The Pandemic Depression
The Global Economy Will Never Be the Same
Once the Europeans had begun to respond to the Marshall initiative, Congress and the executive branch sprang into action. On June 19, 1947, just two weeks after George Marshall spoke at Harvard, the State Department's Policy Planning Staff under George Kennan proposed the establishment of several economic and political committees to flesh out the speech's vague proposal. President Truman and the congressional leadership agreed on this course of action on June 22. Three days later, they found me on the lower floors of the State Department laboring over what remained of the German economy and named me executive secretary of the department's working committee on the Marshall Plan. Our first charge was to estimate the assistance needs of the 16 participating European countries -- after the Soviet Union and its satellites had dropped out -- for the next four and one-quarter years, from April 1948 to June 1952.
Under Secretary for Economic Affairs Will Clayton was dispatched to Europe to explain America's intentions. Throughout his meetings with statesmen in London and Paris, he emphasized that any program designed in Europe and approved by the president still had to meet with congressional approval, and this last step of the process would require political subtlety and patience. Clayton advised his European colleagues first to prepare a detailed plan; American officials would then render "friendly assistance," which would not imply endorsement, in revising the proposal for submission to Congress. The Foreign Relations and Foreign Affairs Committees in the two houses would then consider the aid bill and recommend its passage to Congress, followed by approval of a congressional authorization bill for the program. And, finally, the Finance and Appropriations Committees would appropriate the funds.
By early September, the European working group, the Committee of European Economic Cooperation (CEEC), had drawn up a program that called for almost $30 billion of American assistance over four years -- $19.9 billion for the European debt to the United States and $8.3 billion for net imports from the rest of the American continent. Clayton had to make clear in a friendly fashion that this figure was simply too high; he himself had suggested $6 billion or $7 billion a year for three years. James Reston of The New York Times claims that when he reported the Clayton figures, Senator Arthur Vandenberg (R-Mich.) called him to say that he must have been misinformed, since Congress would never appropriate that amount of money to save anybody.
IRONING OUT THE DETAILS
The first item eliminated was money to buy goods outside the United States -- so-called "offshore purchases." Next to go was the extension of American aid to Europe's colonies. Over the summer of 1947 American policymakers discussed numerous issues associated with the program. Should it consist of commodities and services, cash, or both? What conditions, if any, should be placed on the use of "counterpart funds," which the assisted governments acquired by selling commodity aid in national markets for local currencies? How hard should the United States push on balanced budgets, tight monetary policies, and cooperation and integration among the participating countries? One requirement that Congress deemed of paramount importance was that the European countries be self-supporting at the end of the four-year program.
As early as July 1945 the U.S. government had become concerned about the state of Europe's coal production and the distribution of its energy resources. The harsh winter of 1946-47 intensified the pressure on Europe's strained economies and generated American support for a commodity approach. In London on June 25, Clayton spoke of sending Europe fuel, food, and fiber -- the three "f's," as the economists called them -- and a fourth, fertilizer. Thinking in terms of a preliminary American grant to Britain to enable it and the United States to rebuild continental Europe, Foreign Secretary Ernest Bevin suggested that the British Commonwealth could contribute rubber and wool. Other early European lists mentioned timber, dairy products, dried fruit, steel, transport machinery, even consumer goods. Our interdepartmental working committees produced a program, collected in what became known as the "Brown Books," that listed 26 commodities and commodity groups, provided by the United States and exchanged among participating countries.
The commodity approach had considerable technical deficiencies. First, provision of commodities was supposed to correct balance-of-payments deficits, independently determined. But those deficits, without the aid, would have been too big for any independent management. Second, American policymakers committed the fallacy of misplaced concreteness when they insisted that surveillance of the commodities they provided was necessary to insure their efficient use. Not just U.S.-provided steel should be used efficiently, for example, but all steel -- U.S.-provided, home-produced, and steel imported from other countries. Third, any attempt to forecast the balance of payments far in advance is almost certain to be wide of the mark. When the miserable harvest of 1947 was followed by an excellent harvest in 1948, the agricultural imports projected for 1948 turned out to be excessive.
However deficient in terms of economic analysis, the Brown Books required a tremendous effort on the part of many economists and secretaries who worked weekends, late into the night, and often all night. And the Brown Books impressed Congress. In November, Vandenberg wrote, "The preparations the State Department has made for this next showdown are amazing. Indeed they overwhelmed us with documentation. It is a magnificent piece of work. But it is three inches thick."
Over the summer of 1947, it became clear that the CEEC would not finish its task in time for Congress to act on the proposal before the end of the year. Meanwhile, the United States continued to support the revival of Europe through the U.N. Relief and Rehabilitation Agency. The United States provided more than 80 percent of UNRRA aid but had only one vote in 17; the Soviet Union, the United Kingdom, and Canada held out for their own agendas. In a critical memorandum on Marshall aid, Clayton wrote, in italics, "We must avoid getting into another UNRRA. The United States must run this show."
Awaiting a workable Europe-wide plan, the U.S. government sought supplementary aid for Austria, Italy, Hungary, Greece, and Poland, though help for the last country did not survive a determination by Department of Agriculture officials that the Poles were not really hungry. These funds -- $350 million -- had been authorized in September 1946. In December the British declared that they could no longer feed their heavily populated zone of occupation in Germany and wanted a bi-zonal agreement in which relief costs would be split evenly between Britain and the United States, requiring an increase in American appropriations. Things got no better in 1947.
The Marshall Plan was intended to end this series of rescue operations, but before it could get under way, one last emergency required attention, as France and Italy, both with strong local communist parties, ran out of money. As legislative action on the full Marshall Plan had been postponed until 1948, the executive branch asked Congress for interim aid for the two countries. Under Secretary of State Robert Lovett testified on the matter for two weeks in a special congressional session in November 1947. He reportedly observed that although Congress did not directly attack sin, it must have thought the State Department furnished an adequate substitute.
Dean Acheson has written that although Vandenberg did not furnish the ideas, the leadership, or the drive that secured congressional approval of the Marshall Plan, he did make the result possible. Early on, Acheson had mocked Vandenberg as "a severe cyclonic disturbance caused by hot air . . . producing heavy word fall." In time, however, Acheson came to have great respect and considerable affection for this midwestern Republican as the latter, largely as a result of Pearl Harbor, metamorphosed from a strident isolationist, who had voted for the Neutrality Act of 1938, to a committed internationalist. Vandenberg was a candidate for the Republican presidential nomination in 1940, but he was beaten out by the internationalist Wendell Willkie, who then lost the election to Franklin Roosevelt. He briefly contemplated running again in 1948 but decided he would rather work for a bipartisan -- then often described as "nonpartisan" -- foreign policy in Congress. When the Republican Party won control of both the House and the Senate in 1946, Vandenberg became chairman of the Foreign Relations Committee and, in that capacity, was the leading congressional voice on foreign policy.
Senator Robert Taft (R-Ohio), chairman of the Republican Steering Committee, an important member of the Senate Appropriations Committee, and a noted isolationist, had a sizable following and packed a considerable punch. When the interim aid bill came before the Senate, Taft gave it some trouble; Vandenberg believed that the upcoming presidential election (in which Thomas Dewey, not Taft, won the Republican nomination) must be "what was biting Robert." In the end, however, Taft voted for the interim aid bill. Then, in February, came full Senate deliberation on the larger Marshall bill. The State Department sent me to Capitol Hill to provide Congress with statistics and analysis if, in the heat of debate, they were needed. I sat in the last row of the Senate chamber, directly behind Senator Joseph McCarthy (R-Wisc.).
The two members of the committee on whom Vandenberg most depended were Henry Cabot Lodge, Jr., (R-Mass.) and H. Alexander Smith (R-N.J.). Smith seemed to me far more knowledgeable about the issues, but Lodge was far more effective in debate. What was said had far less impact than how it was said. Smith's voice was low and hesitant, Lodge's loud and confident.
Senator Joseph Ball (R-Minn.) had had an epiphany opposite that of Vandenberg, moving from stalwart internationalism early in his senatorial career to skeptical isolationism. Like some prominent figures then, and a few revisionists since, he felt that no aid would be required if European countries would balance their budgets and depreciate their exchange rates to what economists call "purchasing power parity" -- the rate that would restore the relationships among national prices to levels at which payments were more or less in balance.
At last, I thought, here was a point of economic theory on which I might be consulted. I waited for someone from the Foreign Relations Committee staff to stroll over to me in the back row and ask for enlightenment. No one turned in my direction. Instead, Vandenberg rose to his feet and asserted that the purchasing power parity theory was the work of John Maynard Keynes, and we wanted none of that. Invocation of Keynes implied government interventionism, and it demolished the likes of Senator Ball. I suspect I was the only person in the Senate chamber that day who knew the theory had been propounded not by Keynes, but by the Swedish economist Gustav Cassell.
The most interesting confrontation broke out between Taft and Vandenberg. One of many remaining Senate isolationists, Taft attacked the Marshall program for "helping socialism." Rather than claiming that Europe did not need help, that the United States could not afford the assistance, or that Europe would take care of its own problems -- this last being the view I believed Taft really held -- he said he supported the program but only with reduced funding. Instead of $4 billion for the first full year, Taft suggested $3 billion. Again Vandenberg issued the effective riposte: "When a man is drowning 20 feet away, it's a mistake to throw him a 15-foot rope." Taft's motion to cut the first 12-month authorization lost 56 to 31, and the final Senate vote on the Marshall authorization bill passed 69 to 17. The margin of victory (in percentage terms) in the House was slightly higher, 329 to 71.
PEAS AND FISH
Next came the appropriation of the funds. My recollections of this process relate mostly to the House Appropriations Committee under John Taber (R-N.Y.). Paul Nitze, who was then deputy director of the State Department's office of international trade policy, initially presented the Brown Books, reviewing each item line-by-line, and came ultimately to "pulse peas." Taber asked Nitze, a financial expert from Wall Street, how pulse peas were cultivated. Nitze's answer was wobbly. The representative stormed out of the room and telephoned Robert Lovett to say the whole project was unsatisfactory. Lovett, according to one account I heard, asked Taber, the House expert on defense appropriations, how many rivets were in the wing of a b-29 bomber. Taber understandably drew a blank, and the flow of inane questions dried up.
Some government witnesses on commodities and countries were superb. Walter Levy, a petroleum economist, fascinated the committee members by converting, in his head, tons of oil production per year, the measure used in Europe, to barrels of oil production per day, the practice in the United States. (The conversion is actually quite easy: multiply the first figure by 50 to get the second.) An item on fish in the Brown Books prompted Taber to ask whether it referred to dried cod or fish in brine. The answer was both. The representative was gratified, explaining that his family in upstate New York kept a small barrel of mackerel in brine in the cellar each year.
Among the items in the Brown Books that raised some eyebrows were the country "residuals," imports allowed beyond the 26 commodities and commodity groups, which accounted for some 80 percent of total estimated imports. The "residuals" were necessary for accounting purposes: if new information required revision of one of the 26 commodities or groups, changing the total figure for imports would have undermined Congress' confidence in the estimates. Instead we changed the residual in the opposite direction.
Counterpart funds had been a subject of serious discussion between Washington and the European working group. The negotiated solution was that the proceeds would belong to the recipient government but that their use required agreement by the U.S. mission in the country. The purpose of the restriction was to guard against inflationary spending to cover deficits. The requirement was helpful in cases in which a finance minister wanted a lever against spending-happy cabinet colleagues, irksome to countries like the United Kingdom that believed they adhered to sound monetary and fiscal policies, and awkward in France which had tied its hands with its own restrictions and sometimes needed counterpart cash for legitimate purposes. I recall a young, purist official in the Economic Cooperation Administration who wanted to deny the French government's application for use of counterpart funds. The likely result would have been the fall of yet another French cabinet. The economist was blessedly overruled.
To Congress, counterpart funds looked like an opportunity. Some portion of the funds, it insisted, should belong to the United States and be used at its own discretion, within the laws of the recipient country. The State Department objected that the funds were not aid but the sale of U.S. goods for local currency. In the end, the State Department yielded, agreeing that five percent of counterpart funds would fall under the control of the United States. Some was used to buy or build embassies and ambassadorial residences, much to entertain visiting congressmen.
An important issue in the legislation was how the act would be administered in the United States and abroad. Congress strongly opposed having the State Department in charge and pushed for a separate Economic Cooperation Administration that would run its own missions, though necessarily in close communication with the local American embassy. To head the administration, moreover, Vandenberg could not accept a transplanted State Department official; he wanted a business executive from outside government and pressed upon Truman Paul Hoffman, an automobile manufacturer, who proved to be an inspired choice.
Congress' most positive contribution to the final legislation came in the preamble to the Economic Recovery Act, which urged the participating countries to join in a United States of Europe. European integration had been discussed within the Truman administration before the draft legislation was presented, but the State Department held back from adding a political gloss to a program aimed at economic recovery. Congress lacked such delicate inhibition, and it was this preamble that conveyed the emerging American policy of support for European economic integration. Half a century later, the idea remains current.