The Marshall Plan

by Benn Steil

  Creating a regional payments union would seem an archaic way of dealing with trade deficits and a dollar “shortage.” Today, countries would simply devalue their currencies, or allow them to depreciate in foreign exchange markets; this would tend to make their goods more competitive internationally and reduce the deficits. Indeed, in August 1949 Britain—virtually dollarless and at odds with Washington over plans for protectionist retreat into the sterling area—reluctantly devalued sterling by 30 percent after its Treasury warned of “another instalment of dollar crisis (even with ERP).”102 Germany and other nations quickly followed (twenty-three within a week), with the intended effect. Dollar deficits dissipated, and recovery picked up steam. British reserves tripled within two years.103

  In the context of the early postwar period, however, a time in which most currencies were inconvertible and trade barriers high, global multilateral monetary and trade liberalization, of the sort envisioned at Bretton Woods, was utopian. Within Marshall aid countries, establishing a stable environment in which trust and cooperation could take hold among government, business, and workers was vital to the re-creation of a market economy. Across Marshall countries, U.S. security guarantees and financial support were indispensable to allowing those economies to integrate without engendering unmanageable domestic and foreign conflict.

  Much as the State Department had anticipated, American underwriting of the EPU redirected West European imports from the United States to Germany. Western Europe’s large dollar deficits between 1945 and 1948 were a reflection of Germany’s disappearance as its main capital goods supplier. Massive reconstruction needs had therefore to be filled by the United States. It was an important ambition of the Marshall Plan to eliminate Germany’s need for American aid and its neighbors’ need for dollar imports, simultaneously, by restoring Germany to its traditional export role.

  In re-creating a European division of labor, with Germany as an importer of raw materials and exporter of capital goods, the Marshall Plan succeeded in cutting the transatlantic umbilical cord through which western Europe was sucking in unaffordable dollar imports of coal and other industrial supplies. As Europe’s dollar balance strengthened under the EPU (doubling between 1950 and 1956), its incentive to discriminate against dollar imports also declined. The higher dollar balance thereby enabled the Marshall countries to begin restoring currency convertibility after the EPU wound down in 1958. The EPU also succeeded in integrating Germany into western Europe even more deeply than the United States had aimed (possibly at a permanent cost to its own export sectors).

  Bissell and other Marshall planners saw European integration as only a stepping-stone toward the earlier Bretton Woods vision of a globally integrated world. That is, they believed that sometime soon after the Plan was wound down Europe would shed its protectionist trade and currency cocoon and quickly expand trade with the rest of the world. Within Germany, global integration had been economics minister Ludwig Erhard’s aim: to “return to the world market.” In fact, Germany’s intra–western European trade increased more rapidly after 1955 than did its trade with the rest of the world—as did that of all West European countries. Intra-European integration suited Adenauer, whose priority, in contrast to Erhard, was rapprochement with France and its other immediate neighbors.104 The chancellor was convinced that German integration with western Europe would contribute to the ending of Allied controls over its economy, eventually freeing it to leverage its economic power in the area of foreign affairs.105

  Two decades after the launch of the Marshall Plan, Kennan concluded that his objections to the creation of the Federal Republic of Germany had been based on “some grievous miscalculations.” He had overestimated German hatred toward occupation, division, and Americanization, and underestimated its hatred of Russia and communism. “The political success of the London program and the economic ‘miracle’ that was shortly to begin in Western Germany,” he concluded in retrospect, “stand now in the historical record as authoritative corrections to the extremisms of my outlook in 1949.”106 That “miracle,” upon which western Europe’s own remarkable recovery was built, may rank as the single most important and consequential economic contribution of the Marshall Plan.

  AS WITH ALL LEGENDS, THE Marshall Plan has Its fair share of contrarians. On the question of its economic impact, none is more formidable than the late British economic historian Alan Milward. Wielding vast reams of historical facts and figures, typically buried in dense and difficult prose, Milward weaves an elaborate case against the economic relevance of the Marshall Plan. Far from “saving the world,” as Kindleberger and others have claimed, Marshall aid was, in Milward’s estimation, at best unnecessary. “[T]he postwar European world would have looked much the same without it,” he declares with bracing dismissiveness.107

  As a trenchant skeptic toward Keynesian analyses that suggested large returns to government-directed investment, Milward is naturally unsurprised by the findings of economist Barry Eichengreen and others that offer little empirical support for its importance.108 He instead argues that Marshall aid allowed governments to operate with greater inflation and balance-of-payments deficits than they should have.109 The debtor-friendly EPU, a poor alternative to general currency convertibility, in his view, reinforced this.

  Milward is further dismissive of the idea, popularized by historians Michael Hogan and Charles Maier, that the Marshall Plan operated through the successful export of New Deal political and social constructs. In particular, Europe’s adoption of less conflictual American-style labor-management relations was held to have fueled productivity growth.

  This Washington-centric view does indeed seem remote from developments on the ground in Europe—notably in France, where union demands on wages, redistribution, and political representation remained strikingly more hard-edged than in the United States. For its part, the British government consistently pushed back against American efforts to export their industrial management practices. Though “there will undoubtedly be trouble if the Americans think that we are not sufficiently interested in productivity,” noted one U.K. Treasury report, their “superficial investigations and ill-considered reports” needed to be resisted: “The relations between workers and employers in this country [are] quite different from that in the United States.”110 In any case, the different uses to which France, Italy, and the U.K. chose to direct Marshall funds (industrial modernization, inflation control, and debt retirement, respectively) demonstrate that they cannot all have been pursuing an imported American “model.” Whatever that model was, it was not schizophrenic.

  Where Milward is on much shakier ground is in arguing that western Europe’s hardships were overstated, and that it could have, and would have, gotten onto the same impressive growth trajectory, albeit a few years later, through a combination of toughing-it-out and changing to non-dollar-based suppliers.

  Milward insists that lack of food was not a “resource bottleneck.” Most Marshall countries, he argued, could have pursued their chosen recovery programs without American aid by maintaining food consumption at 1947 levels. One reason is that they were, he believes, generally consuming much more than government records indicate. Germans, Italians, and Austrians, whose average official rations contained insufficient calories to sustain manual work, had access to a black market that was “as important” for acquiring food as the legal one. That the 1948 German currency reform instantly filled shop windows was evidence of prior hoarding. Change policy and the problem goes away.111

  This argument is problematic on at least two grounds. First, U.S. officials were aware of the black markets. Department of Agriculture statisticians in fact calculated Germany’s food needs under the assumption that the average German had access to 200 calories daily through the black market (an assumption Clay thought reasonable only for those with exceptional means).112 Second, the State Department was aware of hoarding and its causes. Clayton constantly drew attention to the problem. But he also believed that aid had to accompa
ny policy reform to support basic levels of consumption during the transition.

  In Britain, a June 1948 Treasury paper laid out the terrible consequences for food availability if the government were to reject American aid conditions; Milward dismisses it as “alarmist and exaggerated.” In France, a January 1948 missive to Washington laid out the costs of the latter failing to continue aid: huge cuts to coal (25 percent), oil (50 percent), and sugar (30 percent) allocations, accompanied by soaring unemployment and a possible Communist takeover. Milward dismisses it similarly: “What else were they likely to say if they wanted the aid?”113

  Milward’s own calculations, however, show that France, even if it had held food consumption at the depressed levels of the summer of 1947, could not have paid, two years later, for its dollar-zone finished goods, steel, vehicle, and industrial raw material imports out of export proceeds. These were possible only because of the Marshall Plan. France’s industrial modernization program, Milward himself emphasizes, had “widespread national support.” Yet it could never have been taken forward without American aid, not even by suppressing food consumption 14 percent below 1949 levels.114

  So on what can Milward hang his argument that Europe would still have achieved full (but delayed) recovery without the Marshall Plan? First, according to his calculations, some countries—the U.K., Italy, West Germany, Belgium, and Luxembourg—could, unlike France, have successfully followed his budgetary reallocation approach: financing their preferred recovery programs, without aid, at much reduced levels of food consumption.115 In the case of Italy, at least, however, this conclusion is difficult to accept. The Communists were a powerful political force, and public knowledge was near-universal that no American aid would be forthcoming if they were present in the government. Fear of losing aid clearly had a depressing impact on the Communist Party’s electoral performance, and explains its absence from ruling coalitions after 1947. Without the Marshall Plan, therefore, Italian policy would have been very different.

  Second, Milward argues that Marshall countries could have shifted their imports to nondollar sources. But which ones? Incredibly, Milward points to “the Federal Republic” of Germany, which was only founded in May 1949. Milward specifically highlights the “Dutch-German economic symbiosis.” The Netherlands, like France, also failed his test of whether its recovery program could have been financed without Marshall aid. Yet Milward insists that “the expansion of German trade” after 1947 was “a powerful force for growth in the Dutch economy,” as if this somehow negates his test.116

  There are gaping holes in the argument, however, that German trade could have substituted for Marshall aid. Milward is silent on the mechanism by which a greater “symbiosis” might have been achieved, and how it would have plugged the Dutch government’s financing gap. He argues only, first, that the impact of Marshall aid on growth in German national income is unproven, and therefore unimportant in explaining the growth of Dutch-German trade, and, second, that there were forces independent of the Marshall Plan pushing “the integration of the Federal Republic into an expanding intra–West European trade circuit.”117

  But political forces, outside the Marshall Plan, were pushing against integration, not for it. France was determined to extract reparations from Germany and to neuter its industrial capacity. It was the United States that made the unilateral decision to reindustrialize Germany, to make French acceptance of this a condition for aid, and to turn the Western-occupied portion of it into an independent state. There is no reason to believe that the United States, had it lacked the motivation to create the Marshall Plan, would still have had the motivation to create West Germany, in defiance of Stalin’s threats and pressures. There is further no reason to believe that France and Britain would have entered into any system of economic (let alone security) integration with this new entity. The Marshall Plan not only initiated such integration, but held it together.118

  Milward’s contrarian take has been rightfully influential in rolling back the deference that many had accorded to early eulogistic accounts of the Marshall Plan.119 Those accounts reflexively ascribed to it all the economic successes that accompanied and followed it. But Milward’s case is ultimately uncompelling, relying as it does on the farfetched idea that less food and more Germany could have achieved better results.

  SO DID THE MARSHALL PLAN work? to the extent that it was intended to allow the United States to disengage from Europe militarily, the answer is no. The Truman administration was ultimately obliged to conclude, reluctantly, that it had to commit to a military alliance, NATO, to bring its vision to reality. The Marshall Plan and NATO are therefore best understood as two parts of a wider European security policy, which was itself embedded in an emerging Grand Strategy of Soviet containment. But on this level, as a component of a broader strategy, the Marshall Plan did indeed work. A critical insight behind the Marshall Plan was that we could not take a popular commitment to democracy and free enterprise for granted. If people’s basic needs for physical and economic security were not met, they were likely to turn to authoritarian alternatives. In the wake of the devastation of WWII, the Marshall Plan and NATO provided western Europe with such security and kept it firmly on the democratic, capitalist path.

  And it did so not, as in Soviet propaganda and western revisionist accounts,120 by forcing American surplus production on them. This would have widened Europe’s balance of payments deficit, frustrated Washington’s integration aims, and exacerbated shortages at home. Instead, the Truman administration, aided by a striking change in American business lobbying priorities, orchestrated a shift in policy at home away from protectionism and toward encouragement of imports.

  Harriman was steadfast in insisting that “the purpose of ECA is to stimulate countries to help themselves,” and that, consistent with the ERP legislation, the funds could not be used “to buy surpluses” from “American industry.” The National Association of Manufacturers, in turn, warned its own members that “efforts to direct [Marshall] funds to [exporting surpluses] must be firmly resisted.” The Chamber of Commerce joined NAM in stating that “US exports [must] be consistent with the ability of our customers abroad to pay for them by their own exports.” A State Department directive further stressed that whereas Washington sought “non-discrimination in world trade, it is recognized that during the period in which Germany’s balance of payments is in substantial disequilibrium [it] will, like other countries in the Organization for European Economic Cooperation, find it necessary to restrict imports.” State insisted, therefore, that the U.S. High Commission in Germany not interfere in trade policy.

  Public consciousness of the importance of closing the dollar gap is reflected in the soaring number of newspaper references to the problem between 1947 and 1950.121 The Marshall Plan helped to close the gap by engineering Germany’s revival as western Europe’s primary capital goods supplier, replacing the United States. In this effort it was assisted by a relaxation of official resistance to foreign currency devaluation. Washington recognized, for example, that if Germany could not devalue it would simply “revert to [the] tactics of the 1930s” through which it “fostered . . . exports by dumping and other unethical methods.”122 This recognition represented a departure from the mind-set of FDR’s Treasury at Bretton Woods, which led it to support U.S. exports by prodding indebted nations to keep their currencies overvalued and to finance trade deficits with more debt—that is, IMF loans.123 Under the Marshall Plan, greater U.S. openness to imports and a stronger dollar also helped smooth implementation of the GATT and a revival of international trade generally.

  The financial assistance aspect of the Marshall Plan also departed from earlier American efforts by abjuring the creation of “unbroken circle[s] of loans to pay back loans,”124 relying instead on grants-in-aid. The impact of this aid was significant, though far less direct than the U.S. government had intended. It provided a cushion with which recipient governments alleviated the short-term hardships and insecurity that accompa
nied homegrown economic initiatives—initiatives that American officials often thought insufficient or misguided. But fear of losing aid kept Communist parties out of government, thus satisfying Washington’s overriding political and economic imperatives.

  There was a geopolitical cost for this success, however. While Eleanor Roosevelt and other liberal American notables saw the Marshall Plan as an enlightened and peaceable alternative to the Truman Doctrine, the Soviets saw it very differently. The Truman Doctrine, notwithstanding its harsh tone, had just restated the existence of an American sphere of influence in the Mediterranean that Stalin had already conceded. The Marshall Plan, in contrast, suggested to him the creation of a permanent American political and military presence in the heart of Europe. This presence would, without determined countermeasures, undermine Soviet control of a buffer region for which the Soviet people had paid dearly in the war.

  That Germany, the mortal enemy, would become central to the Marshall Plan made it particularly threatening. To undermine the American plans, Stalin set out to transform western communists into Soviet fifth columns, launched the Cominform, instigated a coup in Prague, and imposed a blockade on Berlin. A July 1947 Central Intelligence Group (CIA predecessor) report to the White House concluded that Marshall’s initiative had “intensified Soviet determination to maintain its extraordinary powers of control over [eastern European] countries.”125 These nations would pay a steep price so that democratic capitalism might thrive in the West.

  Paris and London, meanwhile, were unwilling to abandon the autarkic thrust of their postwar recovery and development plans without guarantees from Washington that they would be protected against both a revanchist Germany and an increasingly hostile Soviet Union. So whereas the Truman administration had intended the Marshall Plan to ease America’s military departure from Europe, it actually served to draw it into an open-ended commitment. Though Stalin saw militarization as endemic to the Plan, NATO was for Truman a regrettable unanticipated cost of implementing it.