was passionate about redirecting Marshall funds from importing relief supplies, such as wheat and coal, to importing “machinery and equipment to build up Italy’s productive system.” His policy priorities were lower taxes and interest rates. The ECA and its counterpart National Advisory Council in Washington, however, were focused, as they had been in France, on stabilization—particularly controlling inflation. ECA-Washington was prepared to delay counterpart fund expenditures at the first sign of its rise, and undertook a “campaign of education” to change priorities at the Rome mission.55
De Gasperi’s government, of its own accord, and before Marshall had even thought of making a speech at Harvard, was also focused on stabilization. Unlike the French, the Italians wanted to spend their counterpart funds slowly to control inflation; they required no arm-twisting from Washington. The result was much more rapid progress in Italy. From 62.1 percent in 1947 (49.2 percent in France) inflation fell to 5.9 percent in 1948 (while rising to 58.6 percent in France); it was down to 1.2 percent by 1949 (against 12.7 percent in France).56
Also unlike the French, and to ECA-Rome’s constant consternation, the Italians had no interest in investment planning; they wanted to direct the funds to political priorities, such as alleviating unemployment through public works and emigration.57 Throughout the Marshall years, Italian gross investment (net of inventories) as a proportion of GDP remained below prewar levels, while it rose well above them in France.58
In autumn 1948, De Gasperi embraced ECA-Washington, proclaiming his commitment to stabilization. Zellerbach, he understood, could be ignored. He agreed, therefore, only to add some undefined industrial recovery scheme to his priority public works program. Treasury Minister Giuseppe Pella remained determined to rely on private investment, which, he argued, would be stimulated by freeing up funds through cuts in the budget deficit.
The pro-investment faction within the ECA disagreed: more government investment was needed to step in for deficient business confidence. They pleaded for something parallel to France’s Monnet Plan: a “national investment budget” that was “not merely the sum of projects which the various agencies” had already devised, but the product of a coherent modernization strategy.59
Year after year, ECA stabilizers were at odds with ECA investment enthusiasts. All they could agree on was that De Gasperi and Pella were solidly pro-American and anti-Communist, and therefore merited Washington’s support. In Italy, meanwhile, intense factional disagreement on policy within the Christian Democratic party made it impossible for De Gasperi to win approval for the sort of comprehensive investment program Washington wanted. Parliament failed to a
pprove some ECA-approved projects, and approved others the ECA would not approve. The result was slow spending of counterpart funds and increasing American frustration at the disappointing pace of Italian recovery.
The ECA took a new tack in late 1949, threatening to withhold funds for Italian imports unless they included more machinery for industrial modernization. Pella countered that the funds were better spent importing commodities, revenue from the sale of which could be used to relieve unemployment in the south and other depressed regions. The government made only modest, narrow concessions to boost machine tool imports. It never produced an investment program worthy of the name.60
In the fall of 1950, new Rome mission chief Leon Dayton created a diplomatic storm by blasting Italian business for profiteering at the expense of underpaid workers. With war in Korea raging, Washington also began pushing Italy in a new direction. “Over-cautious monetary policies,” Secretary of State Acheson wrote to the Rome embassy in December, were holding back “both [the] investment program implementation and [an] effective defense production program essential to Italian and Western armament.” He criticized Pella for fixating on lira stabilization at the expense of the new American priority of rearmament.61
Though European financial stabilization had been a fundamental economic objective of the Marshall Plan, ECA official Harlan Cleveland concluded that, in the case of Italy, stressing it had been a strategic mistake. “Putting equal emphasis on two sides of the scale,” stabilization and investment, “is not in practice an impartial attitude when the scale is already tipped by the bias of Italian financial policy in one direction.” Given that De Gasperi’s government had always been determined to achieve stabilization, he concluded that Washington could only have achieved both objectives by neglecting the first and pushing twice as hard on the second.62