The Pandemic Depression
The Global Economy Will Never Be the Same
Fifty years ago this June, Secretary of State George Marshall offered unprecedented American assistance to the European countries that would together draft a blueprint for their economic recovery. Within ten months, this vague proposal, known as the Marshall Plan, became a detailed program and then law. Billions of American dollars and tons of American products flowed across the Atlantic over the next five years. As large crates bearing the label "European Recovery Program" (ERP) became familiar sights in Western Europe, the contemporary verdict on the Marshall Plan came in clearly: it was a grand success.
Historical scholarship usually follows the laws of physics: what goes up, must come down. New generations of historians challenge the interpretations of their predecessors and question the deeds of their forefathers, especially those that have received widespread praise. Complementing these trends, the end of the Cold War has forced scholars to rethink their views on the last half-century. But, except for some of the fine points regarding motives, operations, and outcomes, the Marshall Plan has largely been spared this revisionist fate. The collapse of the Soviet Union, the thaw of the Cold War, and geopolitics' return to the messy sordidness of history have only enhanced the importance of the Marshall Plan and the reputation of its American creators.
The Marshall Plan served as the economic and political foundation for the Western alliance that waged the Cold War. It allowed the United States gradually to engage itself in the bipolar confrontation by first committing money, not blood. After its initial subscription of dollars, the United States backed up its investment with military force, protecting Berlin against the Soviet blockade and forming the North Atlantic Treaty Organization, the first permanent military alliance in the nation's history. By providing the seed money for the recovery of Western Europe, the Marshall Plan transformed its beneficiaries from poverty cases into partners. During the quarter-century after 1948, Western Europe recorded its highest economic growth ever. This miraculous progress -- indeed, the German recovery was known as the wirtschaftwunder, or economic miracle -- muted the communist sirens on the eastern side of the Oder-Neisse line. Financial recovery and political stability went hand in hand. And military security soon followed: as the Americans came to see the Europeans as potential contributors to their own defense, Washington became increasingly committed to the alliance.
Thanks to the Marshall Plan, Western Europe could emulate the United States, giving its citizens butter for the good life while not stinting on the guns that would protect that prosperity. The United States and its team had the recipe; the Soviet Union and its Warsaw Pact partners did not, for they lacked the economic and political freedom needed to replicate the winning amalgam.
A WORLD MADE SAFE FOR CAPITALISM
What seems evident in retrospect -- the need for American help to rebuild Europe -- had not yet become clear at the turn of 1947. The worst winter in a century had paralyzed the continent. Shivering British officials worked in unheated offices as coal supplies piled up at mineheads. Railroad cars froze on tracks through out Europe. General Lucius Clay, the U.S. military commander in occupied Germany, concluded that Germany's predicament was "truly appalling."
The international political situation was almost as dismal. Deadlocked Council of Ministers meetings ended any hope that the chasm between the United States and Britain, on the one hand, and the Soviet Union, on the other, could be bridged. In March President Truman took the enormous step of offering aid to Greece and Turkey to combat perceived communist subversion. "It must be the policy of the United States to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures," he told a joint session of Congress. The influential Senator Arthur Vandenberg (R-Mich.) had advised the president to pull out all the stops, and that is exactly what Truman did. Congress authorized $250 million in aid for Greece and $150 million for Turkey. Yet legislators applauded enthusiastically only when Truman promised that these loans would promptly be repaid. The United States had appropriated nearly $20 billion for various foreign-aid programs in the two years since the end of World War II, and Congress and the American people had wearied of seeing their generosity seemingly squandered. But Truman realized that American national security (a term not yet in vogue) demanded an economically healthy Western Europe.
The United States had earlier underestimated the depth of the European crisis. During the war years, U.S. officials had devoted much thought to the design of the postwar economic rules of the game. Learning from the failures of Versailles, they outlined the financial and trade parameters that would guide American economic diplomacy and nurture a peaceful world. The result was the Bretton Woods agreements of July 1944, establishing the International Monetary Fund to supervise and maintain global financial relations and the International Bank for Reconstruction and Development, popularly called the World Bank, to offer large-scale capital loans. The aim was laudable, but the institutions' funds were paltry. The IMF and World Bank received less than $20 billion between them to revive the international monetary system. Britain's virtual bankruptcy in 1945 undermined the foundation on which the Bretton Woods institutions had been laid. Rather than start afresh, the Truman administration granted Britain a loan for $3.75 billion. Other stopgap credits followed.
Even as their postwar plans proved inadequate, American policymakers refused to examine the underlying assumption of their economic diplomacy: the international capitalist system was basically healthy, needing only a government jump-start and some clear guidelines. But the European crisis of 1947 exploded that myth. American officials now accepted that direct U.S. government assistance was the answer. The New Deal had made America safe for capitalism; the Marshall Plan would do the same for Europe. Truman administration officials viewed relief and recovery as intertwined, and the Marshall Plan, with a longer-range vision than most other aid programs, was conceived with its own end in sight: it would help Western Europe rebuild the industrial base that was the key to European prosperity, eventually obviating the need for further American assistance. The first step was to remedy the "dollar gap"; Europe was desperately short of the dollars needed for the American raw materials and parts that would lay the groundwork for the continent's reconstruction.
Charitable considerations played a large role in the Marshall Plan, but strategic concerns were equally important. American officials worried about the leftward turn in European politics, from the pervasive socialist influence throughout Europe to the heavy communist inroads in France and Italy. No one in Washington in May 1947 feared the imminent arrival of Soviet tanks in Paris or Rome. But, as George Kennan's Policy Planning Staff had pointed out, "economic maladjustment . . . makes European society vulnerable to exploitation by any and all totalitarian movements." In other words, a hungry, suffering electorate might vote communist governments into power. The Marshall Plan, wrote Kennan in December 1947, would be an effective tool in the strategy of containment.
American officials also believed skillful economic diplomacy would boost their international influence. Although the promise of assistance had failed to change the Soviet Union's behavior, they maintained their earlier conviction that economic aid could buy diplomatic success, particularly in blunting Moscow's threat and nurturing a United States of Europe. The merits of European integration had been debated on both sides of the Atlantic during the interwar years, and after 1945 American support for a united Europe intensified. The leading Republican spokesman on international affairs, John Foster Dulles, advocated "the reconstruction of Europe along federal lines and for the connection to it of a decentralized German confederation."< Dulles' speech highlighted a central benefit of European integration: it would provide a permanent basis for German recovery while assuaging French fears of the resurgence of German expansionism. Moreover, integration, first economic and then political, could cut the costs of Europe's recovery to the United States while creating ties among belligerent leaders that they would later find difficult to sever.
The Truman administration's grand design also accounts for the decision to extend the invitation to all European nations, including the Soviet Union and its clients. The State Department knew that Congress would never approve aid for Russia, and, despite American officials' general optimism about the utility of assistance as a means of influence, they no longer harbored any illusion that aid would change the course of Soviet diplomacy. As Charles Bohlen, a rising department expert on the Soviet Union, explained, "We gambled that the Soviets could not come in and therefore we could gain prestige by including all Europeans and let the Soviet Union bear the onus for withdrawing."> Fortunately for the administration, Stalin never called the bluff.
Domestic considerations played their part, too. In the beginning of 1947 economic indicators pointed to a slight recession in the United States. When news came of Europe's mounting troubles, State Department economists feared that if the recession coincided with a drop in European purchases, the ramifications for the domestic economy would be serious. Under Secretary for Economic Affairs William L. Clayton put it more bluntly: "Let us admit right off that our objective has as its background the needs and interests of the people of the United States. We need markets -- big markets -- in which to buy and sell."
SELLING THE PLAN
To prepare the formal request for aid, the 16 European nations held nearly continuous meetings in Paris. The working group now had a name, the Committee of European Economic Cooperation (CEEC), and a chairman, the capable Sir Oliver Franks of Britain. Abandoning any lingering fiction of European autonomy, Clayton and Kennan, both at the peak of their influence, joined the discussions. The official report, delivered to the State Department on September 22, warned that disaster would strike Europe without American aid.
The report articulated four basic precepts and goals to guide the recovery program: a strong effort by the participating countries to help themselves and stimulate economic growth; the creation of financial stability within each of the states; maximum cooperation among the Europeans; and an export-growth solution to the countries' balance-of-trade deficit with the American continent. In delineating these fundamental principles, the CEEC gave American advocates of the Marshall Plan something definite to discuss, without committing the administration to a specific aid package. Truman responded by conferring with congressional leaders and asking the chairmen of the Senate and House Foreign Affairs and Appropriations Committees to gather their members and consider the CEEC proposal. Secretary of State Marshall and Under Secretary of State Robert Lovett offered another high-level briefing session on September 29.
In the beginning of October, the Soviet Union played an unwitting role in ensuring congressional approval of Marshall aid when Moscow, together with the national communist parties, issued a manifesto reviving the Comintern (renamed the Cominform), their international organization pledged to converting the world to communism. As general alarm spread, Lovett predicted that, without American aid, the nations of Western Europe "would go to the Soviet [Union]."fl On October 23 Truman called a special session of Congress to convene on November 17.
Meanwhile, the administration had launched a public relations campaign to sell the plan to the American people and, through them, Congress. Although Gallup polls consistently reported that less than half of those questioned had heard of the Marshall Plan and only about one in seven could articulate its goals, the media portrayed the project favorably. Newspapers covered the September CEEC report in great depth, and many columnists raised the red flag of communism, the key to the administration's marketing strategy. Acheson, having resigned his post as under secretary of state in June and resumed his Washington law practice, became a leading force behind the campaign. He crisscrossed the United States, talking to any group that would listen, emphasizing whatever he had been told would play best: the economic benefit to the United States, America's humanitarian and moral responsibility, the importance of the United Nations, or the communist threat to Europe.
While The Wall Street Journal sniped at the Marshall Plan, the American Bar Association strongly supported it, urging its members to adopt a bipartisan attitude toward foreign policy. Americans for Democratic Action, a liberal group that was trying to distance itself from the far left wing, also lobbied energetically. Its secretary wrote Acheson that the ADA endorsement "differentiates us from all the phony liberals who talk about aid to Europe but back away the minute Russia makes clear its opposition to such action." Many ADA chapters boasted significant membership among university faculty, and academics warmly endorsed the plan. The program drew backing from farmers' organizations as well: the expectation of higher profits over an extended period of time proved an irresistible lure even in the isolationist heartland.
By the autumn of 1947 the question in Congress was no longer whether to provide rehabilitation assistance, but how much and in what form. With the cooperation of the Republican leadership, Truman requested $2.6 billion in interim aid at the special November session. Vandenberg led the Senate Foreign Relations Committee in endorsing the bill unanimously and then guided Congress into passing an interim aid package that provided $522 million for France, Italy, and Austria as well as $18 million for China. But the State Department believed the interim aid bill had passed only because many members were holding their fire for the larger, long-range recovery program, and thus this small victory brought little cheer.
The administration continued its battle when Congress returned from its Christmas break. In hearings in January 1948, Marshall had the task of defending the $17 billion, four-year aid request. Both the size of the package and its multi-year authorization were unprecedented. A parade of notables urging enactment of the plan followed: Bernard Baruch, Allen and John Foster Dulles, H. J. Heinz II, James O'Neill, national commander of the American Legion, Walter Reuther, president of the United Auto Workers, and Hamilton Fish, who as a congressman had stood against the New Deal and for isolationism. Henry Wallace of the far-left Progressive Party stood out as one of the few dissenters, assailing the program as a step toward war.
In February a communist government took control in Czechoslovakia; supporters of the Marshall Plan did not hesitate to remind Congress and the public that a decade earlier the West had sold out that country to the Nazis. As Marshall informed the cabinet on March 5: "The strategic and political situation in Europe makes it imperative that the ERP legislation be enacted without crippling amendments." After the communist coup in Czechoslovakia, even such holdouts as the isolationist Senator Robert Taft (R-Ohio) dropped their opposition to the Marshall Plan. On April 2 Congress lopsidedly passed the European Recovery Act. The next day, a proud president signed the legislation into law. The Marshall Plan was under way.
AID IN ACTION
The Marshall Plan legislation called for the creation of an Economic Cooperation Administration (ECA), separate from the Department of State. For this critical job Truman tapped Paul Hoffman, an automobile executive highly regarded by Republicans and Democrats alike. W. Averell Harriman became the ECA's ambassador to Europe, making himself at home in an elegant office on the Place de la Concorde in Paris, where he held court under a bust of Benjamin Franklin. A modest but all-powerful army -- 630 Americans and over 800 Europeans by the end of the program in 1953 -- served under these officers.
American aid came in several varieties: dollar grants, grants in kind, and loans. The total amount disbursed under the Marshall Plan from April 3, 1948, until June 30, 1951, when remaining aid was folded into the Mutual Defense Assistance Program, totaled some $12.5 billion. The ECA allocated grants and loans according to each country's dollar balance-of-payments deficit. Britain received 23 percent of total Marshall aid, and 20 percent went to France (in each case before taking account of intra-European transfers). Overall, around one-third of ERP imports were agricultural, but imports of capital goods also proved crucial. Many of the aid dollars remained in the United States, as the secretary of agriculture had declared that surplus American agricultural products had to be purchased in the country; moreover, 25 percent of the total wheat or wheat products sent to Europe under the first ERP legislation had to be in the form of flour milled in the United States.
The American role in promoting Europe's recovery during these years extended far beyond the disbursement of aid. The ECA oversaw numerous projects, from the rebuilding of the Corinth canal by American contractors under the supervision of the Army Corps of Engineers to the modernization of mines in Turkey. In Trieste American technicians helped install U.S. equipment in an oil refinery. The ECA funded the Anglo-American Council on Productivity which, despite its name, sent businessmen from across Europe to the United States to study American production techniques. The ECA also had a small-business division which distributed information and held counseling sessions. However, most of the time ECA employees concentrated on logistical issues related to the assistance, conducting economic surveys of Europe's infrastructure, continuously reevaluating Europe's aid needs, managing agricultural shipments, and dealing with European officials. On a broader level, American officials attempted to shape European monetary and fiscal policy, especially in such areas as exchange rates and intra-European trade. The ECA had the responsibility of managing export controls to Eastern Europe and the Soviet Union, a cooperative Western policy designed to limit the flow of strategic goods to the communist bloc. The ECA also worked to acquire strategic materials for the United States.
Two contentious issues surrounded the operations from the start: the future of Germany and European economic integration. American officials saw German recovery as essential, but France and Britain still drained reparations from their zones of occupation. Not only did these outflows damage the German economy, but they undermined the Marshall Plan by making Germany, in effect, a conduit for American aid to Britain and France. Once again, the Soviet Union came to the rescue. In June 1948 Soviet forces blocked ground access to Berlin. Rather than allow the Soviets control over the former German capital, American and British aircraft supplied Berlin by air. The city became a symbol of Western resistance to Russian aggression, while the confrontation led both Britain and France to adopt more conciliatory positions on German recovery. By May 1949, when Stalin conceded defeat and the American, British, and French zones merged to become the Federal Republic of Germany, the reparations debate had faded in importance. The communist challenge had spurred the triumph of the American position on Germany's future.
The second question, economic integration, had two dimensions. From the beginning American officials had believed that multilateral European arrangements were a prerequisite for the continent's economic recovery. A joint plan would eliminate duplication and waste, maximize intra-European trade and transfers, and increase efficiency. The more fundamental consideration was whether the ERP should set Western Europe on a path that would lead from integration to economic and political union. European unity appealed to Americans for several reasons, not the least of which was the conviction that Europe's best course was to imitate the United States as closely as possible. These ideas had featured in discussions prior to the ERP's enactment and became far more important once the Marshall Plan was under way. While France, the Benelux countries, and Italy embraced the idea, Britain remained aloof.
But on the strategic plane, a transatlantic unity was emerging. The threat to Europe increasingly demanded a military as well as economic response. In the opening months of 1948, U.S. and British policymakers independently aired the possibility of a security alliance between the United States and Europe. The result of these American and British initiatives, enshrined in a treaty signed in Washington on April 4, 1949, was the North Atlantic Treaty Organization.
A SUCCESS AT HOME AND ABROAD
Western Europe's economic recovery ensured that the Marshall Plan would become the model for future foreign-aid programs. While the ERP was in operation, Western Europe's aggregate GNP increased 32 percent, agricultural production jumped 11 percent over prewar levels, and industrial output exceeded the 1938 figure by 40 percent. The Marshall Plan's success in keeping Western Europe out of the communist bloc convinced American planners that economic weapons could solve diplomatic problems. And this triumph blotted out the failure of American economic diplomacy to alter Soviet policy.
Fortunately, the fathers of the Marshall Plan had aimed their economic weapons at economic problems that were susceptible to an economic solution. Western Europe provided the ideal setting for the American approach. The governing structure, infrastructure, and skilled labor force were already in place. European governments lacked dollars and craved American support. The Marshall Plan filled both needs. But Averell Harriman, writing to presidential adviser Clark Clifford in 1953, warned "against undue preoccupation with economic concerns to the exclusion of others, and against the propensity of altogether too many people to think that if we solve the economic problem we automatically solve all others."
American leaders, frightened by the specter of an encroaching communism, relied on economic diplomacy to an unprecedented extent in the effort to combat that threat. Indeed, the ERP remains a model for positive economic diplomacy. Because of American financial strength, the appropriations occasioned no domestic pain and even brought significant gain to certain industrial and agricultural sectors. Economic diplomacy benefited both the United States and Western Europe, foreign and domestic interests alike. Only the communist bloc, the target of American diplomacy, suffered.
The Marshall Plan was a limited investment that paid incalculable dividends. A situation favorable to American interests was established in Europe. The aid program raised Western Europe from its knees, launched the American challenge to the Soviet Union, and bolstered the American economy. This last point runs counter to the conventional economic wisdom: how could massive government expenditures be a net plus to the domestic economy? The experience of the Marshall Plan shows the answer. Investing to protect prosperity at home generated peace and prosperity abroad, which in turn led to still greater prosperity for the donor. When the vital interests of the United States seem to be at stake, the expenditure of American dollars for foreign aid can be amply justified. That was true at the time of the Marshall Plan, and it is still true today.