The Marshall Plan

by Benn Steil

  BROADLY, IT CANNOT BE SAID that the Marshall Plan succeeded in France and Italy by encouraging a policy agenda different from that preferred by their governments. Washington adapted its desires and expectations to a far greater extent than did Paris or Rome.

  Without Marshall aid, however, it is far less likely that those governments would have had the necessary popular support, let alone the resources, to pursue those policies. More likely, they would have had different compositions, and therefore different agendas. Communists would likely have remained part of the French and Italian governing coalitions in 1947, although a Gaullist backlash could well have upended Communist participation in France. The Marshall Plan succeeded in keeping the Communists (and Gaullists) out of government, but that success came at a price: despite the theatrics of negotiation with the ECA, the French and Italian governments did largely as they pleased, at least domestically.

  The challenge for France was that it could not resist American policy in Germany. After the launch of the Marshall Plan, France found it increasingly difficult to use its occupation zone as a bargaining chip for economic and security concessions. France not only wanted Marshall aid, but needed it once the United States began shutting off its avenues to extracting reparations, territory, and underpriced commodities from Germany. American power in Germany ultimately obliged Paris to accommodate itself to Washington’s western integration agenda.

  It is difficult to overstate the singular importance of Germany in the Cold War conflict. In many ways, the conflict was about Germany. Kennan understood that West European recovery was essential to the protection of U.S. economic and security interests, and that such recovery was itself dependent on a revival of German industry, most of which was fortuitously based in the western occupation zones. Keeping it beyond Russian control was, therefore, itself essential. The creation of a strong, independent West Germany, integrated into a robust West European economic and North Atlantic security architecture, represented a fundamental departure in policy from the late FDR years, one without which it is difficult now to imagine a peaceful end to the Cold War on American terms.

  AS MARSHALL PREPARED TO FLY to Moscow in March 1947, Eleanor Roosevelt was organizing a National Conference on the Problem of Germany in New York City, featuring dozens of prominent backers from Henry Morgenthau to Albert Einstein, to protest what was believed to be Marshall’s pro-German agenda. The conference urged the secretary of state not to abandon Yalta and Potsdam for the sake of creating a German “buffer state”—one that would, in the words of publishing titan William Ziff, Sr., “inevitably . . . dominate through sheer force of economic power.” Instead it called for U.S. endorsement of French claims to the Saar basin63 and reparations paid “in factories and coal” to build up “non-German European industry.”

  General Clay took no issue with reparations in principle. Indeed, he dismantled hundreds of German factories deemed surplus because they were not immediately usable (given shortages of fuel, power, and commodities inputs). Across the three Western zones combined, the Allies removed equipment from 706 plants.64 Germans, for their part, preferred reparations from current production to dismantling.65 Clay got so angered with “German attacks” over his actions that, in November 1948, he threatened to dismantle twenty plants as “punishment” for each such future attack.66

  Clay’s stance on limiting reparations was based on what a self-sustaining Germany could bear, and not aimed at stymieing Soviet demands. An admirer of FDR’s “diplomatic genius” in managing U.S.-Soviet relations, who was on warm personal terms with both Zhukov and Sokolovsky, he had been committed to cooperation with the Soviets in Germany, believing it would create a template for the two countries to work together worldwide.67 His objection to Morgenthauism was that it was not “a program for German peace.” Rather, to him it meant “abandoning [Germany] to chaos.”68 Forced upon a country in which one in three babies was dying within a year, and where coal and other export goods were needed to pay for vital food imports, it meant a deepening humanitarian crisis, threats to basic law and order, and huge additional financial and security burdens on the United States.

  By 1948, Germany had emerged from pariah status in the United States to become the fulcrum of the Marshall Plan. During the war, the country expanded its industrial capacity dramatically—an average of 3.36 billion reichsmarks’ worth per year ($1.34 billion, or $19.9 billion in today’s money) from 1940 to 1945.69 After the war, the western Allies were surprised to find that, in spite of the enormous damage done to the German housing stock, only about 18 percent of industrial capacity had been destroyed by bombing.70 Thus, after targeted repairs to bottleneck suppliers and transport infrastructure, Germany emerged from the conflict with considerably greater industrial capacity than that with which it had begun. It therefore had the imminent potential to provide its neighbors with much needed capital goods and industrial commodities—items that the United States could only provide, where it could provide them at all, at greater cost to itself and a dollar-starved Europe. The fact, therefore, that the Truman administration had the means to set policy largely as it wished in western Germany gave it the power to pursue economic statecraft on a grand scale.

  On the ground in Germany, one of the earliest significant American efforts to boost output was reconstruction of the rail and transport system in 1947, well before Marshall aid was appropriated.71 Action of this sort, not to mention the historic airlift in Berlin the following year, disproved Nazi propaganda that defeat would mean the destruction of German industry and mass starvation.72 It thereby eased acceptance among West Germans of the subsequent division of their country.

  The Truman administration was determined that Germany’s recovery, and western Europe’s, would not be held back by the financial legacy of war. American grants-in-aid to West Germany, which reached a high of 4 percent of GNP in 1950, do not even begin to measure the benefits to the country from Marshall’s program.73 Aid figures ignore the vast and consequential write-off of the country’s debt. Germany’s total official public debt after the war, 86 percent of which was domestic, amounted to nearly four times the country’s 1938 GDP.74 The United States abolished it through the 1948 currency reform that introduced the deutschmark. (Banks holding the debt received compensating assets to prevent their collapse.) As regards external debt, the 1953 London Agreement reduced the principal and interest on obligations incurred through 1933 (when the country defaulted) and postponed settlement of obligations subsequently created until sometime after a future German unification, when a reparations conference could be held.75

  During the war, Germany also accumulated large external debts through a European payments clearing system established by the Reichsbank. This mechanism, through which the Nazi regime financed virtually all of its trade deficits with Europe, overvalued the reichsmark as a means of expropriating its neighbors. When calculated at realistic exchange rates, Germany’s unsettled external payments obligations amounted to nearly 90 percent of its 1938 GDP by the war’s end.

  The Truman administration was determined not to repeat the mistakes of the 1924 Dawes Plan, through which the United States effectively financed Germany’s external obligations. It cleverly prevented this fate by classifying its aid to Germany as credits, rather than grants, and then requiring other Marshall aid recipients to forgo claims on Germany until the country repaid those credits. Until the United States chose to exercise claims against Germany, which it had no intention of doing, no one else would be able to. The “value of [our] claim,” Lovett told Marshall in December 1947, was “in treaty negotiations.” It was the “basis for keeping other claims down.”76 Washington forced Germany’s neighbors to choose between Marshall aid and trying to collect on German debts. They chose the sure thing: U.S. aid.

  The United States secured, in return for this aid, only modest influence over French and Italian economic policy. Yet it was able virtually to dictate policy in Germany. As Clay put it simply, “There was no German government. We
were it. Absolute and sovereign.”77 The United States was therefore far more assertive in imposing its agenda there than elsewhere in Europe. It is notable that Clay dismissed the first German bizonal economic director, the ever-voluble Johannes Semler, for the modest crime of publicly condemning American food aid as Hühnerfutter, or “chicken feed.”78 Clay was a dictator. He was a benign one by any reasonable standard, but a dictator nonetheless—one who was determined to leave his post with Germany committed to capitalism. It was, to his mind, not just Soviet communism that had to be kept out of Germany, but British Labour–style democratic socialism.

  In his visit to Washington in October 1947, a frustrated SPD leader Kurt Schumacher demanded to know how America could profess a commitment to German self-determination while obstructing his party’s efforts to advance “socialization”—state ownership and control of industry.79 The Truman administration would never find comfort with this question. In April 1948, the State Department acknowledged internally that, when it came to the issue of socialization, it had “in spite of our handsome statements of policy regarding German self-determination . . . in practice not arrived at any concrete action.”80

  On the ground in Germany, Clay did his own version of St. Augustine: “Lord, make me chaste—but not yet.” While pledging his commitment to German home rule, he would only permit it after private enterprise and a market economy seemed assured.

  “We do believe that free enterprise has developed a high standard of living in America,” Clay told German trade unionists in September 1947. “However, we believe in democracy more than we do free enterprise”:

  We have no desire to impose any particular economic structure upon the German people. . . . [M]uch has been said about the United States attempting to stop socialization in Germany when it is desired by the German people. That is not our position although we do hope that you will see some of the virtues that result from free enterprise before you make [your decisions].81

  In practice, Clay used pretexts to block socialization. In 1947 he suspended a Hessian referendum vote in favor of socialization and “co-determination” (union representation on corporate boards), and blocked all subsequent attempts to implement it.82 “They were foreign to my way of thinking—and to the American way of thinking,” Clay commented years later. “I was going to try my best to prove that in encouraging free enterprise we were encouraging a more rapid recovery for Germany.” But he denied imposing his ideological views. “I thought it was the job of military government to maintain free enterprise in Germany until the Germans were capable of making that choice for themselves,” he said, referring to a future united Germany (or at least the western part of it).83 This insistence that only the totality of the German people could decide on socialization allowed him to champion self-determination while blocking Länder legislation he didn’t like.84

  Whereas Washington did not try to use its control of Marshall funds to stop socialization in Britain, it did use its funding of food and other British occupation costs to stop socialization in the British zone of Germany. Attlee’s Labour government, mainly for ideological reasons, wanted public ownership of coal and heavy industry in the Ruhr.85 For its part, the Ramadier (and Schuman) government, for far more practical reasons, wanted to shift the locus of such industry to France. Clay was frequently more critical of them than the Soviets. As occupiers, he said, the French “lived in pomp and luxury and . . . took the maximum out of Germany that could be taken.”86 Both the British and French programs in Germany, Clay was convinced, would have set back German industrial recovery.

  In April 1947, Clay demanded “assurance from our Government that its desire to make economic fusion [between the American and British zones] work does not make it willing to accept a highly centralized economic control, which will be utilized in the hands of the SPD with the support of the British Military Government, to extend socialist influence.”87 Marshall himself insisted that the United States would “not sit by while the British tried out any ideas which they had of experimenting with socialization of mines.”88

  U.S. aid provided the necessary sweeteners for the two allies to abandon their visions. As Kennan put it in July 1947, the United States offered the French and British “the choice between a rise in German production or no European recovery financed by the US.”89 Or as General Robertson put it for his country, “He who pays the piper calls the tune.”90

  In spring of 1948, Will Clayton returned from Europe with vivid accounts of urban food shortages, which were particularly acute in Germany. The Nazi government had suppressed inflation with price controls, which led industrial output to stagnate and farmers to withhold produce. Firms and individuals resorted to using cigarettes for payment.91 The Soviets cared about securing German reparations from current production, but little about how the western zones were supposed to produce them without food or economic incentives.

  Clay planned the 1948 currency reform that restored such incentives in secret.92 He had not even discussed the plans with bizonal economics director Ludwig Erhard, who threatened to resign when he discovered them. (Erhard subsequently changed his mind and announced them on radio as his own.)93 That Clay—who had once been the administration’s highest-level advocate of four-power cooperation in Germany—pursued currency reform unilaterally, in spite of bitter Soviet protests, shows that he saw German revival as being far more important to American national interests.

  The Marshall Plan aimed at a substitution of German for American capital goods supply in western Europe. It succeeded. It did so on the basis of economic and monetary reforms that the Soviets had not allowed, and would never have allowed, under the four-party control regime. “Time is on our side,” Clay argued of his approach in October 1947—ignoring both Germans and Russians who disagreed with him.94 He was vindicated by the election of Adenauer as West Germany’s first chancellor in September 1949. The new leader claimed a popular mandate “against the planned economy.”95

  WITH THE UNITED STATES BLOCKING collection on its Massive Accumulated debt, the new Federal Republic of Germany faced none of the temptations of post–World War I German governments. Popular pressure to adopt inflationary monetary policy, radically redistributive fiscal policy, or antiwestern foreign policy was negligible. Washington’s treatment of Germany’s debt was thus at the heart of the country’s subsequent emergence as a model of macroeconomic orthodoxy and geopolitical conservatism.96

  The mechanisms imposed by the Truman administration for eliminating German debt were not incidental to the Marshall Plan; they were integral to it. They were intended to minimize German and overall European reliance on American transfer payments by easing the implementation of industrial policies, monetary reforms, and trade regimes that would encourage the most rapid possible revival of European production. This revival was in turn intended to buttress democratic government in Europe, keeping communist and other authoritarian political forces at bay—a critical element of the emerging Soviet containment policy.

  “Our basic policy . . . is to push freedom as far east as possible,” Acheson told reporters off the record in May 1949. “If a united Germany contributes to that aim, fine; if not, to hell with it.”97 In Clay’s words, the State Department was only “interested in Germany’s relations with other countries, not in Germany itself.”98

  Once the United States had unilaterally blocked Germany’s debt and reparations, it still had to deal with the problem that its neighbors would not trade with it other than through barter. No country was willing to run a trade surplus with Germany, as its exporters would take bottom priority in the long list of creditors. They would likely never be repaid.

  The State Department addressed this problem by mothballing the international monetary system FDR’s Treasury had instituted in 1944 at Bretton Woods and, for the Marshall countries, substituting the European Payments Union, which operated from 1950 to 1958. The system was multilateral, so participants did not care with whom they traded; exporting to Germany no longer ca
rried any special credit risks.

  At the end of each month, countries’ offsetting claims against each other were canceled out, and remaining surplus or deficit balances consolidated; that is, no country had any claim on any other—only against the union as a whole. As long as countries’ balances, positive or negative, remained within certain quotas, no settlements actually occurred. Once various thresholds were exceeded, however, countries settled in dollars or gold, according to formula. To make the system attractive to both debtors and creditors, the United States subsidized it with $350 million of working capital ($3.5 billion in today’s money) through the Marshall Plan. The capital was used to finance debtor deficits by paying out to creditors the difference between the funds the debtors put in and the greater amounts they actually owed. As regards Germany, the EPU, as a closed system, eliminated the country’s difficulties importing from its neighbors by making its past debts irrelevant to the conduct of trade. It allowed Germany to reengage with the world commercially, in Clay’s words, “unhampered by the curse of past political mistakes.”99

  Since the primary purpose of the system was to encourage intra-European trade, participants were required to end discrimination against imports from all other participants and to cut trade barriers—by 50 percent in December 1949, rising in stages to 90 percent by January 1955.100 Actual settlement in gold or dollars under the EPU was less than a quarter of what it would have been outside it, which also provided a major stimulus to trade. As a result, trade within Europe expanded robustly under the EPU, from $10 billion in 1950 ($100 billion today) to $23 billion in 1959 ($191 billion today). Intra-European trade grew far more than trade with North America, and far more than could be explained by the much smaller rise in European output.101 Although West Germany would complain that the system was too debtor-friendly, allowing France and others to avoid settlement in dollars or gold, the alternative would clearly have been much less supportive of the new country’s export-led revival.