The Marshall Plan Today: Model and Metaphor

    Model and Metaphor

Books of Related Interest Geopolitics at the End of the Twentieth Century Nurit Kliot, Haifa University, Israel, and David Newman, Ben Gurion University of the Negev (eds) Boundaries, Territory and Postmodernity David Newman, Ben Gurion University of the Negev (ed.) Geopolitics: Geography and Strategy Colin S. Gray, University of Hull, and Geoffrey Sloan, Britannia Royal Naval College, Dartmouth (eds) Geoproperty Foreign Affairs, National Security and Property Rights Geoff Demarest, United States Army Land-Locked States of Africa and Asia Dick Hodder, Sarah J. Lloyd and Keith McLachlan School of Oriental and African Studies, London (eds) From Geopolitics to Global Politics: A French Connection Jacques Lévy (ed.) The Changing Geopolitics of Eastern Europe Andrew H. Dawson and Rick Fawn University of St Andrews (eds)

THE MARSHALL PLAN TODAY Model and Metaphor

Editors

JOHN AGNEW J. NICHOLAS ENTRIKIN University of California, Los Angeles

First published in 2004 in Great Britain by Routledge 11 New Fetter Lane London EC4P 4EE and in the USA and Canada by Routledge 29 West 35th Street New York, NY 1001 Copyright in collection © 2004 Routledge Copyright in chapters © 2004 individual contributors Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2004. British Library Cataloguing in Publication Data A catalogue record for this book is available from The British Library ISBN 0-203-50307-4 Master e-book ISBN

ISBN 0-203-58233-0 (Adobe eReader Format) ISBN 0 7146-5514-7 (cloth) ISSN 1466-7940 Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher of this book.

Contents List of illustrations Contributors Foreword: The Marshall Plan Speech Preface List of Abbreviations Introduction: The Marshall Plan as Model and Metaphor John Agnew and J. Nicholas Entrikin

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Part I: European Recovery 1 Post-World War II western European Exceptionalism: The Economic Dimension J. Bradford DeLong

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2 Europe and the Marshall Plan: 50 Years On Alan S. Milward

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3 The Economic Effects of the Marshall Plan Revisited Dafne C. Reymen

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4 The Marshall Plan and European Integration: Limits of an Ambition Gérard Bossuat

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Part II: Markets and National Policy 5 As the Twig is Bent: The Marshall Plan in Europe’s Industrial Structure Raymond Vernon

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6 Confronting the Marshall Plan: US Business and European Recovery Jacqueline McGlade

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7 The Marshall Plan: Searching for ‘Creative Peace’ Then and Now Paul Bernd Spahn

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Part III: International Cooperation and Globalization 8 The Marshall Plan and European Unification: Impulses and Restraints Wilfried Loth 9 The Marshall Plan: a Model for What? Thomas C. Schelling

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10 From Marshall Plan to Washington Consensus? Globalization, Democratization, and ‘National’ Economic Planning 241 Stuart Corbridge Index

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Illustrations The following plates appear between pp. 140 and 141. Plates 1 ‘All Our Colours to the Mast’ 2 ‘Western Europe’s Recovery’ 3 President Harry Truman signs the Foreign Assistance Act of 1948, setting into motion the ‘Marshall Plan’ for European Recovery 4 The central figures of the Marshall Plan were (left to right) President Harry Truman, Secretary of State George Marshall, Will Clayton and Paul Hoffman 5 ‘Without the Marshall Plan Your Bread Would Be Bare . . .’ 6 ‘England: Something for Everybody’ 7 Miner’s Homes in Holland 8 ‘The American Bludgeon’ was Russia’s interpretation of America intruding on the sovereignty of west European economies 9 ‘Can He Block It?’ Figures 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 3.1 3.2 7.1 10.1

Germany: GDP per capita, 1870–1994 France: GDP per capita, 1870–1994 Italy: GDP per capita, 1870–1994 Britain: GDP per capita, 1870–1994 GDP per capita since 1900 Exports plus imports divided by national product Real investment as a share of GDP US transfers abroad as a share of GDP German unemployment, 1949–70 Western European inflation, 1950–96 Days lost to strikes Allotments and aid received per country Contribution by Marshal Plan in GNP growth European Recovery Program recipients Diagram of the world system during (A) and after (B) the Cold War

27 28 29 30 35 40 44 46 47 47 49 113 115 197 261

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Tables 1.1 Effect of international trade on Western European post-WWII development 2.1 Net ERP aid received, after trading settlements made with ‘conditional’ aid 2.2 Net total ERP aid received, after trading settlements made with ‘conditional’ aid and drawing rights 2.3 Additional output growth attributable to the Marshall Plan, allowing for interaction effects 3.1 Comparison between aid requiring counterpart deposits and allotments 3.2 Aid requiring counterpart deposits and loans compared to allotments 3.3 Deposits in counterpart funds and loans compared to allotments 3.4 Regression equations used for the simulations 3.5a Contribution to growth by the Marshall Plan through the three traditional channels 3.5b Contribution to growth by the Marshall Plan allowing all channels to operate 3.6 Impact of aid on investment, current account and government spending 3.7 Growth equations (1948–1955) 5.1 Foreign manufacturing subsidiaries established by multinational enterprises in selected areas 5.2 Number of mergers, acquisitions, and joint ventures in manufacturing industries, 1982/83 to 1992/93 7.1 Funds made available to ECA for European economic recovery 7.2 European recovery program recipients

41 61 61 63 116 117 118 119 119 120 120 121 161 165 193 196

Contributors John Agnew is Professor of Geography at UCLA. He served as the Associate Director of the UCLA Center for European and Russian Studies. He is author of numerous books and articles on geopolitics including Political Geography (Arnold), The United States and the World Economy (Cambridge), and Mastering Space (Routledge) with Stuart Corbridge. Gérard Bossuat holds the Jean Monnet Chair of Contemporary History at the University of Cergy-Pontoise (France). He also chairs the Department of History and directs a Master ‘Manager of Europe’ project. Professor Bossuat is a member of the Liaison Group of the Historians within the European Community and of the administrative staff of the Jean Monnet Foundation in Lausanne, and of the Institut Pierre Mendes in Paris. He is on the editorial boards of Matériaux pour l’Histoire de notre temps, Recherche socialiste, and Journal of European Intégration History. Professor Bossuat’s recent books are Les aides américaines économiques et militaires à la France, 1938–1960 (Paris), Comité pour l’histoire économique et financière de la France (2001); Les fondateurs de l’Europe unie (Paris, 2001); and (with Georges Saunier) Inventer l’Europe, histoire nouvelle des groupes d’influence et des acteurs de l’unité européenne, actes du colloque de Cergy-Pontoise des 8–10 November 2001, PIE Peter Lang, 2003. Stuart Corbridge is Professor of Geography at the London School of Economics and at the University of Miami. He works mainly on India and is the author of Reinventing India: Liberalization, Hindu Nationalism and Popular Democracy (Polity, 2000, with John Harriss). His next book, with Glyn Williams, Manoj Srivastava and Rene Veron, will be published by Cambridge University Press in 2004 under the title Seeing the State: How the Rural Poor Experience Governance and Democracy in India. Besides India, his main interests are in development studies and international political economy. J. Bradford DeLong is Professor of Economics at the University of California, Berkeley, Co-Editor of the Journal of Economic Perspectives, and a Research Associate of the National Bureau of Economic

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Research. He served in the Clinton Administration as Deputy Assistant Secretary of the Treasury for Economic Policy. He has written on the evolution and functioning of markets, the course and determinants of long-term economic growth, and the making of economic policy. Recent publications include, ‘The Marshall Plan: History’s Most Successful Structural Adjustment Programme’, with B. Eichengreen (in R. Dornbusch et al. (eds), Postwar Economic Reconstruction and Lessons from the East), ‘Keynesianism Pennsylvania-Avenue Style’, Journal of Economic Perspectives. J. Nicholas Entrikin is Professor of Geography at UCLA and former Associate Director of the UCLA Center for European and Russian Studies. His writings include works on place and political community in western Europe and North America as represented in The Betweenness of Place: Towards and Geography of Modernity (Johns Hopkins), ‘Lieu, Culture et Démocratie’, Cahier de Géographie du Québec, ‘Political Community, Identity, and Cosmopolitan Place’, International Sociology, and ‘Democratic Place-Making and Multiculturalism’, Geografiska Annaler. Wilfried Loth is Professor of Modern European History at the Universität in Essen, Germany. A specialist on the history of the Cold War, Professor Loth has had several of his books translated and published in English, including The Division of the World: 1941–1955 (Routledge), Stalin’s Unwanted Child: The Soviet Union, the German Question and the Founding of the GDR (Macmillan) and Overcoming the Cold War: A History of Détente, 1950–1991 (Routledge). Jacqueline McGlade is Associate Dean for Graduate and Academic Affairs and Associate Professor of History, University of Northern Iowa. She has published several articles on American aid and post-1945 western Europe including ‘From Business Programme to Production Drive: The Transformation of US Technical Assistance to Western Europe’, in Marshall Aid and European Industry (Routledge), NATO Procurement and the Revival of European Defense, 1950–60 (Palgrave) and ‘The Big Push: The Export of American Business Education to Western Europe after World War II’, in Missionaries and Managers: United States Technical Assistance and European Management Education, 1945–60 (Manchester). Alan S. Milward is Senior Research Fellow at St John’s College, Oxford and Official Historian to the United Kingdom Government. He is

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affiliated with The European University Institute and the University of North London. Professor Milward is the author of numerous books and journal articles on modern European economic history, including The Reconstruction of Western Europe: 1945–51 (Methuen) and The Frontier of National Sovereignty: History and Theory, 1945–92 (Methuen). Dafne C. Reymen has a Ph.D. in Economics from Stanford University. She is currently working for the ECORYS group, conducting policy preparatory research, and is Visiting Professor at EHSAL (Brussels, Belgium). Thomas C. Schelling is the Lucius Littauer Professor of Political Economy (Emeritus) at Harvard University and the Distinguished University Professor of Economics and Public Affairs at the University of Maryland. He has served in the United States Bureau of the Budget, the Economic Cooperation Administration in Europe and in the White House Office of the Director of Mutual Security. Professor Schelling is a member of both the National Academy of Sciences and the American Academy of Arts and Sciences. His books include Choice and Consequence (Harvard University Press), Arms and Influence (Yale), and The Strategy of Conflict (Harvard University Press). Paul Bernd Spahn is Professor of Public Finance at the Johann Wolfgang Goethe University in Frankfurt, Germany. He has served as an economic consultant for the International Monetary Fund, the World Bank, the Commission of the European Union, and numerous governments all over the world. His research interests include public finance, especially tax policy and coordination, fiscal decentralization, international economics, and economic integration. Raymond Vernon was the Clarence Dillon Professor of International Affairs and the Herbert Johnson Professor of International Business Management at Harvard University. Before joining the faculty at Harvard he spent a long career in the Securities and Exchange Commission and the Department of State dealing with issues of postwar recovery in Japan and Europe. He was a member of the American Academy of Arts and Sciences and the author of numerous books on international finance and development, including, Big Business and the State Changing Relations in Western Europe (Harvard), Beyond Globalism: Remaking American Foreign Economic Policy (Free Press) with D. Spar, In Hurricane’s Eye: The Troubled Prospects of Multinational Enterprises (Harvard). Professor Vernon passed away in 1999.

Foreword: The Marshall Plan Speech The following is the speech given by Secretary of State George C. Marshall in which he outlined a program of economic assistance to war-torn Europe. It became known as ‘The Marshall Plan Speech’. June 5, 1947, Harvard University, Cambridge, Massachusetts Mr President, Dr Conant, members of the Board of Overseers, Ladies and Gentlemen: I’m profoundly grateful and touched by the great distinction and honor and great compliment accorded me by the authorities of Harvard this morning. I’m overwhelmed, as a matter of fact, and I’m rather fearful of my inability to maintain such a high rating as you’ve been generous enough to accord to me. In these historic and lovely surroundings, this perfect day, and this very wonderful assembly, it is a tremendously impressive thing to an individual in my position. But to speak more seriously, I need not tell you that the world situation is very serious. That must be apparent to all intelligent people. I think one difficulty is that the problem is one of such enormous complexity that the very mass of facts presented to the public by press and radio make it exceedingly difficult for the man in the street to reach a clear appraisement of the situation. Furthermore, the people of this country are distant from the troubled areas of the earth and it is hard for them to comprehend the plight and consequent reactions of the longsuffering peoples, and the effect of those reactions on their governments in connection with our efforts to promote peace in the world. In considering the requirements for the rehabilitation of Europe, the physical loss of life, the visible destruction of cities, factories, mines, and railroads was correctly estimated, but it has become obvious during recent months that this visible destruction was probably less serious than the dislocation of the entire fabric of the European economy. For the past ten years conditions have been abnormal. The feverish preparation for war and the more feverish maintenance of the war effort engulfed all aspects of national economies. Machinery has fallen into disrepair or is entirely obsolete. Under the arbitrary and destructive Nazi rule, virtually every possible enterprise was geared into the German war

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machine. Long-standing commercial ties, private institutions, banks, insurance companies, and shipping companies disappeared through loss of capital, absorption through nationalization, or by simple destruction. In many countries, confidence in the local currency has been severely shaken. The breakdown of the business structure of Europe during the war was complete. Recovery has been seriously retarded by the fact that two years after the close of hostilities a peace settlement with Germany and Austria has not been agreed upon. But even given a more prompt solution of these difficult problems, the rehabilitation of the economic structure of Europe quite evidently will require a much longer time and greater effort than has been foreseen. There is a phase of this matter which is both interesting and serious. The farmer has always produced the foodstuffs to exchange with the city dweller for the other necessities of life. This division of labor is the basis of modern civilization. At the present time it is threatened with breakdown. The town and city industries are not producing adequate goods to exchange with the food-producing farmer. Raw materials and fuel are in short supply. Machinery is lacking or worn out. The farmer or the peasant cannot find the goods for sale which he desires to purchase. So the sale of his farm produce for money which he cannot use seems to him an unprofitable transaction. He, therefore, has withdrawn many fields from crop cultivation and is using them for grazing. He feeds more grain to stock and finds for himself and his family an ample supply of food, however short he may be on clothing and the other ordinary gadgets of civilization. Meanwhile, people in the cities are short of food and fuel, and in some places approaching the starvation levels. So the governments are forced to use their foreign money and credits to procure these necessities abroad. This process exhausts funds which are urgently needed for reconstruction. Thus a very serious situation is rapidly developing which bodes no good for the world. The modern system of the division of labor upon which the exchange of products is based is in danger of breaking down. The truth of the matter is that Europe’s requirements for the next three or four years of foreign food and other essential products – principally from America – are so much greater than her present ability to pay that she must have substantial additional help or face economic, social, and political deterioration of a very grave character. The remedy lies in breaking the vicious circle and restoring the confidence of the European people in the economic future of their own countries and of Europe as a whole. The manufacturer and the farmer throughout wide areas must be able and willing to exchange their product for currencies, the continuing value of which is not open to question.

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Aside from the demoralizing effect on the world at large and the possibilities of disturbances arising as a result of the desperation of the people concerned, the consequences to the economy of the United States should be apparent to all. It is logical that the United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace. Our policy is directed not against any country or doctrine but against hunger, poverty, desperation, and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist. Such assistance, I am convinced, must not be on a piecemeal basis as various crises develop. Any assistance that this Government may render in the future should provide a cure rather than a mere palliative. Any government that is willing to assist in the task of recovery will find full cooperation, I am sure, on the part of the United States Government. Any government which maneuvers to block the recovery of other countries cannot expect help from us. Furthermore, governments, political parties, or groups which seek to perpetuate human misery in order to profit therefrom politically or otherwise will encounter the opposition of the United States. It is already evident that, before the United States Government can proceed much further in its efforts to alleviate the situation and help start the European world on its way to recovery, there must be some agreement among the countries of Europe as to the requirements of the situation and the part those countries themselves will take in order to give proper effect to whatever action might be undertaken by this Government. It would be neither fitting nor efficacious for this Government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of the Europeans. The initiative, I think, must come from Europe. The role of this country should consist of friendly aid in the drafting of a European program and of later support of such a program so far as it may be practical for us to do so. The program should be a joint one, agreed to by a number, if not all, European nations. An essential part of any successful action on the part of the United States is an understanding on the part of the people of America of the character of the problem and the remedies to be applied. Political passion and prejudice should have no part. With foresight, and a willingness on the part of our people to face up to the vast responsibility which history has clearly placed upon our country the difficulties I have outlined can and will be overcome. I am sorry that on each occasion I have said something publicly in regard to our international situation, I’ve been forced by the necessities

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of the case to enter into rather technical discussions. But to my mind, it is of vast importance that our people reach some general understanding of what the complications really are, rather than react from a passion or a prejudice or an emotion of the moment. As I said more formally a moment ago, we are remote from the scene of these troubles. It is virtually impossible at this distance merely by reading, or listening, or even seeing photographs or motion pictures, to grasp at all the real significance of the situation. And yet the whole world of the future hangs on a proper judgment. It hangs, I think, to a large extent on the realization of the American people, of just what are the various dominant factors. What are the reactions of the people? What are the justifications of those reactions? What are the sufferings? What is needed? What can best be done? What must be done? Thank you very much.

Preface Most of the chapters presented in this book derive from papers presented at a conference held at UCLA in November of 1997 entitled ‘The Marshall Plan: Lessons after 50 Years (1947–97) – Through the Cold War and Toward Unification’. The conference was organized under the auspices of the UCLA Center for European and Russian Studies (renamed in 2002 as the UCLA Center for European and Eurasian Studies). The editors were the then former and current associate directors of the Center and the primary conference organizers. The papers were revised to form the core of this book, and several additional contributions were invited. The one paper that is presented in its original conference format is that of late Professor Raymond Vernon. We would like to thank Professor Ivan Berend, the Director of the Center, for his leadership and generosity in supporting the conference and this publication. In addition to Center support, financial assistance for the conference was provided by the Goethe-Institut German Cultural Center, the University of California Berkeley Center for German and European Studies, the Kreditanstalt für Wiederaufbau, and Mr George Gregory. Vera Wheeler, Center Program Director, and her staff provided greatly appreciated assistance in the planning and organization of the conference. We would also like to acknowledge the conference participants whose work is not presented here but whose contributions were essential to the success of the meeting. They include: Professor Michael Intriligator, Dr Malinka Koparanova, and the former Czech Foreign Minister Jirí Dienstbier. Several people were especially instrumental in the preparation of this book and are deserving of notice. First and foremost, we would like to express our gratitude to Carol Medlicott for her invaluable assistance in preparing the manuscript for publication. Her organizational efficiency, critical eye, and sound judgment were essential to the successful completion of this project. The UCLA Academic Senate Faculty Research Grant Program provided funding for her work. The critical yet encouraging commentary and careful manuscript review provided by Professor Günther J. Bischof were important to us in revising both the introduction and the overall thematic organization of the volume. Lisa Hyde of Frank Cass Publishers and Heidi Bagtazo

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of Routledge have been patient and effective editors in facilitating the transition from manuscript to published volume. John Agnew J. Nicholas Entrikin UCLA

Abbreviations AMF AMP CED CEEC COCOM DOTs EBRD ECA ECSC EDC EIP EPU ERP EURATOM FFMA FNA FOA GAB GARIOA GATT IMF ISB ITO MDAA MSA NAM NATO NFTC NICs NSC OECD OEEC OIG UNRRA

Jean Monnet Archives Additional Military Production Committee for Economic Development Committee on European Economic Cooperation Coordinating Committee Developing and de-colonized countries European Bank for Reconstruction and Development Economic Cooperation Administration European Coal and Steel Community European Defense Community European Industrial Projects European Payments Union European Recovery Program European Atomic Energy Community French Foreign Minister Archives French National Archives Foreign Operations Administration General Agreement to Borrow Government Aid and Relief in Occupied Areas General Agreement on Tariffs and Trade International Monetary Fund International Settlements Bank International Trade Organization Military Defense Assistance Act Mutual Security Agency National Association of Manufacturers North Atlantic Treaty Organization National Foreign Trade Council Newly Industrialized Countries National Security Council Organization for Economic Cooperation and Development Organization for European Economic Cooperation Overseas Investment Guarantees United Nations Reconstruction and Rehabilitation Administration

xx USDS USTA&P

    US Department of State US Technical Assistance and Productivity Program

Introduction: The Marshall Plan as Model and Metaphor JOHN AGNEW AND J. NICHOLAS ENTRIKIN

In a 1947 address at the Harvard University Commencement, Secretary of State George C. Marshall outlined the idea, later enshrined in the Truman Administration’s European Recovery Program, of reconstructing a devastated Europe only just emerging from World War II through the infusion of US aid on a massive scale. The Marshall Plan would eventually cost between 12 and 13 billion dollars before being subsumed by US defense spending on NATO and support for a variety of bilateral aid programs in the early 1950s. The Marshall Plan was indeed by many measures a successful international aid program, which like most such programs had more than purely philanthropic aims. Among other things, a devastated Europe was an invitation to Soviet political meddling, an opportunity for rebuilding export markets for US businesses, and a chance to experiment with creating an open world economy that would not experience repetition of the economic and political disasters of the previous twenty years. Evocative speeches at timely moments played a major role in defining and reorienting ‘Europe’ after World War II. One was Winston Churchill’s ‘iron curtain’ speech at Westminster College in Missouri in 1946. Another was George Marshall’s speech at Harvard in 1947 offering American aid and advice in rebuilding a shattered continent. A third was Robert Schuman’s speech in Paris in 1950 proposing common European control over coal and steel resources. These speeches, perhaps because they were relatively short and eloquent, captured the popular imagination of the time. They shifted thinking by creating a new conventional wisdom. With hindsight they seem like founding moments of what has happened since. The fact that two were given in the United States points to both American centrality to Europe’s future and the interweaving of destinies that was already under way. Scholars have long debated the extent to which the Marshall Plan of 1947 actually contributed to the postwar growth and prosperity of western Europe and the degree to which it was an unprecedented act of

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state altruism or an example of American imperialism. Indeed, scholarship on the consequences of the Marshall Plan has gone through several identifiable stages. Accounts of the Marshall Plan as the major cause of postwar European recovery were challenged by the revisionist counterfactual analysis of Alan Milward (1984), and Milward’s conclusions have in turn been questioned by Barry Eichengreen and Marc Uzan’s (1992) econometric analysis reasserting the positive impact of the plan through its critical and timely support of basic market systems in fragile European national economies. These and other interpretive disagreements highlight the troublesome data issues associated with Marshall Plan scholarship, in which seemingly straightforward claims, such as the amounts of aid received by participating countries, are matters of continual reassessment and argument. What appears beyond dispute, however, is that the plan had two major impacts, irrespective of either its quantitative effect or its motivation. One was the political–psychological boost its massive economic assistance gave to a recovering Europe. The other was its undoubted contribution to the divergence in political–economic paths of western and eastern Europe. After Stalin’s rejection of the plan as an example of unmitigated American imperialism, the funds and the American ideas for how they should be spent poured into western Europe where they influenced the course of both ideology and institutions over the next 50 years. Indeed, it is not too far-fetched to suggest that the opening up of national boundaries to trade and investment implicit in the plan’s approach and the conjoining of private and public initiatives within the plan helped lay the groundwork for later European unification and the decisive choice of the US side by western Europe in the emerging Cold War between the United States and the Soviet Union. Since 1989, the reinvigoration of European unification and the collapse of the Soviet Union have created a sense of a new European age, of a unifying Europe looking to the future rather than a divided Europe mired in the past. Recent events, such as the dreadful and continuing violence in the former Yugoslavia, the cataclysmic economic implosion of Russia, and the emergence of significant cleavages among members of the European Union with respect to acceptance of key policies on population mobility and currency unification, and foreign policy cleavages over the war in Iraq, remind us of the fragility of what has been achieved. At the same time they suggest the need for greater international coordination to combat a renewal of political and economic fragmentation. Yet the seemingly compulsive progress of integration within the European Union and the convulsive collapse of the Cold War world also recall the European past, particularly the years immediately after World War II,

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when Europe was divided between east and west, and what these years signify both in terms of the trajectory of western Europe thereafter and the relevance of that experience for the assimilation of the east into the project of European unification. In particular, the spirit of integration represented by the European Union can be traced to the immediate postwar years when a group of western European political leaders, such as Monnet, Schuman, De Gasperi, and Adenauer, combined a vision of an integrating Europe with support for an American plan of economic recovery and institutional reform. This initiative was directed as much at preventing a recurrence of the Depression of the 1930s as at minimizing the likelihood of a return of the national animosities that had produced the two world wars. As such it closely matched contemporary American imperatives. Along with the military commitments of the United States to western Europe in the form of NATO, designed to frustrate Soviet ambitions beyond the sphere of influence agreed to by the Allies (the United States, Britain and the Soviet Union) at the Yalta conference in 1945, the most important material and symbolic economic commitment of the US government took the form of the Marshall Plan, designed to limit the political success of indigenous Communist parties by pointing to American financial support and the absence of any Soviet equivalent, stimulating European economic growth to help American exports, and creating (in conjunction with the Bretton Woods Agreement on currencies of 1944) a world economy in which the competitive protectionism of the 1930s would be a thing of the past. The Marshall Plan has become the centerpiece of claims about what distinguished the aftermath of World War II in Europe from that of World War I, particularly the limited emphasis on reparations from a ‘guilty’ Germany and the necessary role in this played by the United States government, and the specific American contribution to western European economic growth and prosperity in the 1950s and 1960s. It has also become a model or rhetorical device for exhorting planned external intervention elsewhere, more recently for eastern Europe and the former Soviet Union, and most recently for Afghanistan and Iraq, to do what the Marshall Plan is alleged to have done so successfully for western Europe after World War II. More than fifty years after the introduction of the Marshall Plan, therefore, the plan still lives on but now as a model for organizing the transition from state socialism to open market economies. As Barry Eichengreen (2001, 141) has noted, the Marshall Plan was a unique response to a particular historical circumstance, but ‘Marshall’s key insight, that a market economy needs institutional and policy support to function effectively, is as timely today as 50 years ago.’

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Two related themes, the Marshall Plan as a force for western European economic recovery and political integration and as a model for the later world economy and the recent transition economies, form the conceptual axis for the organization of this volume. The Marshall Plan looms large in general debates about the origins of the Cold War and the globalization of the world economy under American auspices. It has recently assumed an intellectual and political importance out of all proportion to what its initiators seem to have had in mind. Since the end of the Cold War the Marshall Plan has taken on a mythic role in political rhetoric and in debates among scholars that is deserving of close attention. The purpose of this book is to begin such a reevaluation by incorporating examination of the impact of the plan, its legacy for European integration, its emergence as a model for the transition from state socialism, and its founding as a vital underpinning of the globalizing world economy which accompanied the mutual development of the Cold War western world’s American and European halves. The book consists of 10 chapters by authors from a range of disciplines – from economics and history to political science and human geography – and a diversity of national backgrounds – from French and British, to German and American. They combine to tell a collective narrative that extends well beyond a specifically ‘American story’ of the Marshall Plan and its consequences. The book also offers a mix of views from leading authorities on the Marshall Plan, including Alan Milward, Raymond Vernon, Wilfried Loth, Gerard Bossuat, and Thomas Schelling, and a group of younger, noteworthy scholars, such as J. Bradford De Long, Stuart Corbridge, Dafne C. Reymen, and Jacqueline McGlade. The continuity of the Marshall Plan as a metaphor and model for beneficent external intervention to aid in economic transformation under conditions of socio-economic collapse is one feature that distinguishes this book from others on the Marshall Plan or aspects of it that have appeared since 1980. The other feature is its focus on the longerterm impacts of the Marshall Plan, including that of its effect on European unification. Most previous studies fit under one of three rubrics. In the first category are volumes of memoirs, recording the origins and working of the plan from the point of view of participants. The volumes published in celebration of the 35th and 40th anniversaries of the plan are of this type (Hoffman and Maier, 1984; Clesse and Epps, 1990). The second category consists of studies of the politics of the plan in relation to single countries (for example, Bischof, Pelinka and Stiefel, 2000; Maier and Bischof, 1991; Whelan, 2000) or the role of individual political figures, such as Dean Acheson, in its formulation (for example, Chace, 1998). The third, and final, are books that have emphasized the

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impact of the Marshall Plan on the postwar economic recovery of western Europe (for example, Wexler, 1983; Milward, 1984; Eichengreen, 1995) or its role in creating a political–economic ‘bridge’ between the United States and Europe across which American ideas of political– economic organization might freely pass (for example, Mee, 1984; Hogan, 1987). Though covering many of the themes raised in the other studies, this book endeavors to provide a rather more comprehensive perspective on the Marshall Plan than is found elsewhere in terms of the plan’s long-term political influence, as well as its shorter-term political and economic impact. Not surprisingly, it is closest in format to another 50th anniversary volume, The Marshall Plan: Fifty Years After, edited by Martin Schain (2001) under the auspices of the Center for European Studies at New York University. Both books examine the debates concerning the Marshall Plan’s legacy for European recovery and integration, but some of the following chapters extend beyond these themes to include consideration of the salience and discursive power of the idea of the plan in other arenas of international affairs. The Introduction provides four services to the reader of the book. The first is to situate the Marshall Plan in the geopolitical context of the Cold War and the new world economy to which it contributed. A particular emphasis is placed on what the Marshall Plan signifies about the peculiar character of the dominance exerted by the United States as an emerging superpower in the late 1940s. The second is to provide a brief overview of the Marshall Plan and its legacy. This is a brief narrative of the origins and unfolding of the plan that should help in providing background for the disputes over its impact in subsequent chapters. The third is to outline the use of the Marshall Plan as a metaphor and model for external support, particularly in relation to eastern Europe in the early 1990s. Finally, the organization of the book, the specific chapters, and their relationship to the overarching themes are traced. The Peculiarity of American Hegemony In early 1947 the United States government did not yet have any kind of grand strategy in relation to either its global role or the more specific problems of its military and political presence in Europe. As Dean Acheson, then Under-Secretary of State, wrote in his memoir, referring to himself and his colleagues in the Truman Administration: ‘Only slowly did it dawn upon us that the whole world structure and order that we had inherited from the nineteenth century was gone and that the struggle to replace it would be directed from two bitterly opposed and ideologically irreconcilable power centers’ (Acheson, 1969, 726).

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What was clear was that the relative location of the various victorious armies at the end of the war seemed to augur a world divided into spheres of influence with the Red Army in eastern Europe, the American army in Japan and southern Korea, the British and American forces in Germany and Italy, and the British army in Greece. This vision, originating at the Yalta Conference in 1945, received its most vivid expression in Winston Churchill’s famous speech on 5 March 1946 at Westminster College, Missouri, when the former British prime minister warned that an ‘iron curtain’ had descended across Europe and an Anglo-American alliance had to make sure that it went no further. Stalin had earlier endorsed his own version of a dividing world when in a speech on 9 February 1946 he spoke of the fundamental incompatibility between his communist and the American capitalist systems. The war of words that constituted the verbal face of the Cold War as it was to grow down the years was under way. Its military and political–economic components were not long in revealing themselves. Mutual suspicions fueled by divergent political–economic systems, a budding arms race, and mutual interpretations based on totalistic accounts of the Other, systematically exaggerating each one’s negative features, left little scope in 1946–47 for calm realpolitik appraisal of either side’s intentions or capabilities. Each side began to define itself as the complete opposite of the other with each considered as an ideal type of political–economic system between which there could be no compromise in a struggle for global primacy. The growing rigidity of this division did not unfold linearly. The recent opening of Soviet archives suggests some Soviet wavering in terms of response to the initial offer to include the Soviet Union and eastern Europe in the plan (Roberts, 1994). Many forget that Marshall’s speech did not single out western Europe but had a much more expansive understanding of Europe (Loth, 1988). The British also contributed to the polarization, not only by means of Churchill’s rhetoric and Foreign Secretary Bevin’s fervent anti-communism and enthusiasm for Anglo-American joint ventures, but also through pursuing the goal of propping up the British Empire by encouraging an east–west division in place of possible alternatives, such as a US–Soviet détente, that might have doomed the continuation of British pretense to Great Power status (Ryan, 1982; Taylor, 1990). The signs of the growing Cold War were evident, however, in the conflict over the Greek civil war, struggles over Berlin, revelations of Soviet espionage to acquire nuclear secrets, George Kennan’s writings characterizing the Soviet Union as an adversary that only understood the ‘logic of force’, and an increasing consensus between the two political parties and among powerful economic interests in the United States that the

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country could not safely retreat into its shell as it had done after World War I. Although the military aspect of the emerging global confrontation with the Soviet Union received pride of place in both Washington DC and Moscow, the US approach increasingly involved a focus on tying foreign policy to the needs of domestic economy including a sense that the future success of the latter depended on an expanding world market to which the Soviet Union as an autarkic state-command economy posed a direct threat. What made the United States a peculiar superpower, therefore, was not its command over nuclear weapons or its military might in general but its desire and ability to export its ethos of organized capitalism so as to build and protect its base at home. This made it qualitatively different from the previous experience of the British and their focus on territorial empire-building or the Soviet Union’s commitment to ideological rather than material exports. The Americans have been the true dialectical materialists, exporting ideas and commodities at one and the same time. The immediate origins of the Marshall Plan lay in the perception by leading figures in the Truman Administration that (1) with the defeat of Germany and Italy and the exhaustion of Britain and France, Europe was a power-vacuum into which the Soviet Union might expand unless countered economically as well as militarily by the United States, and (2) the economic recovery of Europe involved not only direct financial aid to rebuilding but also an institutional reorientation in many European nations towards the American model of business–government relations preferably in a framework in which the barriers between states in Europe would become like those between States in the United States (Leffler, 1984; Hogan, 1987, 26–53). The American insistence on a multinational approach with joint planning and resource sharing suggests how seriously the US Administration took the idea of moving beyond bilateral aid into an entirely new world of multilateral commitments and multinational institution building. At an early stage the Marshall planners presciently determined that Germany, the devastated enemy of two years previously, would serve as the locomotive of European recovery. For this to happen, however, the legitimacy of national governments (above all, that of West Germany) as providers for their populations had to be reestablished and the other countries had to be open to the impulses transmitted by German economic rejuvenation. If American federalism inspired the political thrust, the economic principles to guide American engagement with Europe were those that had evolved in the corporate expansion of the 1920s and the New Deal of the 1930s in the United States: ‘where a large internal economy integrated by free-market forces

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and central institutions of coordination and control seemed to have laid the groundwork for a new era of economic growth and social stability’ (Hogan, 1987, 27). Europe was viewed as central to world economic recovery. The Europe that mattered was the industrial one that was currently in crisis but when it did recover was likely to pose a threat to the US unless incorporated into an American-ordered world economy. US aid was to finance the dollar deficits of Europe incurred in transatlantic trade and thus to enable reconstruction and movement towards currency convertibility (Eichengreen, 1996, 104–5). Left undefined in Marshall’s speech so as to suggest a purely beneficent, even anti-geopolitical approach to reconstruction, postwar ‘Europe’ was really industrial western Europe as viewed from the US, plus other countries included largely for political reasons. But of course Europe was also the historic region of origin of most Americans at the time, not least their leaders. So, it was seen as ‘natural’ that Europe would have a high priority in postwar American designs. The confrontation with the Soviet Union was also most obvious and crucial in Europe, whether directly through military competition, or indirectly through the threat posed by large communist parties with Moscow affiliations in Italy, France and several other countries. Will Clayton, one of the architects of the plan, directly linked the European origins of most Americans with anti-communism in a speech on 18 December 1947: Western Europe is made up of our kind of people. Many of our forefathers came from there. Those people hate Communism but if they must resist it under conditions of economic frustration, cold, and hunger, they will lose the fight (Dobney, 1971, 229). The actual impact of the plan was much more complex than the Marshall planners foresaw. Though the Marshall Plan, along with such American international initiatives as the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade, were to give powerful institutional support to the emergence of an ‘embedded liberalism’ in relations between the US and Europe, individual countries adapted differentially to the initiatives of the plan. The American architects of the plan realized that they could not achieve their goals without active European collaboration, so they were sensitive to national differences, including different national business histories and financial systems. Rather than ‘one size fitting all’, therefore, the Marshall Plan allowed for significant national variation in response to the general overarching political–economic direction implicit in the plan for Europe as a whole. Out of the Marshall Plan and, after 1949, with NATO, a regional

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architecture of power, institutions, and ideology evolved, which, while allowing for local differences, served three security goals, somewhat flippantly expressed as ‘keeping the Americans in, the Russians out, and the Germans down’ (that is inside but controlled within a western community of states), and the economic goals of stimulating European economic recovery in a broad framework building towards regional integration on an American model but allowing for national differences. Of course, what was shared was a generally dirigiste appreciation of the virtues of planning and state–business collaboration, associated in the United States with the New Deal, something lost to the world economy since the 1980s’ explosion of support for monetarist and supply-side economic ideologies that look with disfavor on the explicit planned intervention represented by the Marshall Plan and such subsequent European institutional initiatives as the European Coal and Steel Community, the European Common Market, and the European Union. If in early 1947, therefore, as Dean Acheson relates, there was no American grand strategy for the postwar world, after midsummer of that year there was indeed. It was represented in the Marshall Plan, a proposal that managed to encapsulate within one general policy initiative a set of ambitious goals for making over Europe in a new, Americanized image. Not only did this mark a total departure from the American attitude of retreat after World War I, it also signaled the rise of a new and distinctive superpower, oriented towards a remaking of its recent enemies and allies alike rather than their simple conquest or incorporation into an American imperium. This is why the Marshall Plan can be seen both as a philanthropic act and a cunning design for a new world order. To its architects, neither one would be seen as contradicting the other. Revisiting the Marshall Plan Formal American planning for European recovery had begun by early 1947. From the beginning its two most significant features for later adoption were a tendency to think in terms of Europe as a whole and the need to integrate Germany into a regional trading and production system so as to encourage recovery all round and reduce the fears of its neighbors that a revived Germany necessarily meant a dangerous one. The Marshall Plan grew out of a series of memoranda and speeches influenced by these ideas about the form that European recovery might be encouraged to take. But it also emerged in response to a perception that European recovery was in crisis and needed a kick start by the only country capable of giving it: the United States.

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Key among the speeches and memoranda were a speech given by Dean Acheson in Cleveland, Mississippi on 8 May 1947, where a leading figure in the Truman Administration State Department previously skeptical about the need for a Cold War plan asserted the need for a ‘coordinated European economy’ to be pursued, if necessary, ‘without full Four Power agreement’ (Acheson, 1969, 228–9) and a persuasive memorandum penned by another State Department official and former Texas cotton broker, Will Clayton, a week after his return from a European trip, 27 May 1947, that recommended 6–7 billion dollars in new aid each year over three years to reorganize an economy that had become ‘divided into many small watertight compartments’ but now should become a ‘European economic federation’ (Clayton Memorandum, quoted in Hogan, 1987, 43). The day after the submission of his memorandum, Clayton met with Secretary of State Marshall and others, such as George Kennan, to discuss his recommendations and those of the Policy Planning Staff of the State Department, which Kennan then headed. Interestingly, Truman himself was absent from this discussion. His keeping a low profile can perhaps be put down to his image as a partisan politician whose patriotism could be questioned by the Republicans, then in legislative ascendancy within the federal government, and Marshall’s contrasting image as the organizational genius who had brought victory in the recently concluded war. At this meeting the main points of what was to become Marshall’s historic speech were outlined and agreed to. They included the idea of closer European union, extending an invitation to eastern European countries and the Soviet Union to participate in a recovery plan but with the goal of integrating western Europe alone if they refused to join, and insisting that the Europeans themselves should develop an overall plan of multilateral action under American auspices. This may have been one of the most brilliant political strategy sessions of all time. Not only did it lay out a simple yet effective plan for American aid to European recovery, it also provided a vision of a ‘new’ Europe to serve as a basis for more specific American military and economic policies towards the region and a way of restricting Stalin’s options by making him reject the noble offer of American aid rather than exclude him from the outset and thus give him the ready opportunity to portray the plan as a plot to extend American dominion over western Europe. In late 1945 the US government had vastly underestimated the degree of European economic exhaustion. The best example of this was the inadequacy of the 3.75 billion dollar British loan of 6 December 1945 to the task of setting the British economy back on track. Only through touting the virtues of sustaining free enterprise beyond American shores

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and invoking the threat of Soviet fishing in troubled waters did the Truman administration convince a skeptical Republican Congress that some action was due. Through 1946 and into 1947 the perceived failure of a British or a wider European recovery encouraged an increasing sense of crisis. Crop failures in France and Italy and a brutally cold winter throughout Europe reinforced the sense that something had to be done in 1947. This reached a peak with two related events: the virtual bankruptcy of Britain in late 1946 as an American-mandated convertibility of sterling into dollars led to a run on the pound and the British government’s announcement in early 1947 of a withdrawal of its forces from Greece where British-supported Royalists were battling a Communist insurgency. It was in response to this situation that President Truman went to Congress on 12 March 1947 to enunciate his ‘doctrine’ of protecting ‘free peoples’ from Communist (Soviet) aggression. Clayton’s persuasive advocacy of doing something for European recovery came at precisely the moment, therefore, when events combined with policy preparation to make his logic compelling (for a brief but useful account of Clayton’s contribution to the Marshall Plan, see Fossedal and Mikhail, 1997). Marshall decided to make a short speech about what Europe needed in a Commencement Address he had already been invited to give at Harvard University on 5 June 1947. Reflecting the melding of themes urged by Acheson, Kennan and Clayton, the speech announced a proposed program of American aid to Europe that was not directed against any country (in other words, the Soviet Union), was to involve active European direction, and was to be such that ‘Any assistance that this Government may render in the future should provide a cure rather than a mere palliative’ (Marshall Commencement Address at Harvard University, 5 June 1947, reprinted in Mee, 1984, 271–3; see Foreword). Above all, the speech appealed directly to Americans’ sense of generosity and fears for an American economy without strong international supports. Reference to the Soviet Union and communism was indirect but nevertheless present sufficiently to suggest that without American action the Soviet Union would be the beneficiary of Europe’s present penury and misery (Leffler, 1992, 157–64). The speech passed without much immediate publicity, the US government had not yet adopted the mores of Hollywood, save for a press conference by President Truman on the day of the speech announcing its content. The Administration was aware of strong opposition to international initiatives from within the Republican party that controlled the Congress and had to contend with the charge, following President Truman’s veto of a Republican tax cut bill on 17 June 1947, that ‘Truman had decided to relieve the war-torn countries of Europe rather than the

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hard-pressed taxpayers of the United States’ (Hogan, 1998, 90). There was as yet no great popular consensus for either a global crusade against communism or an internationalist economic policy. Indeed, many domestic interests had nothing much at stake in foreign investment and were not readily persuaded of the compelling national-security argument for American financing of European recovery (Fordham, 1998). In addition, one common interpretation of the American experience continued to see it in terms of opposition to European statecraft and Great Power politics more than as a national experiment in political economy that now needed to expand in order to survive. To supporters of America as a haven from European skullduggery, the Marshall Plan went against the tenets of the greatest previous speech given by an American General, George Washington’s Farewell Address, as it warned against the dangers to the fledgling republic of ‘foreign entanglements’ (see Hogan, 1998, 69–118, 419–62). As things turned out, the plan had a crucial ally in Republican Senator Vandenberg and its most important proponent in George Marshall, the Secretary of State. Vandenberg helped adapt the legislation for a European Recovery Program to meet with objections from his own side but without gutting it of its essential ingredient, a substantial first year commitment of funds to the tune of 5.3 billion dollars. Marshall’s role as the mastermind of American victory in World War II and his aloof, almost monumental demeanor, made for difficulty in countering anything he might sponsor, as the Truman Administration knew and used to its advantage (Pogue, 1987). The association of Marshall’s name with the plan, therefore, became its greatest political asset even though he himself, in typically modest fashion, insisted that the plan not bear his name but be called the ‘European Recovery Program’. Rarely could such a genuine act of modesty have had such limited effect! The Plan remained wedded to his name right from the start. Despite the support of Vandenberg and the celebrity of Marshall, multiple claims were deployed to convince skeptical Representatives and Senators of the plan’s necessity: Nothing was excluded from the administration’s pitch if it looked as though it might attract a few votes. If economic arguments failed, references were made to charity; if charity failed to arouse interest, the plight of Western civilization itself was worked into the conversation (Mee, 1984, 239–40). A major plus for the Administration was the positive response of the new-fangled ‘public opinion’ as expressed through a Gallup poll. More Americans had heard of the plan than had not. Of those who had, 56

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percent thought the plan best considered an act of charity; 8 percent thought it would ‘curb communism’; and 35 percent regurgitated the grab bag of claims on offer from the plan’s proponents, had no opinion, or had never heard of it. This provided not only tangible evidence of support from the public for the plan but also a broad sympathy for Marshall’s primary goal of rescuing Europe from economic crisis (Mee, 1984, 241). An American popular ‘desire for universal harmony’ (Dallek, 1983, 158) could be seen as expressing itself in the Marshall Plan. Public perception of the plan was not left, however, entirely to chance. It was aided and influenced by the close cooperation of the State Department and prominent business and labor ‘internationalists’ who formed organizations, such as the Committee for the Marshall Plan to Aid European Recovery, as part of a coordinated effort to influence both public opinion and a wary Congress (Wala, 1986). Congressional opinion was finally brought into line by a combination of leaked documents that vilified Stalin as a former ally of Hitler (in the German–Soviet non-aggression pact of 1939) and the Soviet overthrow of the multi-party Czechoslovakian government that seemed to prove that Stalin was a continuing threat to world peace. Even though the Czech crisis could be seen, as it was by George Kennan, as a delayed consolidation of the Soviet sphere of influence, it allowed the Administration to play the anti-communist card when all other arguments had failed to convince. This was to prove to be only the first time in a long line of occasions as the Cold War advanced, that US governments were to use this card to trump their opponents, both domestic and foreign. To administer the huge task of transferring American goods and credits to Europe, President Truman chose a businessman, Paul G. Hoffman, as the Economic Cooperation Administrator. Truman had wanted to appoint his friend Dean Acheson, but Senator Vandenberg insisted that Acheson would never be confirmed by the US Senate and suggested a Republican businessman in his place. Hoffman staffed his Washington office with other businessmen and made the goal of expanding European productivity to American levels the overall goal of the plan. With Averell Harriman as his Paris-based representative to the European side of the operation – the Economic Cooperation Administration (ECA) in the US and the Organization for European Economic Cooperation (OEEC) in Europe – Hoffman set about convincing and badgering the Europeans into accepting his experts and their advice. Economic and political effects were not long in coming. In particular, the introduction of American machinery seemed to have dramatic effects on production across a range of manufacturing industries, credits allowed European firms and governments to import raw materials from the

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United States and elsewhere, public works projects, such as restoring war-damaged harbors, received infusions of equipment and funds. Even before the first supplies arrived, European anti-Communists were using the promise of Marshall Plan aid as a campaign issue against their Communist opponents. Through its Information Division in Paris and the eighteen country missions, the ECA flooded Europe with propaganda for the plan. Greatest attention and money was directed at those countries seen as most susceptible to a communist threat, but even those countries seen as relatively secure, for example, Ireland, were targeted in order to address ‘misconceptions of the United States’ (Whelan, 2000, 362). Emanating from these sites were numerous press releases, posters, publications, radio programs, newsreels, and documentary films produced by the ECA to promote the plan as a message of hope to the war-weary European populace (Hemsing, 1994; Ellwood, 1988). There was opposition to the plan in Europe. Apart from the Communists who saw the plan as disguised American imperialism, there were some who resented the arrogance of the Americans (Pisani, 1991). Others saw the Marshall Plan as a Trojan Horse for American business, sizing up assets in anticipation of future investment and control. But before these currents could form anything other than disparate voices at the margins of organized politics, the US government became involved in a war in Korea that led to a rapid switch towards military aid to Europe and abandonment of the Marshall Plan as it had operated from the late Spring of 1948 until 25 June 1950. In those two years the US had contributed a total of $13,015,000,000 (Mee, 1984) or $12.5 billion (Milward, 1984, 94), depending upon whom you rely, to European recovery. More crucially, the plan had helped restore European economic confidence at a critical time when recovery was still fragile. More controversially, the plan may have contributed to the overall growth of Europe in the 1950s and probably helped revive thinking and action about the benefits of European economic integration. With its security successor, NATO, the Marshall Plan also put the United States into Europe, defying physical geography to define a political geography in which the United States tied its global fortunes irrevocably to a subset of those European nations that had agreed to participate in the plan. Its architects could have had no idea of its long-term significance. The Marshall Plan as Metaphor and Model Of course, a large part of Europe was denied participation in the plan because it lay inside the Soviet sphere of influence. With the disintegra-

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tion of the Soviet sphere of influence and the collapse of the Soviet Union itself in the early 1990s, the Marshall Plan came back to life, only this time as a metaphor for the external effort needed to bring eastern Europe into the world economy and as a model for what was required institutionally and financially to do so. More recently, President Clinton invoked the Marshall Plan as a precedent for both the military action and subsequent reconstruction taken against Serbia in response to the ‘ethnic cleansing’ of Albanians in Kosovo in 1999. Others continue to call for Marshall Plans for Albania, Bosnia and other specific parts of eastern Europe. More recent events in the Middle East have shifted the geographic referent but not the message. In a 2002 speech at Marshall’s alma mater, Virginia Military Institute, President George W. Bush invoked the Marshall Plan in describing American efforts in re-building post-Taliban Afghanistan and more broadly for securing peace in the aftermath of a more geographically generalized war on terror. Administration critics counter that it is precisely the lack of a Marshall Plan-like scale of investment in building infrastructures and economies that jeopardizes the military successes in the wars in both Afghanistan and Iraq. These concerns have also appeared in Congressional debate. For example, the Committee on International Relations of the US House of Representatives met in the summer of 2002 to discuss ‘Economic Development and Integration as a Catalyst for Peace: A “Marshall Plan” for the Middle East’. Its Chairman, Representative Harry J. Hyde, proposed an American Marshall Plan for the Middle East, where the enemy was violence and extremist religious and nationalist ideologies rather than communism, and the goal was investment in material conditions that would foster hope and a renunciation of terror by the general population (Committee on International Relations, 2002). These invocations of the Marshall Plan are not entirely new ideas. The Marshall Plan idea had been subject to episodic appropriation down the years for projects as diverse as the ‘war on poverty’ in American cities and Third World development projects and environmental clean-up. For example, beginning in the late 1950s, a Marshall Plan for Third World development was a re-occurring theme in the diplomatic efforts of Bruno Kreisky, the Austrian Federal Chancellor from 1970 to 1983 (Lacina, 2000, 13). What has been particularly attractive about invoking the name of the Marshall Plan in relation to eastern Europe and the Soviet Union, however, was that these were the very countries to which an offer of aid had been made under the original plan but which had been refused by Stalin. Justice would be finally served if the offer were made again. Using historical analogies or metaphors to justify some present design or plan is integral to modern diplomacy and to international discourse

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more generally (Lakoff and Johnson, 1980). Some metaphors are recycled to the point of becoming clichés, such as ‘Munich’, as a synonym for appeasement of dictators, or ‘Vietnam’ as a metaphor for military intervention without an ‘exit strategy’, or, more to the point, for ‘quagmire’. Events continue to generate fresh expressions, such as ‘Tiananmen’ as a metaphor for brutal crackdown, and ‘Gulf War’ for hollow victory, increasing the repertoire of terms that give color and dimension to debates over foreign policy. Metaphors tend to be given negative play and are invoked largely for undesirable outcomes. The Marshall Plan is interesting as a metaphor for directing foreign-policy discussions because it has acquired a largely positive connotation. In both negative and positive cases, however, ‘history’ is widely regarded as offering ‘lessons’ as imparted by familiar metaphors without attending much at all to how international and global contexts may have changed since the original moment/place to which the metaphor refers. Political leaders must communicate in familiar terms with both the public and their counterparts. They must also justify their actions with reference to previous action or inaction that produced desired or undesired outcomes. They have no other way in which to make the case for this or that policy. Former Secretary of State Madeleine Albright, for example, is reported to have drawn a direct comparison between her efforts to build a post-Cold War order in Europe and elsewhere with the enterprise of Acheson and others during the Truman Administration. An interviewer refers to her reaction to reading James Chace’s (1998) new biography of Dean Acheson by quoting her as follows: ‘I have been accused of overstating the case,’ she said, alluding to her reputation for tough-sounding rhetoric on the problems of eastern Europe. ‘They [Acheson, Clayton, et al.] did it in spades, and that is how they got the Marshall Plan’ (Dobbs, 1999, 56). Yet this reaction by reference to a 1999 that is essentially unchanged from a 1947 in the meaningfulness of both metaphor and associated action was elicited at precisely the same time at which Britain’s Law Lords were rejecting the once hallowed right of a Head of State (in this case Chile’s Augusto Pinochet) to immunity from prosecution of human rights offenses and the NATO bombing assault on Serbia represented the final breakdown of the legitimacy of a regime’s claims to do whatever it might like within its ‘sovereign’ territory. The world changes, therefore, even as it is still represented in terms of supposedly timeless historical metaphors. The use of the Marshall Plan as a historical metaphor in relation to eastern Europe serves a number of purposes. One is as a serious rhetorical strategy to point to a dire need to parallel the opening up and privatization of assets within previously state-command economies with institution building to help create the legal conditions, government reg-

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ulation, and business organization without which long-term and equitable economic growth cannot occur. It thus provides a rhetorical weapon against the advocates of a neo-liberal ‘big bang’ who have had the ear and the hearts of many western leaders in the early 1990s. Implicit in the use of the Marshall Plan metaphor, therefore, is a political–economic model that harkens back to the postwar years but which is no longer au fait in the brave new world of 1990s transnational liberalism where the magic of the marketplace rules dominant political agendas. Another usage implies less a nostalgia for an international Keynesianism than an attempt at communicating with Western publics about the drastic state of affairs in eastern Europe and the former Soviet Union. From this point of view, the end of the Cold War can be compared in the severity of its human consequences to the aftermath of World War II. Hence, something like the Marshall Plan is needed to give hope to the dispirited and promise to potential investors. Very quickly, however, national aspirations to acquire membership in NATO, as a sort of second-hand membership in a Western ‘club’, replaced talk of a new Marshall Plan for eastern Europe as a whole, in which a distinction was increasingly made by those in its most western parts (for example, Czechoslovakia, Poland, and Hungary) to distinguish themselves as a more qualified ‘Central’ Europe from a less ‘NATO-ready’ eastern Europe between themselves and the former Soviet Union. This tendency has been exacerbated in the divisions within NATO that have seen fault lines within its traditional core members. The strains caused by the Iraq War have further deepened these fault lines as well as created new ones. The diplomatic fallout between the United States and NATO allies France and Germany led not only to the inflammatory geography contained in US Defense Secretary Donald Rumsfeld’s comments about an ‘old’ and ‘new’ Europe, but also to the equally incendiary remarks by French President Jacques Chirac chastising eastern European nations for their ‘infantile’ support of the US position and warning that such behavior could lead to problems in their accession into the EU. Finally, the Marshall Plan has come to signify a kind of bold American initiative that has been replaced by either an absence of decisive action, say in relation to the 1994 Rwandan genocide, or the global refugee crisis, or a muddled and indecisive multilateral action, as in Somalia, throughout the Middle East and the Balkans. So, particularly from an American perpective, the Marshall Plan conjures up an image of an America that seems to have lost its political and moral compass. Its invocation, therefore, represents a hoped-for return to decisive initiatives, whether or not they are precisely modeled on the plan itself. In many quarters there is an increasing sense that the world’s troubles and problems, especially those of

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the Middle East, cannot be left to either the marketplace or to simple multilateral agreements among states. As the ‘sole superpower’ the United States has global responsibilities. The Marshall Plan offers inspiration to those who take this position for two reasons (for example, Rostow, 1997, 211). First, the plan had a popular consensus in the United States that has been lost in divisive debates about foreign policy. There is a nostalgia here for a pre-Vietnam War ‘non-partisan consensus’. Second, the plan was a truly multilateral, even if strongly pushed by the United States. Even the smallest countries could participate. It was, therefore, a demonstration of world leadership more than imperialism. After September 11 the Bush Administration has taken decisive action, but critics argue that such actions have not heeded the message contained in President Bush’s own invocation of the Marshall Plan in reference to Afghanistan. They argue that massive investment in postwar rebuilding efforts and multilateralism are precisely what is needed to make the war on terrorism successful. These various uses of the Marshall Plan metaphor have had powerful resonance. What remains in dispute is how appropriate they are for early 1990s and contemporary eastern Europe, or elsewhere today and in the future. Is there an essential equivalence between the post-World War II period and the wounded but still potentially powerful western European economies, on the one hand, and the post-Cold War period and a set of much weaker and, from an American perspective, less vital set of economies in the East, on the other? Have NATO and European Union membership overwhelmed the symbolic attractiveness of the Marshall Plan model among east European élites? In the contemporary world can a project such as the Marshall Plan be appropriately invoked when international and global conditions are so different from those in 1947, with no Soviet threat to discipline American politicians and competing demands on American power that make ‘Europe’ more responsible for its own future than was the case in the late 1940s? Does the Marshall Plan mark the beginning of an era of transatlantic multilateral cooperation that is now coming to a close? These are just some of the questions raised by invocation of the Marshall Plan. As long as the present is understood in terms of the ‘lessons of history’, however, the Marshall Plan, one of the few positive metaphors in circulation in the gloomy circuits of world affairs, will continue to be recycled as both model and legitimation of actions planned and under way. The Thematic Organization of the Book and Chapter Overview The organization of the book reflects the range of themes outlined above. The three sections attempt to convey, in turn, (1) whether and how

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the Marshall Plan led to economic recovery and political cooperation in western Europe after World War II; (2) some of the ways in which western European and American economies came together as a result of the Marshall Plan yet how each side had a basic institutional similarity that facilitated this, in contradistinction to recent western and eastern Europe; and (3) long-term impacts of the Marshall Plan both as an influence on European unification, as a metaphor for east European economic recovery in the early 1990s, and as a model for a globalizing world economy that faces problems of international cooperation for development and environmental sustainability that are not dissimilar to those engaged by the Marshall Plan in its day. The four chapters in section 1, by J. Bradford DeLong, Alan S. Milward, Dafne C. Reymen, and Gerard Bossuat, offer different perspectives on the general political and economic impacts of the plan in western Europe in the aftermath of World War II. Bradford DeLong sees the cooperative spirit among business, labor, and governments in western Europe as owing something to the early example of the plan. The virtuous circle of growth underpinned by this collaboration only faltered after 1973 when the oil-price crisis and the adoption of monetarist policies by some governments undermined the trust and mutual confidence of the various parties. Alan Milward extends his justly famous critical analysis of the Marshall Plan as a stimulant of postwar European economic growth in arguing for its inappropriateness as a model for contemporary eastern Europe. He directly challenges those, largely American authors, such as DeLong and Eichengreen, Maier, and Hogan, who have attributed Europe’s rapid economic recovery after World War II to the plan. He forcefully argues that specific empirical questions about the impact of the Marshall Plan open up larger theoretical questions about the emergence and successful functioning of an interdependent international economic system over a long period. Dafne C. Reymen offers a cogent analysis of the Marshall Plan’s spending pattern, describing in detail the gap between the funds allocated to each country and what was actually spent. She finds that this latter figure tells a set of different national stories about the impact of the plan rather than the single one about Europe as a whole that usually prevails. Late 1990s aid plans to eastern Europe are assessed in light of the template provided by this analysis. Finally, Gerard Bossuat offers a skeptical view of both American leadership and the impact of the plan. He utilizes a wide range of French-language sources to argue that the American military presence in Europe has had more long-lasting effects upon western Europe than has the Marshall Plan. The second section focuses on the institutional consequences of the plan. Raymond Vernon, a major historian of international business and

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a participant in the administration of the plan, traces a significant shift in European business culture to the effects of the Marshall Plan. In particular, he sees the plan as challenging and undermining the cartel culture of European big business in a way that was later carried forward under the policies of the European Union. Jacqueline McGlade provides evidence for greater ambivalence of segments of American business towards the Marshall Plan than has conventionally been noted. She sees a fundamental conflict that divided American business between a desire to gain and protect markets in Europe and a concern over American postwar rebuilding and possible support for future European business competitors. Finally, Paul Bernd Spahn sees the institutional similarity between the United States and western Europe as laying the groundwork for the Marshall Plan’s success. In counterpoint, the political–economic dissimilarity between eastern and western Europe today is much greater than was that between the US and western Europe in 1947. The third section brings the book full circle from consideration of the Marshall Plan’s specific impacts in the short- and medium-term to Alan Milward’s important point about the plan’s relationship to long-term trends in global political–economic interdependence. Wilfried Loth’s perspective is overtly political in investigating the role of the Marshall Plan as a force for European integration. He sees the aid and conditionality of the plan as encouraging Europe’s recovery but argues that it also facilitated and encouraged the movement for a more integrated Europe as manifested most recently in the European Union. Thomas C. Schelling, a former official in the Marshall Plan and a distinguished economist/political scientist, speculates on the Marshall Plan as a model for the early twenty-first century. He argues that now it must be directed at global problems such as the environmental threats from greenhouse gases. The Marshall Plan was a regional program that had global consequences. Today we need global programs for many of the problems we face. But they too must be based on cooperation. That is the lasting legacy of the Marshall Plan: whatever is made of its specific impacts, it is probably the best example in modern history of successful multinational cooperation to achieve a common goal. Finally, Stuart Corbridge compares the Marshall Plan as a model for economic development to the currently favored development strategy often called the ‘Washington Consensus’. Similar to the Marshall Plan, the Washington Consensus has sought to encourage open economies and democratic political institutions in aid to developing countries, but, unlike the plan, it has not offered a consistent and reliable set of aid packages to make long-term institutional change possible. This reflects the crisis in national approaches to planning implicit in the plan in an increasingly globalized

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world economy in which mobile capital is less and less constrained by national borders. A world economy the Marshall Plan helped bring about is no longer congenial to the national-planning goals it adumbrated. Indeed, it is remarkable that the Marshall Plan remains so prominent in political discourse at a time when the world that it helped to construct has changed so significantly. Even the Atlantic alliance that the Marshall Plan helped to create and nourish shows signs of weakening. The United States and many of its traditional western European allies seem to be headed in different foreign policy directions, and these diplomatic differences have extended into cultural antagonisms and mutual incomprehension (Kagan, 2003; Lambert, 2003). In spite of these deteriorating relations among nations formerly linked by the plan, the symbolic power of the Marshall Plan as model and metaphor has not diminished. If anything its significance has been enhanced by the recognition that massive investments in material conditions that give hope for distressed peoples and nations have lasting positive consequences for both benefactor and recipient nations as well as for world peace. References Acheson, D. (1969) Present at the Creation: My Years in the State Department. New York: Norton. Bischof, G., Pelinka, A. and Stiefel, D. (eds) (2000) The Marshall Plan in Austria (Contemporary Austrian Studies v. 8). New Brunswick: Transaction Publishers. Chace, J. (1998) Acheson: The Secretary of State Who Created the American World. New York: Simon & Schuster. Clesse, A. and Epps, A. (eds) (1990) Present at the Creation: The Fortieth Anniversary of the Marshall Plan. New York: Harper and Row. Committee on International Relations, United States House of Representatives. (2002) ‘Economic Development and Integration as a Catalyst for Peace: A Marshall Plan for the Middle East’, Proceedings, July 24, 2002 Hearing, One Hundred and Seventh Congress, Second Session, Washington, D.C., http://house.gov/international-relations. Dallek, R. (1983) The American Style of Foreign Policy: Cultural Politics and Foreign Affairs. New York: Knopf. Dobbs, M. (1999) ‘Double Identity: Why Madeleine Albright can’t Escape her Past’, New Yorker, 29 March, pp.50–7. Dobney, F.J. (ed.) (1971) Selected Papers of Will Clayton. Baltimore: Johns Hopkins University Press. Eichengreen, B. and Uzan, M. (1992) ‘The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR’, Economic Policy, 14, 13–75. Eichengreen, B. (1995) Europe’s Postwar Recovery. Cambridge: Cambridge University Press. Eichengreen, B. (1996) Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press. Eichengreen, B. (2001) ‘The Market and the Marshall Plan’, in Schain, M. (ed.), The Marshall Plan: Fifty Years After. New York: Palgrave, pp.131–45. Ellwood, D.W. (1988) The Marshall Plan Forty Years After: Lessons for the International System Today. Bologna: Bologna Center for the Johns Hopkins University School of Advanced International Studies.

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Fordham, B.O. (1998) Building the Cold War Consensus: The Political Economy of U.S. National Security Policy, 1949–51. Ann Arbor: University of Michigan Press. Fossedal, G. and Mikhail, B. (1997) ‘A Modest Magician: Will Clayton and the Rebuilding of Europe’, Foreign Affairs, 76/3, pp.195–9. Hemsing, A. (1994) ‘The Marshall Plan’s European Film Unit, 1945–55: a Memoir and Filmography’, Historical Journal of Film, Radio and Television, 14, pp.269–98. Hoffman, S. and Maier, C. (eds) (1984) The Marshall Plan: A Retrospective. Boulder CO: Westview Press. Hogan, M.J. (1987) The Marshall Plan: America, Britain and the Reconstruction of Western Europe, 1947–1952. Cambridge: Cambridge University Press. Hogan, M.J. (1998) A Cross of Iron: Harry S. Truman and the Origins of the National Security State, 1945–1954. Cambridge: Cambridge University Press. Kagan, R. (2003) Of Paradise and Power: America and Europe in the New World Order. New York: Knopf. Lacina, F. (2000) ‘The Marshall Plan – Contribution to the Austrian Economy in Transition’, in Bischof, G., Pelinka, A. and Stiefel, D. (eds) The Marshall Plan in Austria. New Brunswick: Transaction Publishers, pp.11–14. Lakoff, G. and Johnson, M. (1980) Metaphors We Live By. Chicago: University of Chicago Press. Lambert, R. (2003) ‘Misunderstanding Each Other’, Foreign Affairs, 82, 62–74. Leffler, M.P. (1984) ‘The American Conception of National Security and the Beginnings of the Cold War, 1945–48’, American Historical Review, 89, pp.346–81. Leffler, M.P. (1992) A Preponderance of Power: National Security, The Truman Administration, and the Cold War. Palo Alto: Stanford University Press. Loth, W. (1988) The Division of the World, 1941–1955. London: Routledge. Maier, C. and Bischof, G. (eds) (1991) Germany and the Marshall Plan. New York: Berg. Mee, C.L., Jr (1984) The Marshall Plan: The Launching of the Pax Americana. New York: Simon & Schuster. Milward, A. (1984) The Reconstruction of Western Europe, 1945–51. Los Angeles and Berkeley: University of California Press. Pisani, S. (1991) The CIA and the Marshall Plan. Lawrence: Kansas University Press. Pogue, F.C. (1987) George C. Marshall: Statesman 1945–59. New York: Viking. Roberts, G. (1994) ‘Moscow and the Marshall Plan: Politics, Ideology and the Onset of the Cold War, 1947’, Europe–Asia Studies, 46, pp.1371–88. Rostow, W.W. (1997) ‘Lessons of the Plan: Looking Forward to the Next Century’, Foreign Affairs, 76/3, pp.205–12. Ryan, H.B. (1982) The Vision of Anglo-America. Cambridge: Cambridge University Press. Schain, M. (ed.) (2001) The Marshall Plan: Fifty Years After. New York: Palgrave. Taylor, P.J. (1990) Britain and the Cold War: 1945 as Geopolitical Transition. London: Pinter. Wala, M. (1986) ‘Selling the Marshall Plan at Home: The Committee for the Marshall Plan to Aid European Recovery’, Diplomatic History, 10/3, pp.247–65. Whelan, B. (2000) Ireland and the Marshall Plan. Dublin: Four Courts Press. Wexler, I. (1983) The Marshall Plan Revisited. London: Greenwood Press.

Part I European Recovery

1 Post-World War II western European Exceptionalism: The Economic Dimension J. BRADFORD DELONG

Introduction After World War II western Europe developed a set of politico-socioeconomic institutions that turned out to work remarkably well. The institutional setup was scorned by the Left as a social democratic halfway house that failed to solve the structural contradictions of capitalism and was doomed to eventual instability and collapse. Similarly, the Right saw it as sapping the will and individualistic enterprise of the people, and thus opening the door to left-wing totalitarianism. But the western European social democratic ‘mixed economy’ worked amazingly, remarkably, unbelievably well. It delivered economic growth at a pace that the world had never before seen. It produced an after-tax and transfer distribution of income that was remarkably egalitarian. It powered western Europe’s remarkably smooth and rapid transition through the final stages of its structural transformation to an industrial economy and society. So what went right? Where did this post-World War II western European exceptionalism come from? What lessons were learned from the Great Depression and from World War II, and why did these lessons prove so appropriate for managing western European economies in the first generation after the war? And what went wrong thereafter? The post-World War II European miracle lasted for only a single generation, until 1973. Why was western European exceptionalism so temporary? And why did the economic policy lessons learned from the Great Depression, World War II, and the first post-World War II generation turn out to be inappropriate for the post-1973 period? The short answer is that after World War II western European politico-economic policy was successful because it tapped into a virtuous circle. Trade expansion drove growth, growth drove expanded social insurance programs and real wage levels; expanded social insurance states and real wage levels made for social peace, which allowed inflation

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to stay low even as output expanded rapidly; rapidly expanding output in turn led to high investment, which further increased growth and created the preconditions for further expansions of international trade. The combination of all these factors created an extra 1.5–2 percent per year of productivity growth – the approximate magnitude of the unexpectedly rapid growth of the post-World War II western European miracle – coming from nothing but the fact that things had started off on the right foot. Why, then, did the period of western European exceptionalism end? I believe that western European exceptionalism ended because it was assassinated. It was assassinated by an odd combination of oil barons, union leaders and monetarists. Without the tripling of world oil prices in 1973, and again in 1979, the pressure to do something to reduce inflation would have been much weaker. It was strong pressure to do something to reduce inflation that broke down the alliance between social democratic welfare state politicians and union leaders. The former pressured the latter to sacrifice their real wages in support of the fight against inflation. This they refused to do. The consequence was, first, higher inflation and, second, a shift in political power to the Right and the turnover of power to make monetary policy to central banks interested in halting inflation no matter what the cost. Once it was plain that the old consensus politicians could not fight inflation through corporatist dialogue, the new non-consensus politicians won votes by promising that they would fight inflation through monetary restraint – and their monetarist economic advisers assured them that any excess unemployment created by fighting inflation would be transitory and temporary (see Friedman, 1968). In the United States the monetarists turned out to be largely right: the higher unemployment created by fighting inflation turned out to be transitory and temporary. In Europe the monetarists turned out to be wrong: the higher unemployment created by fighting inflation turned out to be persistent and permanent, leaving Europe with its current problems of structural unemployment (see Cohen, 1996). The post-World War II western European Miracle The Magnitude of the Miracle Nobody disputes that post-World War II western European economic growth was miraculous. The magnitude of the miracle is clear in the graphs of the broadest of macroeconomic aggregates. As Figures 1.1–1.4 show, in West Germany, France, Italy, and even in Britain, the level of

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$20,000

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Figure 1.1 Germany (West after 1945): GDP per capita, 1870–1994

real economic product – GDP – per capita exceeded the best performance of the interwar period by the early 1950s. By 1960 all countries’ economic product was higher than not just the best interwar performance, but it was well above levels that would have been predicted by extrapolating pre-1939 or pre-1914 trends into the indefinite future. For example, in West Germany just after reunification, GDP per capita (measured in 1990 dollars) from the late 1970s through the 1990s was, and remained, some 40 percent higher than even pre-1914 trends would have predicted, and some 70 percent higher than would have been predicted from the interwar growth trend. In France GDP per capita settled into a new trend some 70 percent higher than the pre-1914 trend – and fully 100 percent higher than the interwar trend. Italy was even more extreme, with GDP per capita levels settling into a new trend at double what would have been predicted from simple extrapolation from before 1914 or from the relatively stagnant interwar period. Even Britain – which experienced the smallest relative acceleration in growth after World War II of the four – has today a GDP per capita level some 20 to 30 percent above the pre-1914 trend, and

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Figure 1.2

France: GDP per capita, 1870–1994

some 30 to 40 percent above the interwar trend. The net result has been to give the average Italian in the 1990s a measured material standard of living of some $16,500 dollars of 1990 purchasing power – more than five times the measured material standard of living on the eve of the Great Depression. For (West) Germany the coefficient of multiplication is 4.5; for France it is 3.5; for Britain the coefficient of multiplication is roughly 3. National statistical agencies, however, are far from perfect. They have a hard time measuring the impact on the material standard of living of the invention of new goods and new types of goods. Walk around Westwood, Los Angeles, and see the people wearing polarized sunglasses, listening through earphones to portable CD players, wearing shoes with well-cushioned yet lightweight soles, and drinking the products of espresso machines. Ask yourself the question: when did the increment to material welfare from the ability to make shoes with better soles, polarized sunglasses, or espresso machines enter into national income

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$20,000

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Figure 1.3

Italy: GDP per capita, 1870–1994

accountants’ calculations of aggregate economic activity? The odds are that each of these improvements never made it into national income accountants’ estimates of long-run growth. National income accountants have limited budgets and very difficult tasks. There are many who believe that unmeasured improvements in productivity stemming from new goods and new types of goods average perhaps 1 percent per year today. It seems reasonable to extrapolate their estimate to cover all of this century, and to hypothesize that unmeasured improvements contributed perhaps half as much in the second half of the nineteenth century, when technological progress was slower. Before 1850 these issues are much less important, for most of pre-1850 waves of innovation were in the making of producer, not consumer, goods. If correct, then the coefficient of multiplication since 1930 in Italy is not a factor of 5 but a factor of 10; in (West) Germany not a factor of 4.5 but a factor of 9; in France not a factor of 3.5 but a factor of 7; for Britain not a factor of 3 but a factor of 6. That is, I think, the proper measure of the post-World War II western European miracle.

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Figure 1.4

Britain: GDP per capita, 1870–1994

Does this seem too large a coefficient of multiplication? It probably is if you are one of relatively poor for whom the inventions of the past 60 years are a smaller part of your consumption bundle. It probably is too large if you are one of the very rich for whom the principal benefit of wealth is, as economist Paul Krugman likes to say at conferences, ordering people around: ‘seeing ’em jump’. It probably is too large if you follow Richard Easterlin (1997) and believe that increased material wealth does not increase human happiness, and that our restless dissatisfaction and non-satiation today tells us that the twentieth century has seen the triumph of economic growth. Easterlin adds that this triumph is not a triumph of humanity over material wants. Instead, it is material wants that have triumphed over humanity. But for those from the lower middle class to the merely rich, it is hard to imagine anyone who does not view their material welfare as vastly, vastly greater than that of their counterparts of 60 years ago. Consider modern audiovisual and recording technologies, antibiotics,

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information-processing, telecommunications and transportation. It is hard to escape the conclusion that more than half the differences between 1300 and today in how western Europeans live their material lives have come since the start of the Great Depression. Was This Miracle Inevitable? From today’s perspective it is easy to ignore claims that the western European growth miracle is something in need of special explanation. Is not the ‘convergence’ of western European economies to the approximate level of national product per capita and the approximate long-run growth path of the United States a ‘natural’ process? Was it not bound to happen as technology diffused across national boundaries, as universal secondary education made its presence felt, and as governments allowed market forces to direct investment and to weed out noncompetitive firms (see Barro and Sala-i-Martin, 1995)? But there is nothing ‘natural’ about such ‘convergence’ to North American norms. To put it another way, if ‘convergence’ is ‘natural’ to economists, it is ‘unnatural’ to political economists. There are many forces and factors that could have blocked the western European growth miracle – and that did indeed block its analogue in many times and places. There are only only two other places and times that this ‘natural’ process has been operating with strength similar to that of western Europe in the first post-World War II generation. One is North America during its 1860–1950 century of industrialization. A second is East Asia in the past two generations. But in the world as a whole since 1870, and in the world since 1945, the dominant trend has been toward divergence, not convergence (see DeLong, 1988). Over the past century, at least, those nations and economies that start behind in GDP per capita have tended to fall further behind as time has passed. Let me expand on this point by very briefly sketching out crude pictures of three counterfactual alternative futures for western Europe as of 1945 – alternatives that might have been the future, or that informed observers in 1945 thought might well become the future, but that were vastly different from what western Europe’s actual experience turned out to be: relatively stable democracy, growing welfare states with diminishing income inequality and rapid economic growth. Stalin’s Dream The first we might as well call Stalin’s dream: the future that Josef Stalin may well have expected to see in western Europe in the generation after the end of World War II. Or, more accurately, a future that we might

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speculate Stalin expected, for trying to read the mind of Josef Stalin is an extremely hazardous occupation. For Stalin and his acolytes, all the experience of the interwar period reinforced the interpretation that Lenin (1916), drawing from Hobson (1913), had arrived at in trying to understand the failure of Marx’s (1848) predictions of increasing immiserization to come true in the pre-World War I period. The pre-World War I economies had managed to avoid the problems of overproduction, insufficient consumption and consequent financial crises, deep depressions and worker immiserization through imperialism: maintaining employment at home by force-flooding the rest of the world with exports. But by 1910 there were no new markets to conquer: imperialist expansion had reached its limits. Hence, Stalin and his acolytes may well have believed that history was on their side. In World War I the imperialist capitalist powers resorted to armed struggle so that the victors, at least, could restore the conditions for imperial expansion and further prosperity. But the spoils of empire from defeated Germany, Austria-Hungary and Turkey were small. Hence the post-World War I prosperity in the victors was short-lived and anemic. Moreover, the bourgeoisie in the losing nations became anxious for a rematch – World War II. World War I had brought their brand of state socialism to Russia and its dependencies. World War II had brought their brand of state socialism to the Balkans, to the Elbe and to half of Asia. So to Stalin and his acolytes the obvious thing to do in the aftermath of 1945 was to wait: cement state-socialist control where the Red Army had marched, rebuild the economies of the socialist powers, and sit back and wait for interimperialist rivalry to once again flame up, this time into World War III. The centrally planned direction of investment through the replacement of the anarchy of the market by the logic of socialist development would enable industry in eastern Europe to leap far ahead of western Europe (see Sweezy, 1942): Krushchev addressing the west during Eisenhower’s presidency was confident that he and his would be there at your funeral. Overproduction and underconsumption would push western Europe, Britain and the United States into a new Great Depression. The United States would greedily eye the British and French empires as potential markets to ensure full employment across the Atlantic. Sooner or later World War III would break out with the United States on one side and Britain and France on the other. And in the aftermath of capitalist imperialism’s third suicide attempt, state socialism would advance to the Atlantic, or perhaps further. It is worth pausing at this point to note that Josef Stalin and Paul Sweezy were not alone in expecting economic growth behind the Iron

-     

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Curtain to leap ahead of growth in the capitalist powers. Governments behind the Iron Curtain were supposed to be able to cut the consumption of their disciplined, regimented, brainwashed, totalitarian citizenry to the bone, leaving more of total economic product for investment. Higher investment would mean faster growth. All knew that the Soviet Union – with a third of its population under enemy occupation, with a quarter of Nazi Germany’s prewar industrial capacity, facing an enemy with all of the resources of occupied Europe to draw on – had outproduced Nazi Germany in tanks and aircraft during World War II. A common view in the industrial west after World War II was that the Soviet economy and society was inferior at producing goods for consumers or making it possible to live a free and happy life, but was quite possibly superior at generating long-term growth – particularly long-term growth directed at supporting military power. Swift Soviet construction of nuclear and thermonuclear weapons in the decade after World War II and the extraordinarily successful Soviet space program of the late 1950s and early 1960s both gave support to the vision of the Soviet economy as a powerful engine of heavy industrial growth and technological progress. The Argentine Trajectory A second live possibility – one feared greatly by staff economists such as Charles Kindleberger (1987) in the US Department of State – was that post-World War II western European governments would fail: they would either fail to maintain the high level of aggregate demand urged by Keynes (1936), or they would fail to allow the market system to do its job in its place. Call the second of these possible failures the Argentine trajectory: post-World War II western Europe viewed in the Argentine mirror (see DeLong and Eichengreen, 1993). Had the post-World War II western European political economy taken a different turn, governments might have been slow to dismantle wartime allocation controls. The late 1940s and early 1950s might have seen the creation in western Europe of allocative bureaucracies to ration scarce foreign exchange and the imposition of price controls on exportables in order to protect the living standards of urban working classes. In response to the social and economic upheavals of the Depression, Argentina in fact adopted such policies: demand stimulation, large-scale income redistribution to politically powerful organized urban workers, and the use of tight controls to manage imports, exports and the trade balance.

34

   

Carlos Díaz-Alejandro (1970) provides what has become the standard analysis of Argentina’s post-World War II economic stagnation. At the end of World War II Juan Perón gained mass political support. Taxes were increased, agricultural marketing boards created, unions supported, urban real wages boosted and international trade regulated. Perón sought to generate rapid growth and to twist terms of trade against rural agriculture and redistribute wealth to urban workers who did not receive their fair share. The redistribution to urban workers and to firms that had to pay their newly increased wages required a redistribution away from exporters, agricultural oligarchs, foreigners and entrepreneurs. The Perónist program produced almost half a decade of very rapid growth. But then agricultural production fell because of the low prices offered by government marketing agencies to subsidize urban workers. The rural sector found itself short of fertilizer and tractors. Squeezed between declining production and rising domestic consumption, Argentinian exports fell. By the first half of the 1950s the real value of Argentine exports was only 60 percent of the depressed levels of the late 1930s, and only 40 percent of 1920s levels. The consequent foreign exchange shortage presented Juan Perón with only unattractive options. First, he could attempt to balance foreign payments by devaluing to bring imports and exports back into balance in the long run and in the short run by borrowing from abroad. But effective devaluation entailed raising the real price of imported goods, and thus cutting the living standards of the urban workers who made up his political base. Moreover, devaluation improves the trade balance only in the long run of two years or more. In the short run devaluation is effective only if it makes international speculators willing to bet their money and provide short-term capital inflows – and a resort to foreign funding would have been treason. Second, Peron could contract the economy, raising unemployment and reducing consumption and expand incentives to produce for export by decontrolling agricultural prices. Once again, however, this would have cut the living standards of his political base by creating mass unemployment. The only live option was to control and ration imports. As Carlos Díaz-Alejandro (1970) writes: First priority was given to raw materials and intermediate goods imports needed to maintain existing capacity in operation. Machinery and equipment for new capacity could neither be imported nor produced domestically. A sharp decrease in the rate

-     

35

of real capital formation in new machinery and equipment followed. Hostility toward foreign capital, which could have provided a way out of this difficulty, aggravated the crisis . . . (p.157) Subsequent governments did not reverse these policies: the political forces that Perón had mobilized had to be appeased, and the economic interests that lived off of the (few) import licenses or off of the exclusion of foreign competition grew large and active. Thus post-World War II Argentina saw a huge rise in the price of capital goods. Given low and fixed agriculture prices, hence low exports, it was very expensive to sacrifice materials imports needed to keep industry running in order to import capital goods. Unable to invest, the Argentine economy stagnated. In 1929 Argentina was a developed country: its share of the labor force in industry is intermediate between Germany and Italy – something approaching that of France. Its level of national product per capita is sometimes above, sometimes below, but always in the same league as France and Germany (and far above Italy) until the 1950s. Yet since World War II Argentina has stagnated, as Figure 1.5 shows. Measured $20,000

Germany France Italy

$10,000

Argentina

Log Scale

$5,000

$2,500

$1,250 1900

1920

1940

1960

1980

Year

Figure 1.5

GDP per capita since 1900

36

   

GDP per capita today is some 60–70 percent higher than in 1930 or in 1914 (and taking account of unmeasured improvements in productivity perhaps gives a coefficient of multiplication of 2.5). Argentinians today have access to enough modern consumption technology to give them significantly higher material standards of living than their counterparts of the belle epoque. But the gap between what Argentina’s level of material productivity is and what it so clearly might have been is immense. And the consequences of slow growth for Argentinian politics have filled the country with sorrow. Might western Europe have followed a similar trajectory? Quite possibly. In Díaz-Alejandro’s estimation, four factors set the stage for Argentina’s decline: a politically active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata and a government that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity. At the end of World War II western Europe was at least as vulnerable as Argentina to this populist overregulation trap. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation. The contrast between western Europe’s successful economic redevelopment after World War II and its unsuccessful redevelopment after World War I is remarkable (see Maier, 1987). And ex ante I at least cannot find strong structural factors that would ensure that western Europe’s post-World War II economic trajectory would keep it in, and Argentina’s carry it out, of the First World. The Cross of Gold The third alternative was the crucifixion of the post-World War II European economy upon what turn-of-the-century US presidential candidate William Jennings Bryan called the cross of gold: inappropriate reliance on the gold standard to manage domestic and international economies in an environment in which such reliance would generate cruel and painful deflation. Countries with few gold reserves faced with the task of balancing their imports and exports do so by squeezing their economies, creating mass unemployment as a way of reducing imports to what can be financed out of export earnings.

-     

37

Such a scenario seems to me at least to be easy to imagine. It requires only (1) a much earlier end of US loans and grants to Europe; (2) the failure of international capital flows from the United States to fill the gap; and (3) the control over monetary and fiscal policies in western Europe then of people with the same views as those who control monetary and fiscal policies in western Europe now. Such governments respond to rising prices or to trade deficits by deflation. They respond to trade surpluses by accumulating gold reserves. The first priority is to maintain sound finance: a balanced government budget and a firm commitment not to reduce the gold value of the currency. Suppose American aid to Europe had come to a sudden and firm end at the end of 1946. Suppose that private international capital flows had not started up to cover the gap between western European exports and imports – after all, American long-term investors in Europe after World War I had lost a fortune. Suppose that western European countries had applied policies – mixtures of devaluation and deflation – in order to avoid running out of foreign exchange reserves. What would have happened then? Devaluations – no matter how large – would not have helped European countries balance their international accounts in the short run. Devaluation makes exports cheaper, but it also means that less foreign currency is earned for each commodity exported. In a long run of more than two years, devaluation swings the current account toward surplus and can bring imports down and into balance with exports. But in the short run it does not. In the short run of less than two years devaluation is more likely to increase than reduce a current account deficit. In the short run, deflation is the only way to close a gap between exports and imports: reduce demand for imports by reducing the incomes of those who buy imports, and the way to reduce the incomes of those who buy imports is to reduce national product and cause unemployment through high interest rates. The average current-account deficit for the big three western European nations – Italy, Britain and France – was 3 percent of national product. Since imports (M) are a function of the level of national product (Y): M ⫽m0 ⫹m⬘Y and since the current account balance (NX) is equal to the difference between exports (X) and imports (M): NX ⫽X ⫺M As long as exports are unchanged, the magnitude of the reduction in national product depends on the size of the increase in imports needed

   

38

to bring the current account into balance, and on m⬘, the marginal effect of a reduction in national product on imports:

⌬Y ⫽

⌬(NX ) m⬘

Thus a back-of-the-envelope estimate of the reduction in national product necessary to close the gap between exports and imports of Italy, France and Britain in 1948 would be roughly 9 percent, if the marginal effect of a reduction in national product on imports were equal to onethird: a 9 percent fall in total production relative to potential output, and in all probability a 5 percentage-point rise in unemployment. But this estimate holds only if exports were unaffected by the policies undertaken to bring trade into balance. In fact things are worse, for exports are not unaffected by the policies undertaken. More than half of European countries’ exports in the immediate aftermath of World War II were to other European countries. Were Italy to reduce its current account deficit by reducing imports, it would reduce imports from France – and so boost France’s current account deficit. European countries’ attempts to reduce their trade deficits reduce each other’s export earnings as well. Taking account of the size of intra-European trade and the fact that reductions in national product are an order of magnitude larger than the reductions in the trade deficit doubles the back-of-the-envelope estimate of the post-1947 recession required to balance western Europe’s current account. Requiring western Europe to balance its current account from 1947 on, using market forces, would have imposed a Great Depressionsized interruption on the course of western European recovery. Thus I find it difficult to understand claims by Milward (1984) and others that Marshall Plan (and preceding, and subsequent) aid was not very significant. Such claims seem to rest on a belief that aid merely postponed a necessary adjustment to reality because it did not permanently solve the dollar gap. But to me this seems to miss the point. Expanding exports and other sources of financing to match imports was much easier in the early 1950s as a gradual process in the context of the Korean War boom and the contribution of a US army to western European defense than it would have been as a sudden shock in 1947. A claim that countries forced to restrict imports suddenly and substantially could still have financed imports of essential capital goods begs the question of how the reduction in other categories of imports was to be achieved. Was it to be achieved through overall reductions in demand that would cause mass unemployment? Was it to be achieved through the installation of an apparatus of controls and licenses that would soon

-     

39

have acquired a powerful native political constituency, and pushed western Europe onto the Argentine trajectory? Milward does not say. He simply does not analyze how international payments would have been balanced in the late 1940s in the absence of a Marshall Plan. Whatever patterns of western European economics and politics would have emerged from such a Great Depression-sized interruption of post-World War II recovery, they would not have resembled the 1950s as that decade actually unfolded. The post-World War II political settlement might not have survived a post-World War II recession the size of the Great Depression: perhaps Stalin’s dream would have come true on an accelerated timetable. Moves in the direction of the Argentine trajectory toward a bureaucracy that licenses every import have proven very hard to reverse, and have had devastating consequences for economic growth elsewhere in the world (see Diaz-Alejandro, 1970). How realistic are these three counterfactual alternative scenarios? The third is very realistic indeed. Ex ante there were good reasons to think that it might well happen. Post-World War II and pre-World War II history are littered with examples of countries that faced substantial current account financing difficulties, and found their economies in deep recession as a result. The second in fact happened – to Argentina under Perón, and after. It could have happened elsewhere as well. The first appears, from our present-day standpoint, to be not so realistic. The world does not work as Lenin or Hobson thought. Imperial markets were not essential to maintain First World prosperity. The United States, on the one hand, and Britain and France on the other, did not come close to military blows over the future of empires, and over Third World markets. Nevertheless, history is full of contingencies. Neither World War I, World War II, nor the Great Depression makes any sense when analyzed as the equilibrium outcome of strategies followed by rational and well-informed governments and private economic agents. One or two major wars or economic disasters in the post-World War II period might well have brought us all appallingly close to Nineteen Eighty-Four by 1984. The particular combination of institutions and policies appeared remarkably well tuned to produce rapid economic growth in the 1950s and 1960s. But things could very easily have been otherwise. They were otherwise in western Europe after World War I, and in the southern cone of Latin America after World War II.

   

40

The Components of western European Exceptionalism So what were the components of the European miracle? What were the sources of such rapid post-World War II western European growth? Expanding International Trade An important cause of rapid post-World War II growth was expanded international trade. Traditionally, western Europe had exported industrial goods to and imported agricultural goods from eastern Europe, the Far East, and the Americas. After World War II there was little prospect of rapidly restoring this international division of labor. Imports of food and consumer goods for relief diverted hard currency from purchases of capital goods needed for long-term reconstruction. Changes in net overseas assets reduced annual earnings from abroad. The net effect of the inward shift in demand for exports and the collapse of the net investment position was to give Europe in 1947–48 only 40 percent of the capacity to import that it had possessed in 1938. From this base, the successful export performance of western Europe after World War II is remarkable. As Figure 1.6 shows, by the end of the 1960s the ‘openness’ of the main continental western European economies – the sum of their exports plus their imports, measured as a share of total national product – was easily twice that of the interwar average. 70%

Germany 60%

Britain

40%

Italy

France 30% 20%

10%

Year

Figure 1.6

Exports plus imports divided by national product

1990

1980

1970

1960

0%

1950

Percent

50%

-     

41

World War II marked a watershed between an interwar period in which international trade was a relatively small and stable share of national product, and a period in which trade underwent a strong secular increase not only in its absolute volume, but relative to GDP. What if this expansion of world trade had not taken place? What if exports and imports as shares of national product had remained at their (relatively low) levels of the interwar period? The puzzle always facing economists trying to understand economic growth is whether trade causes faster growth or growth causes expanded trade. The most recent attempt to cut this Gordian knot was undertaken by Jeffrey Frankel and David Romer (1996). Their conclusion is that each dollar of expanded imports or exports expands total national product by some 34 cents: expanded exports allow an economy to shift labor into the export sectors where it is more productive, and to raise consumer welfare and producer productivity by giving them more power to purchase imports from low-price consumer and capital goods producers in other countries. Expanded trade puts more pressure on domestic monopolies to reduce their excess profits and to become more efficient. Expanded trade allows economies to more easily and productively soak up technological innovations made elsewhere in the world. Frankel and Romer’s estimates allow us to assess how much postWorld War II western European growth was aided by the fact that a wide variety of pressures – from the US government seeking faster European unity to French politicians eager to weld the German and French economies together so tightly that neither could ever afford to begin a war again – pushed western European economies into more open configurations with higher import and export shares of national product. Table 1.1 reports calculations based on Frankel and Romer’s methodology. They suggest that a little bit less than half a percentage point per year in post-World War II pre-mid 1970s growth in national product in the TABLE 1.1 EFFECT OF INTERNATIONAL TRADE ON WESTERN EUROPEAN POST-WWII DEVELOPMENT

Country France West Germany Italy Britain

1930s openness

Mid-1970s openness

Difference in GDP level attributable to expanded trade

Difference in annual growth

20% 15% 15% 30%

40% 47% 44% 57%

7.9% 12.9% 11.6% 11.4%

0.31% 0.52% 0.46% 0.46%

42

   

major economies of western Europe can be attributed to increased openness. Market-Conforming Governments Renewed growth required, in addition to financial stability and openness to trade, free play for market forces. On this issue the Marshall Plan – specifically, the conditions attached to US aid – tried to constrain western Europeans’ choices. Each recipient had to sign a bilateral pact with the United States. Countries had to agree to balance government budgets, restore internal financial stability, and stabilize exchange rates at realistic levels. Europe was still committed to the mixed economy. But the United States insisted that market forces be represented liberally in the mix: this was the price that the United States charged for its aid. The demand that European governments trust the market came from the highest levels of the Marshall Plan administration. Dean Acheson (1960) describes the head administrator, Economic Cooperation Administration chief Paul Hoffman, as an ‘economic Savonarola’. Acheson describes watching Hoffman ‘preach his doctrine of salvation by exports’ to British Foreign Secretary Ernest Bevin. ‘I have heard it said,’ wrote Acheson, ‘that Paul Hoffman missed his calling: that he should have been an evangelist. Both parts of the statement miss the mark. He did not miss his calling, and he was and is an evangelist.’ Now this point should not be overstated. The price charged for Marshall Plan aid was one that western Europeans might well have paid for their own sake in any event. Support for the market was widespread, although just how widespread was uncertain. At most US pressures and others tipped the balance. Some memoirs, like those of Vincent Auriol (1970), suggest a powerful influence for US pressure. Others tell a very different story. Moreover, post-World War II western Europe remained very, very far from laissez-faire. Government ownership of utilities and heavy industry was substantial. Government redistributions of income were large. The magnitude of the ‘safety nets’ and social insurance programs provided by the post-World War II welfare states were far beyond anything that had been thought possible before World War I. Post-World War II western Europe was so far from laissez-faire that many (including Hayek, 1944) thought it was doomed: doomed to totalitarianism as mixed-economy governments used their economic powers to suppress dissent, and doomed to stagnation as creeping socialism paralyzed the economy. But the large post-World War II social insurance states were accom-

-     

43

panied by financial stability, by substantial reliance on market processes for allocation and exchange, and by openness to world trade. The powerful mixed-economy governments took the separation of powers seriously: judges remained independent, pressure from government-owned enterprises to refrain from criticizing governmental policy remained light, and political competition remained free and open. Fears that the social insurance state would inevitably slide into totalitarianism proved as false as the fears that the social insurance state would cripple the market economy. Thus western Europe’s post-World War II bet on a market-heavy mixed economy turned out to be a good one, delivering a relatively egalitarian distribution of income, a high degree of social insurance, and rapid economic growth. It is difficult to figure out how much difference the market-heavy mixed economy made. How much would a marginal step away from market and toward centrally-planned allocations have harmed post-World War II western European growth? No one knows. Certainly the degree of variation within western Europe, or between western Europe and the United States, was insufficient to generate visible differences in growth performance. Both Germany and Sweden did well. Both France and Italy did well. Perhaps it is simply best to say that this factor was tied up with all the others: without a market-heavy component of resource allocation under the mixed economy, it is hard to believe that either expanded trade or high investment would have been a significant aid to growth. High Investment Europe’s rapid growth in the 1950s and 1960s was associated with exceptionally high investment rates, as Figure 1.7 shows. The investment share of GNP was nearly twice as high as it had been in the last decade before World War II. Accompanying high rates of investment, was rapid growth of productivity. Even in Britain, the laggard, productivity growth rose sharply between 1924–37 and 1951–73, from 1 to 2.4 percent per year. This high investment share did not, however, reflect unusual investment behavior during expansion phases of the business cycle. Rather, it reflected the tendency of investment to collapse during cyclical contractions and the absence of significant cyclical downturns between 1950 and 1971. High investment was a consequence of successful Keynesian demand management. Thus successful performance at managing the business cycle translated into success at maintaining long-run economic growth. How much success? It depends on how much you believe that high investment is an important source of rapid growth in the sophistication and productivity

   

44 40%

Italy

Percent

35% 30%

Germany

25%

France

20%

Britain

15% 10% 5% 0% 1950

1960

1970

1980

1990

Year

Figure 1.7

Real investment as a share of GDP (from the International Comparison Project)

of technologies that an economy can successfully apply. I believe in the estimates found in DeLong and Summers (1991): they suggest that a five percentage point reduction in investment as a share of GDP – a reduction in the average share that might well have followed from a much more variable cyclical performance – would have produced an 0.8 percentage point per year boost in the rate of economic growth. Keynesian Demand Management The post-World War II era was the era of John Maynard Keynes. But what does that mean? It means that Keynes’s name was a powerful one to conjure with, because anyone who rejected his intellectual legacy could be accused, convicted, and immediately hanged as a fool who wished to bring the Great Depression back. But how much of a difference did Keynesian policies actually make? Let’s take a look at Keynesian policies – both those adopted for Keynesian reasons, and those adopted for non-Keynesian reasons but that Keynes would nevertheless have applauded.

-     

45

Supreme Allied Commander, Europe As far as western Europe is concerned, the first ‘Keynesian’ policy was the US government’s desire to spend a fortune – and to require that western European governments spend a fortune as well – on the military establishment of NATO. This piece of military Keynesianism was in large part a reaction to the policies of Josef Stalin and Kim Il Sung: the attack on South Korea was an essential step in shifting the American congress from a post-World War II demobilization mindset to a Cold War mobilization mindset. Without Stalin’s letting Kim Il Sung off the leash and his attacking South Korea, there was no prospect that congress would have ever approved the blueprint for the Cold War military that Dean Acheson (1969) and company had drawn up in NSC-68, and no prospect that the NATO military establishment, as we have known it for the past fifty years, would have come into being (see Halle, 1967). By the mid-1950s, however NATO was in place, just waiting there in case Stalin’s successors were to attempt in Germany what Stalin, Mao, and Kim Il Sung had attempted in South Korea: the reunification by force of a country that had been divided in the armistice that ended World War II. In the mid-1950s Stalin’s successors were largely unknown: today we know vastly more about them than anyone west of the iron curtain knew then. The only solid thing known about them then was that they had flourished under Stalin. And they had continued playing the games Stalin played by shooting one of their own number – Lavrenti Beria – in the power struggle that followed Stalin’s death. Stalin, their master, had exhibited a taste for snatching up territory when he thought it could be taken cheaply – starting with the suppression of the Mensheviks in Georgia, and including the attack on eastern Poland in the opening days of World War II, the annexation of Latvia, Lithuania, and Estonia as well as Moldova in advance of Hitler’s attack on Russia. Western Germany could probably not be snatched up cheaply by a Soviet coup de main. But the fact that occupying western Germany in 1955 would probably be very different from occupying Latvia in 1940 was not wholly reassuring. Stalin also at times exhibited a remarkable degree of bad judgment: allowing Kim Il Sung to launch the Korean War, the unsuccessful attack on Finland in 1939, his belief in the early 1930s that social democrats were the foe of the German Communist Party most worth fighting, and (the mother of all miscalculations) his decision in mid-1939 to become Hitler’s ally, in the hope that Russia could then watch Nazi Germany and the western democracies exhaust themselves in trench warfare.

   

46

Perhaps Stalin’s successors would exhibit a similar appetite for conquest on the cheap, and a similar weak grasp of geopolitical realities. So by the mid-1950s a full US army – corps, divisions, airwings, and an enormous logistical tail – was sitting in western Germany as a deterrent. The United States spent lavishly to project its Cold War military power. Net military transactions amounted to three-quarters of a percent of US national product in the mid-1950s, and total unilateral transfers to Europe to 1 percent of America’s national product: approximately 3 percent of western European GDP at that time, as Figure 1.8 shows. 2.5%

2.0%

1.5% Net military transactions Other unilateral transfers 1.0%

0.5%

0.0% 1946

1950

Figure 1.8

1954

1958

US transfers abroad as a share of GDP

Inflation and Economic Growth Keynesian policies to stimulate demand, however, were effective only so long as labor markets were accommodating, requiring increased pressure of demand (applied by governments in response to slowdowns) to produce additional output and employment rather than higher wages and hence higher prices. Unemployment fell to remarkably low levels, as Figure 1.9 shows. Yet the macroeconomy was stable. Investment was maintained at high levels, and rapid growth persisted. Should things change – and should Keynesian policies be blamed for higher inflation rather than praised for maintaining high employment – then the policy consensus that supported western European exceptionalism might quickly unravel, and did quickly unravel in the 1970s when inflation spiked, as Figure 1.10 shows.

-     

47

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

Figure 1.9

German unemployment, 1949–70

25%

Britain Average 1951–55

Italy

France

15%

10%

5%

W. Germany

Year

Figure 1.10

Western European inflation, 1950–96

1990

1980

1970

1960

0%

1950

Inflation (Percent per Year)

20%

1970

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

0.0%

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Thus one key to Europe’s rapid growth was relatively inflation-resistant labor markets. So long as they accommodated demand pressure by supplying more labor input rather than demanding higher wages, the other pieces of the puzzle fell into place. What then accounted for the accommodating nature of postwar labor markets? One explanation is that they were not really that accommodating. As Figure 1.10 shows, inflation in the first half of the 1950s in France, Italy, Britain and West Germany averaged some 4.3 percent per year – higher than inflation is today in any of the four countries, and a level of inflation that would cause today’s central banks to worry that policy was too loose, raise interest rates, and push unemployment back up. Why didn’t central banks in the 1950s worry about inflation that averaged nearly 5 percent? Perhaps the most important reason was that this rate of inflation did not (Britain aside) produce frequent balance-of-payments crises. As long as foreign exchange markets were not pressurizing the central bank to devalue the currency, central banks were generally happy. And the key reason that moderate domestic inflation in western Europe could be combined with no pressure on exchange rates was the so-called Balassa–Samuelson Effect: the fact that a rapidly-growing industrializing economy has a rapidly-rising equilibrium real exchange rate as well, because the process of industrialization is the process of becoming more competitive in making traded goods – better at producing the industrial manufactures that make up the bulk of international trade. Thus a fixed exchange rate in the 1950s was compatible with a relatively high inflation rate – an inflation rate several percent per year higher than the United States. As long as central banks focused not on internal balance but on maintaining a fixed exchange rate against the dollar, it did not strike them that the moderate inflation of the 1950s was anything to worry about. Another conventional explanation of the coexistence of full employment with (relatively) low inflation in post-World War II Europe, following Kindleberger (1987), is elastic supplies of underemployed labor from rural sectors within the advanced countries and from Europe’s southern and eastern fringe. Elastic supplies of labor disciplined potentially militant labor unions. A problem with this argument is that the competition of underemployed Italians or Greeks or eastern European refugees was hardly felt in the United Kingdom, yet UK labor market behavior was transformed as in other countries after World War II. But there are other explanations. Charles Maier’s (1987) very convincing explanation is ‘History’. The memory of high unemployment and strife between the wars served to

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moderate labor-market conflict. Conservatives could recall that attempts to roll back interwar welfare states had led to polarization, destabilizing representative institutions and setting the stage for fascism. Left-wingers could recall the other side of the same story. Both could reflect on the stagnation of the interwar period and blame it on political deadlock. Certainly any comparison of the magnitude and duration of strikes – shown in Figure 1.11 – between pre-Nazi and post-World War II Germany cannot help but leave the viewer convinced that industrial relations were completely and fundamentally different before and after. 40 – 35 – 30 – 25 – 20 – 15 – 10 –

0

1920 _ 1949 _ 1922 _ 1949 _ 1924 _ 1949 _ 1926 _ 1949 _ 1928 _ 1949 _ 1930 _ 1949 _ 1932 _ 1949 _ 1922 _ 1949 _ 1922 _ 1949 _ 1949 _ 1949 _ 1950 _ 1949 _ 1952 _ 1949 _ 1954 _ 1949 _ 1956 _ 1949 _ 1958 _ 1949 _ 1960 _ 1949 _ 1962 _ 1949 _ 1964 _ 1949 _ 1966 _ 1949 _ 1968 _ 1949 _ 1970 _

5 –

Figure 1.11

Days lost to strikes (millions)

One potential explanation of relative labor peace is that the Marshall Plan set the mold for post-World War II labor relations. Putting the point in this way serves to underscore that the Marshall Plan was but one of several factors contributing to observed outcomes. Marshall Planners sought a labor movement interested in raising productivity rather than in redistributing income from rich to poor (see Maier, 1987). With labor peace a potential precondition for substantial Marshall Plan aid, labor organizations agreed to push for productivity improvements first and defer redistribution until later. Moreover, money was channeled to non-communist labor organizations. European labor movements split over the question of whether Marshall aid should be welcomed – which left the communists on the wrong side, opposed to economic recovery. Yet another element in the post-World War II supposed success of

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Keynesianism – policies to boost production and maintain full employment by managing aggregate demand – was the fact that Keynesian policies came as a surprise. It is very possible that the first generation of Keynesian policies were vastly more effective because they represented a change to which firms and workers had not yet adapted. Perhaps in subsequent generations they are likely to generate not faster growth and higher employment but stagflation – the combination of higher unemployment and higher inflation – as individuals and businesses learn to foil the effects of a government-induced boost to the economy by indexing their wages to inflation before the fact. Here the Bretton Woods System – understood not in the sense of Milward (1984), but of Eichengreen (1996) – played a role. Bretton Woods linked the dollar to gold at $35 an ounce and other currencies to the dollar. So long as American policy makers’ commitment to the Bretton Woods parity remained firm, limits were placed on the extent of inflationary policies. So long as European policy makers were loath to devalue against the dollar, limits were placed on their policies as well. Price expectations were stabilized. Inflation, where it surfaced, was more likely to be regarded as transitory. Consequently, increased pressure of demand was less likely to translate into higher prices instead of higher output, higher employment, and greater macroeconomic stability. If you add up the flow of unilateral military transfers to support NATO, the automatic expenditures of the expanded western European welfare state, and the ability to run low interest rates and stimulate investment made possible by the Balassa–Samuelson effect, it is easy to conclude that there simply was no room for anything like a Great Depression in post-World War II western Europe. The flow of social welfare spending, of American unilateral transfers, of European defense spending, and of investment were all amplified by the Keynesian multiplier to provide a strong base of aggregate demand already close to the ceiling of potential output. Keeping aggregate demand strong meant that western European investment remained high as a share of national product. Successful demand management not only kept production near potential and reduced the distributional misery of the business cycle, it also significantly accelerated European economic growth. Yet perhaps the impact of Keynesian doctrines was felt more in what they prevented than in what they did. Had policies in the 1950s and 1960s been like policies in the 1930s, all expenditures would have been cut in an attempt to balance the budget whenever recession threatened. The intellectual dominance of Keynesian ideas prevented the balance-the-budget at all costs policies that had proved so harmful during the Great

-     

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Depression (see Hall, 1989). And to prevent, by ideological force alone, even the possibility of something as destructive as Chancellor Bruening’s resort to deflation in the early 1930s – that was an important achievement (see Hall, 1989). Virtuous Circles All these explanations rely, at some level or other, on virtuous circles. One way to think about the post-World War II settlement, and the contrast with the interwar period, is as a coordination problem. Labor, management and government in Europe could, in effect, choose to try to maximize their current share of national income like after World War I. Inflation, strikes, financial disarray, cyclical instability and productivity problems can all be seen as corollaries of this equilibrium. Alternatively, the parties could trade current compensation for faster long-term growth and higher living standards, even in present-value terms. Workers would moderate their wage demands, management its demands for profits. Government agreed to use demand management to maintain employment in return for wage restraint on the part of unions. Higher investment and faster productivity growth could ensue, eventually rendering everyone better off. Such a ‘social contract’ is advantageous only if it is generally accepted. If workers continued to aggressively press for higher wages, management had little incentive to plow back profits in return for the promise of higher future profits. If management failed to plow back profits, workers had little incentive to moderate current wage demands in return for higher future productivity and compensation. If labor relations were conflictual rather than harmonious, productivity would be the casualty. Once western Europe had shifted onto this ‘social contract’ equilibrium path – once workers and management began to behave in a manner consistent with the superior equilibrium – they had no obvious reason to stop. The End of the Miracle Everything went right in western Europe – growth, distribution, price stability, employment stability – up until 1973. Since then things have gone wrong. If western Europe is ‘exceptional’ today, it is exceptional in its high and stubborn structural unemployment, and in the narrow vision of its central bankers. False Monetarist Gods In the late 1960s and early 1970s western European inflation crept up from roughly three percent per year to roughly six percent per year, in

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part because inflation in the United States had crept up. It is not clear why six percent per year inflation would have represented a crisis: it was little more than the rate of inflation that European governments had tolerated in the early 1950s, after all. What changed Europe’s political economy, and did provoke a crisis, was the explosion in inflation that followed the tripling of world oil prices by OPEC in the fall of 1973. Governments reacted to a fall in aggregate supply by trying to boost aggregate demand – and found themselves with inflation rates in the range of twelve to twenty percent in the mid-1970s and again at the end of the 1970s, when the fundamentalist Iranian Revolution again disrupted world energy markets. In the wake of these oil shocks and the rise in expectations of future inflation that the unhinging of the price level’s nominal anchors had created, governments had a choice of three strategies: •

•

•

The first strategy was one of drift: hope that something would turn up to improve the situation. This may have been the best strategy ex ante, but ex post nothing turned up to improve the situation. The second strategy was to attempt ‘corporatism’: ask labor unions to moderate wage increases, and accept falling real wages for a while as part of the price for restoring overall price stability and maintaining the high-growth, high-investment, high-employment configuration in western Europe. The third strategy was to hit the economy over the head with a brick: turn over macroeconomic management to central bankers, give central bankers the independence to make their own decisions, and tell them to make fighting inflation their first, last, and only priority.

The ‘corporatist’ strategy was the dominant one tried in the 1970s, and it failed. Some union leaders could not hold their members to the corporatist bargains that union leaders had agreed to. Some union leaders found themselves outflanked in union politics by challengers who denounced those who had comfortably gotten into bed with the politicians. Some union leaders did not think that high inflation was their problem or that their country’s social democrats were their party. In this they were wrong. Consensus politicians generally got one or at most two chances to bring inflation under control by corporatist agreement. After their one or two chances had expired, voters angry at inflation would vote for the other side – and they would go the centralbanker route. Few union leaders in the 1970s understood how damaging the high-unemployment central bank-launched disinflations of the 1980s were going to be to their constituents and their organizations.

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By 1985 there were many ex-union leaders and many ex-union members who wished that they had been more willing to cooperate with consensus social democratic politicians in the 1970s. As inflation remained high in the late 1970s, left-wing economists hastened to assure voters that inflation was just a redistribution and not a very painful one. In the United States left-of-center economists compared inflation to a head cold – and the provoking of a recession to ‘cure’ inflation the equivalent of submitting to a lobotomy to try to cure it. But left-wing economists were ignored by voters. Faced with a disease, inflation, that the consensus social democratic politicians could not cure, voters and politicians looked for another solution, and the monetarists were there to offer one. In country after country, consensus social democratic politicians were replaced by those who would hand over power to manage the macroeconomy to central bankers whose views could be described as ‘monetarist’ – not necessarily in the sense that they believed that chartist-like tracking of M1 (flow of money) was the answer, but in the sense that they believed that if the central bank focused on reducing inflation then the rest of the economy would take care of itself (see Friedman, 1968). And, indeed, the politicians and central bankers were assured by monetarist economists that a shift toward an anti-inflation policy would lead at the most to a few years of temporarily high unemployment. The monetarist belief was that business cycles are fluctuations around (not shortfalls below) a business cycle-free long-term growth path. Fight inflation, the monetarists told the central bankers, and in a few years you will have the best of both worlds: low inflation and low unemployment. In the long run, Friedman (1968) assured everyone, the average rate of unemployment would be the ‘natural’ rate of unemployment no matter what the rate of inflation was – so there was ultimately no cost to handing control of economic policy over to the inflation-fighters. As far as the United States is concerned, it appears that the monetarists told the truth: after a decade made more difficult by the destructive and growth-retarding structural fiscal deficits of the Reagan administration, the United States had a low unemployment, a low inflation rate, and a high share of high-tech private investment in GDP. As far as Europe is concerned, it appears that the monetarists were wrong. Unemployment in Europe began to rise in the mid-1970s, and became more than four times what it was at the start of that decade. There has been no sign of any ‘natural’ rate toward which unemployment tends to return.

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The Exclusion of the Unemployed As unemployment in Europe rose and remained high in the 1980s, it became more and more clear that no one – or, rather, no one powerful in the political nation – really cared. There is a sense in which the European Union today has high unemployment because, in Daniel Cohen’s (1996) words, ‘the war on unemployment is in the hands of governments which represent first and foremost the point of view of the people who have jobs and fear losing them’. Unemployment has been feared and regretted, but feared and regretted less than the remedies that would have been necessary to contain it, and that might have harmed the market position of some of the unemployed. As Cohen (1996) argues, one possible road that western Europe might have taken in response to the stubborn persistence of unemployment would have been to try to construct in Europe the conditions that made the monetarist promise – that unemployment produced by fighting inflation would be temporary – true in the United States. European governments could have attempted to increase the amount of ‘churning’ in the labor market by increasing speed with which those who seek jobs find them: forcing those who have jobs to compete with those who do not. The distributional consequences of following this ‘American strategy’ are unpleasant. One consequence is insecurity on the part of the employed, and a shift in power in labor-management relations back toward management. A further consequence is the steady downward pressure on wages from the potential competition of the unemployed, downward pressure that has led to a vast widening of income inequality in the United States. A second road to cure European unemployment would have been to try to boost public employment, and to spend large sums of money on reentry programs for the jobless – training subsidies, job search assistance, and much higher subsidies to employers for hiring the unemployed. But these costly reentry programs must be paid for by higher taxation. The fear has been either that higher taxation will slow economic growth, or that programs for the unemployed will crowd out other social benefits. The European Union has remained stuck in the middle. It has rejected the first strategy. It has not tried the second. The United States provides a somewhat positive example of the first strategy. There is no successful example of the second: it is not clear that it is even possible.

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Conclusion Had European political economy taken a different turn, post-World War II European recovery might have been hobbled by clumsy allocative bureaucracies that rationed scarce foreign exchange and placed ceiling prices on exportables to protect the consumption of urban working classes. Yet post-World War II western Europe saw a rapid dismantling of controls over product and factor markets, and the restoration of price and exchange rate stability. To some degree this came about because underlying political– economic conditions were favorable. After all, no one in Europe wanted a repeat of interwar experience. To some degree it came about because the governments in power believed that the ‘mixed economies’ they were building should have a strong pro-market orientation. To some degree it came about as a result of a Marshall Plan that gave post-World War II European politicians a little bit of extra room to maneuver, in order to carry out their intentions. Without aid, they would likely have faced a harsh choice in the late 1940s between contraction to balance their international payments and severe controls on admissible imports. For budgets to be balanced and inflation to be halted in postWorld War II western Europe, political compromise was required. Consumers had to accept higher posted prices for foodstuffs and necessities. Workers had to moderate their demands for higher wages. Owners had to moderate demands for profits. Taxpayers had to shoulder additional liabilities. Recipients of social services had to accept limits on safety nets. Rentiers had to accept that the war had destroyed their wealth. There had to be broad agreement on a ‘fair’ distribution of income, or at least on a distribution of the burdens that was not so unfair as to be intolerable. Such agreement was easier to reach, the larger the size of the pie available for division among interest groups. Thus at first aid and then rapid economic growth made virtuous circles very possible. What about Europe today, which is far from exceptional? It is hard to believe that the differences that separate the slowlygrowing, unemployment-ridden western Europe of today from the western Europe of the Great Keynesian Boom are large. Not much has changed, and yet we have wandered from there to here. Perhaps we can change a little bit, and go back from here to there? Perhaps. Perhaps not. But in any case western European economic management leaves those of us who study and make macroeconomic policy on this side of the Atlantic scratching our head in puzzlement. What western Europe appears to need are policies that will (a)

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stimulate demand by expanded government deficits and lower interest rates, (b) free up the labor market and make it easier to hire workers so that higher demand will generate lower unemployment and not higher inflation, and (c) a reform of the social insurance state so that it provides fewer sinecures to those with favorable economic positions and more genuine social insurance. But when we look at western Europe today, we do not see such policies. Instead, we see policies of continued fiscal contraction in order to meet the requirements for monetary union. These do not provide companies and workers with stronger incentives to make and find jobs either through government subsidy or through market opportunity. Since either tacking right or left appears unacceptably risky, the decision of European governments has been to stay in the middle, and hope that monetary union will lead to something positive. But what that ‘something positive’ will be, no one can say. Bibliography Acheson, D. (1960) Sketches from Life. New York: Harper & Bros. Acheson, D. (1969) Present at the Creation. New York: New American Library. Auriol, V. (1970) Mon Septennat, 1947–1954. Paris: Armand Colin. Barro, R.L. and Sala-i-Martin, X. (1995) Economic Growth. New York: McGraw-Hill. Borchardt, K. (1991) Perspectives on Modern German History and Policy. Cambridge: Cambridge University Press. Bordo, M. and Eichengreen, B. (1993) A Retrospective on the Bretton Woods System. Chicago: University of Chicago Press. Cohen, D. (1996) The Misfortunes of Prosperity. Cambridge: MIT Press. DeLong, J. Bradford (1988) ‘Productivity Growth, Convergence, and Welfare: Comment’, American Economic Review, 78/5 (December), pp.1138–54. DeLong, J. Bradford and Eichengreen, B. (1993) ‘The Marshall Plan as a Structural Adjustment Programme’, in Rüdiger Dornbusch, Wilhelm Nölling, and Richard Layard (eds) Postwar Economic Reconstruction: Lessons for Eastern Europe. London: Anglo-German Foundation for the Study of Industrial Society. DeLong, J. Bradford and Summers, L.H. (1991) ‘Equipment Investment and Economic Growth’, Quarterly Journal of Economics, 106/2 (May), pp.445–502. Diaz-Alejandro, C. (1970) Essays on the Economic History of the Argentine Republic. New Haven: Yale University Press. Easterlin, R. (1997) The Economic History of the Twenty-First Century. Berkeley: University of California Press. Eichengreen, B. (1989) ‘European Economic Growth After World War II: The Grand Schema’, presented to the Conference ‘Marking the Retirement of William N. Parker’, New Haven. Eichengreen, B. (1992) Golden Fetters: The Gold Standard and the Great Depression. New York: Oxford University Press. Eichengreen, B. (1996) Globalizing Capital. Princeton: Princeton University Press. Frankel, J. and Romer, D. (1996) Trade and Growth: An Empirical Investigation. Cambridge, MA: National Bureau of Economic Research. Friedman, M. (1968) ‘The Role of Monetary Policy’, American Economic Review, 58/2 (May), pp.1–17. Gimbel, J. (1976) The Origins of the Marshall Plan. Palo Alto: Stanford University Press.

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Hall, P. (1986) Governing the Economy: The Politics of State Intervention in Britain and France. New York: Oxford University Press. Hall, P. (ed.) (1989) The Political Power of Economic Ideas: Keynesianism Across Nations. Princeton: Princeton University Press. Halle, L. (1967) The Cold War as History. New York: Harper and Row. Harris, S. (1948) The European Recovery Program. Cambridge, MA: Harvard University Press. Hayek, F. (1944) The Road to Serfdom. Chicago: UC Press. Hazlitt, H. (1947) Will Dollars Save the World? New York: Appleton-Century. Hobson, John A. (1913) Imperialism, a Study. London: Allen and Unwin. Hogan, M. (1987) The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947–1952. Cambridge, UK: Cambridge University Press. Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money. London: Macmillan. Kindleberger, C. (1987) Marshall Plan Days. Boston: Allen and Unwin. Lenin, V. (1916) Imperialism, the Highest Stage of Capitalism. New York: Vanguard Press. Maier, C.S. (1987) In Search of Stability. Cambridge: Cambridge University Press. Maier, C.S. (1977) ‘The Politics of Productivity: Foundations of American International Economic Policy after World War II’, International Organization, 31, pp.607–33. Maier, C.S. (1981) ‘The Two Postwar Eras and the Conditions for Stability in Twentieth-Century Western Europe’, American Historical Review, 86, pp.327–52. Marx, K. (1848) Wage-Labor and Capital. New York: Vanguard Press. Milward, A.S. (1984) The Reconstruction of Western Europe 1945–51. London: Methuen. Sweezy, P. (1942) The Theory of Capitalist Development. New York: Oxford University Press. Wallich, H. (1955) Mainsprings of the German Recovery. New Haven: Yale University Press.

Note I would like to thank Alan Taylor, Richard Freeman, Robert Waldmann and especially Barry Eichengreen for helpful discussions. This essay draws heavily upon the ideas of, conversations with, and joint work conducted with Barry Eichengreen. I would also like to thank the National Science Foundation, the Alfred P. Sloan Foundation, and the University of California at Berkeley’s Institute for Business and Economic Research for financial support.

2 Europe and the Marshall Plan: 50 Years On ALAN S. MILWARD

Although there have been some thoughtful academic celebrations of the 50th anniversary of the Marshall Plan, they have been quiet affairs indeed compared to the lavish celebrations of its 40th. It is now thought of as having done its work. The Wall has come down. Only the academic debate continues, mostly over arguments raised at the time of the 40th anniversary, which coincided with the first wave of serious publications into the Marshall Plan’s meaning and impact. After 40 years it was still important for US officials to maintain the public position of their government in 1947, that aid would be available to all European countries who were ready to participate in a cooperative organization for its utilization. There were still a few academics maintaining the same position, but their defenses were being overwhelmed. Successive conferences in western European capitals reached solid academic agreement that not only were the terms for aid to Soviet bloc countries unacceptable to their political systems, but that they were intended to be so. The offer was couched in the way it was to allow for the possibility that Czechoslovakia and, with much less hope of success Hungary and Poland, might still have enough room for political maneuver to accept it, change their political system and be attracted out of the rapidly forming Soviet bloc. That possibility was at once closed by the USSR. The Marshall Plan did not divide Europe and Germany by accident; the outcome was foreseen and in the case of Germany intended. Before the 50th anniversary came around, the Cold War, the Soviet bloc and even the Soviet Union itself were no more. The problem had become not the immovability of eastern Europe but its instability. It was natural to ask the question whether another Marshall Plan might not bring stability to the former Soviet bloc as the original had earlier done to western Europe. The attempt to answer that question gave a further impulse to answering the question in the forefront of earlier research: how effective was the Marshall Plan? The results have been to deepen somewhat our understanding of the plan’s economic impact on western Europe, but in doing so also to show how inapposite it would have been

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to have had a second Marshall Plan for eastern Europe. The amount of money would have had to be far greater and spent over a longer period of time. Most authors, however, are persuaded that the greater difficulty would have been the lack of political response. The question that emerges from this examination of the possibilities for a second Marshall Plan for Europe is of wider importance than the history of the Marshall Plan itself: what is necessary for an interdependent international economic system to function successfully over a relatively long period? This large question has been reached by beginning with a much narrower one: what was the quantitative contribution of Marshall Aid to western Europe’s postwar growth? It is not easy to know the precise quantities of Marshall Aid received by each country. Marshall Aid was voted annually for each US fiscal year by Congress from the start (1 July 1948) of fiscal year 1949. After the first annual allocation, however, there were two successive attempts to multilateralize intra-European trade over the US fiscal years 1949 and 1950 (1 July 1948–30 June 1950) by allowing national Marshall Aid allocations to be used in trade settlement transfers between OEEC countries. The second of these, in fiscal year 1950, took the form of constituting drawing rights for trade debtors on aid actually allocated to the creditor country. It meant that sums finally received by any country could be very different from those originally allocated to it at the start of the fiscal year. In February 1950 Congress allowed as much as one-third of the total Marshall Aid appropriation for fiscal year 1951 to be set aside to support the creation of a genuinely multilateral payments system for intrawestern European trade. Such a system was brought into being by the agreement on the European Payments Union (EPU) signed in September 1950. Of the total Marshall Aid appropriation, 19.4 per cent was allocated as working capital to EPU, and so was transferred by EPU trade settlement operations to intra-European trade debtors. A further 8.3 percent went into a special fund to guarantee the UK against losses of gold through membership of EPU. Taking account of the transfers of Marshall Aid through trade settlements raises the question of whether it makes economic and historical sense to measure its impact separately from that of other contemporary aid programs of which the dollar transfers were also recycled through international trade. Calculations which show the relatively low contribution of Marshall Aid to the growth of the West German economy need, for example, to be read in the awareness that an earlier relief program operated by the US army of occupation, Government Aid and Relief in Occupied Areas (GARIOA), was still in operation in the first fiscal year

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of Marshall Aid and in calendar year 1949 was responsible for financing more than half of the aid-financed imports into West Germany. Other large aid programs to Greece were also in operation throughout the Marshall Plan period. Most published estimates of the sums of Marshall Aid received have as their end-point 30 December 1951, because that was the day on which the Economic Cooperation Agency (ECA), set up to administer Marshall Aid, was wound up. The Truman administration, however, had intended Marshall Aid to be a five-year program and funds were in fact disbursed until 30 June 1953 (the end of fiscal year 1953) under the aegis of ECA’s successor agency, the Mutual Security Agency (MSA). Quantitatively, the addition of the funds transferred through MSA for similar imports as under the aegis of ECA does not make much difference to the measured contribution of the Marshall Aid program to the growth of European economies, but its existence means that the leverage exerted by Marshall Aid over the recipients did not end, as most studies make it do, in 1951. All estimates of the quantitative contribution of Marshall Aid to the growth of western European countries, either as a static contribution to their national income, or to current accounts which were almost invariably in deficit with the dollar zone, or to investment, show it to have been much smaller than the propagandistic enthusiasm of contemporary economists proclaimed.1 Western Europe of course was not a whole, and all quantitative estimates also agree that the contribution through any of these channels to recipient nations shows a wide range of difference. The same two conclusions hold when any attempt is made to dynamize the effect of Marshall Aid, but the contribution of Marshall Aid appears larger when dynamized. The importance of final Marshall Aid receipts, not allocations, as a percentage of GNP in the first US fiscal year (1949) of the plan’s operation varied from 14 percent in the case of Austria to 0.3 percent in the case of Sweden. There were seven countries out of the fifteen recipients in the program where the net addition was more than 5 percent of GNP (Table 2.1). Growth rates of GNP in western Europe were high over the period 1945–51; Marshall Aid was intentionally degressive. Net aid receipts thus declined as a percentage of GNP throughout the program. Table 2.2 illustrates this for some recipients. In Table 2.1 the powerful effect of using ‘conditional’ aid to recipients to enable trade debtors to them to purchase their exports can be particularly noted in the case of the Irish Republic. A neutral country in World War II, to whose economy the word recovery hardly applied, since on balance the world war was beneficial to it, received a substantial addition

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TABLE 2.1 NET ERP AID RECEIVED, AFTER TRADING SETTLEMENTS MADE WITH ‘CONDITIONAL’ AID. US FISCAL YEAR 1949 (1 JULY 1948–30 JUNE 1949) AS A PERCENTAGE OF GNP

Austria Netherlands* Irish Republic France* Norway Italy Iceland Denmark Western Germany (Trizone) United Kingdom Belgium/Luxembourg* Sweden

14.0 10.8 7.8 6.5 5.8 5.3 5.0 3.3 2.9 2.4 0.6 0.3

* Including aid to overseas territories. Source: Bank for International Settlements, 19th Annual report (Basle, 1949).

TABLE 2.2 NET TOTAL ERP AID RECEIVED, AFTER TRADING SETTLEMENTS MADE WITH ‘CONDITIONAL’ AID AND DRAWING RIGHTS, 1 JULY 1948–30 DECEMBER 1951 AS A PERCENTAGE OF 1949 GNP

Netherlands France Italy United Kingdom (GDP) West Germany (1950 GNP)

A At pre-September 1949 exchange rates

B At post-September 1949 exchange rates

16.1 9.9 8.8 5.2 4.7

23.1 11.5 9.6 7.5 5.9

For method of calculation see A.S. Milward, The Reconstruction of Western Europe 1945–51 (London: Methuen, 1984), p.97.

to GNP by virtue of the very large proportion of its imports which was purchased from the UK. Otherwise, the direct contribution of Marshall Aid to national income is notably high in some cases: Austria, the Netherlands and France. Austria is omitted from Table 2.2 because difficulties with the data make the calculation less robust than for the other entries. However, the table shows how rapidly the contribution of total net aid received by this method of reckoning must have declined over the successive three and a half year period. As an upper bound it would represent an addition of 6.6 percent to Dutch GNP and a lower bound of

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4.6 percent over the period as a whole. For France it would have fallen between 3.3 percent and 2.8 percent, for Italy between 2.7 percent and 2.5 percent. It seems likely therefore that Austria and the Netherlands were the only two recipients in western Europe to which Marshall Aid made a really significant contribution to growth of GNP. Even there, it should be borne in mind that the average annual growth rate of national income in the Netherlands over the period 1945–60 was almost 5 percent. In France it was 4.4 percent. Analysis of the channels through which this financial contribution may have contributed to the growth of GNP has remained in a resolutely Keynesian mode. Marshall Aid has been typically measured as a contribution to investment, and investment as a contribution to growth. In one sense this is historically appropriate. The political justification of the Marshall Aid program embodied every assumption of Keynes’s economics on which Harrod–Domar growth models were to be constructed. In historical retrospect this probably had to be so. The political objectives of the US government, which underlay Marshall Aid, could not have been attained had Congress been confronted with an alternative form of economic analysis in which the Aid program would have appeared mainly as an invitation to lax monetary policy, prolonged balance of payments deficits and inflation. It was in fact all three. However, political reliance on Keynesian assumptions was justified, at least in the medium-term, by the low inflation rates that followed the end of Marshall Aid. The years 1952–58 recorded lower average rates of inflation across western Europe than any subsequent period of comparable length. The whole program was predicated on the concept of economic growth, albeit early and ill-defined. Until summer 1947 American postwar aid to Europe had been called, accurately enough, relief. It was not intended to go beyond that year. The loans to the UK and France were for a different purpose: to try to ensure their adherence to the international commercial framework set out in the Bretton Woods agreements. Marshall Aid, however, was conceived under another star, a future dominated by a long-run economic and social competition with the communist system. The capacity of capitalism to generate national and personal income growth more successfully than the communist alternative had to be demonstrated, otherwise western Europe would not survive as the western defensive bulwark of the United States. It followed, therefore, that it was on total factor productivity that dollar aid must have its effect. The persistence of Keynesian modes of analysis of Marshall Aid can in part be justified by the argument that it tests a major policy on its own terms. It is not a-historical. It asks whether Marshall Aid worked in the way that the US government hoped that it would.

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It was in this Keynesian context that Eichengreen and Uzan sought to dynamize the contribution of aid to the European economies’ growth.2 Their method was to write equations specifying three channels through which Marshall Aid could have operated: investment, current account and government spending, as well as a set of growth equations containing variables for other possible determinants of growth, and then to carry out a series of simulations using historical data, but setting Marshall Aid to zero in order to obtain a counterfactual value for GNP growth without Marshall Aid. The results indicate that the effect of Marshall Aid operating through any one of the three channels varied between small and insignificant. The largest effects were in Austria and the Netherlands, confirming my earlier arithmetical counterfactuals. However, when the growth equations were respecified to include the Marshall Plan allotments, not the receipts as used in Tables 2.1 and 2.2, in the growth equations, and the three channels – investment, current account and government spending – were made to interact, the contribution of Marshall Aid to economic growth appeared as more significant, at least for fiscal year 1949 (1 July 1948–30 June 1949). It would seem, therefore, that it was through other channels than providing additional cash for investment, for the current account, or for government budgets that Marshall Aid had this greater impact. The apparently larger contribution made by Marshall Aid in Table 2.3 should be taken as a contribution to growth in western Europe as a whole. If Eichengreen and Uzan had used receipts, rather than allotments, the individual additions to growth for the separate countries would read TABLE 2.3 ADDITIONAL OUTPUT GROWTH ATTRIBUTABLE TO THE MARSHALL PLAN, ALLOWING FOR INTERACTION EFFECTS (%)

Fiscal year 1949 (1 July 1948–30 June 1949) Austria Belgium Denmark France Germany Italy Netherlands Norway Sweden United Kingdom

7.50 1.50 2.00 2.50 2.25 3.50 4.75 0.00 0.25 1.00

Source: B. Eichengreen and M. Uzan, ‘The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR’, in Economic Policy, vol. 14, 1992 (April).

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quite differently. They would, for example, show a larger contribution to the growth of France. Through what mechanisms were these interactive effects, which seem to show the Marshall Plan as a more significant contribution to Europe’s growth than more direct measurements imply, obtained? Five suggestions can be found in the large literature on the Marshall Plan. One is that the plan founded Europe’s reconstruction on an implicit social contract between labor and capital whose specific intention and effect was to improve total factor productivity. A second more specific version of this hypothesis is favored by Eichengreen: that the international institutional machinery created by the Marshall Plan, notably the European Payments Union (EPU), created a framework for higher growth by institutionalizing this implicit social contract into the trade settlements machinery. A third is that quality of investment mattered more than volume. Investment, it can be argued, widened bottlenecks of resources, of transport and of technology at crucial moments in the recovery process and in so doing built a bridge between postwar recovery and Europe’s great boom. A fourth is the effectiveness of the conditionality on which Marshall Aid was provided. A fifth is the transference to western Europe of a politicosocial system in the United States directed mainly towards continued improvements in overall productivity. The idea that total factor productivity and GNP grew so rapidly after 1945 in western Europe because of a ‘social contract’ between capital and labor was originally popularized by Maier. He saw the social contract as a corporatist political deal between government, employers and labor, in contrast to the manifest failure to reach any such agreement after World War I. He called this ‘the politics of productivity’.3 This phrase has been extremely influential on a stream of writers who have identified the Marshall Plan as the vehicle through which this corporatist deal was introduced into European politics. Hogan’s meticulous study of American–British diplomatic relations during the Marshall Plan, for instance, sees the Marshall Plan as the export of the political model of the New Deal to western Europe.4 Ellwood sees the Marshall Plan as a force which fundamentally reshaped attitudes to politics and to productivity in western Europe.5 DeLong and Eichengreen are more tentative, but nevertheless suggest that the Marshall Plan influenced European labor movements towards increasing total factor productivity rather than redistributing income, and that in so doing it might have reduced the pressure of wage inflation on European economies, and that this, in its turn, might be one explanation for Europe’s 25-year uninterrupted boom.6 Generalization about a corporatist ‘social contract’ in Europe is an open invitation to historians to argue that on their particular patch it was

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not so. On one particularly important patch, France, that certainly does seem to have been the case. Wage demands were not moderated and the most powerful trade union was so opposed, often violently, to the Marshall Plan that its membership seemed to live in a different political system from employers and government. Maier’s hypothesis has led to interesting detailed studies of the use of lavishly-funded American trade union officials by the ECA to influence European unions towards accepting the American version of collective bargaining within a politico-economic ideology not fundamentally in conflict with that of employers.7 It would certainly not be justifiable to conclude from these studies that the politics of European trade union movements were changed into a simulacrum of those of their American counterparts. They seem to have remained strikingly different, most of them by the end of the 1950s still at least as interested in redistribution and in political power at the center as in confining themselves to collective bargaining within a system without purposively redistributive political machinery. The idea of the social contract, however, also inspired the argument of Eichengreen that the international institutions of the Marshall Plan were built on the social contract which Maier believed he had identified. Why, Eichengreen asked, was the settlements machinery of the European Payments Union so complicated and so favorable to debtors?8 Would not dollar convertibility of current accounts, conforming to the International Monetary Fund (IMF) definition of convertibility, have been more desirable? Convertibility, after all, was the goal of the UK Treasury and the preferred option of the US Treasury. It would have been attainable in 1950, Eichengreen argues, when most European balances with the United States became much more favorable. The United States chose otherwise and discouraged such a move. A foreign policy consideration influenced the US decision to back the merely transferable settlements machinery of EPU with Marshall Aid. This was American political support for European integration; EPU kept France and Germany together in an integrationist framework when the former still had no hope of establishing convertibility and the latter was scarcely born. When Germany from 1952 onwards would have been able to follow sterling into non-resident convertibility, the United States still discouraged any such British move, because France would have been left behind. But it is not on the US desire to persevere with European integration that Eichengreen lays weight, so much as on the generosity of the EPU settlements machinery to current account debtors.

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    A repeat of the debilitating struggle over income distribution that had characterised the post-World War I period was successfully averted. Workers agreed to moderate wage demands if management agreed to reinvest the profits they thereby accrued in productivity-enhancing plant and equipment. Each side agreed to trade short-term gains for long-term benefits so long as the other side agreed to do the same.9

The settlements mechanism of EPU reflected and sustained, he argues, these, often implicit, domestic political contracts. Dollar convertibility, rather than currency transferability between members as EPU provided, would, Eichengreen is able to demonstrate, have reduced European incomes by between 1 and 2 percent. That reduction would have been almost comparable statistically for OEEC member-states as a whole to there having been no Marshall Plan. EPU was almost certainly the most generous multilateral settlements mechanism for debtors which history records. In return for any surpluses within intrawestern European trade members received mostly EPU credits in European currencies transferable within the payments union. The working capital was made up of a dollar deposit allocated from Marshall Aid and quota-deposits by each member. The quota-deposit was reckoned as 15 percent of the total of each member’s visible and invisible transactions with all other members. Any surplus up to 20 percent of this initial quota would be covered only by the registration of credits on the other members. Only after a surplus reached 60 percent of the initial quota was repayment made entirely in gold/dollars. Between the 20 percent mark and the 60 percent mark a sliding scale of repayment moved progressively towards a higher gold/dollar share but still provided for much of total debt to be repaid by credits in transferable EPU currencies, not in freely convertible US dollars or in gold. The US and UK Treasuries regarded EPU as a serious impediment to eventually achieving convertibility under IMF rules, as did the Federal German Ministry of Economics. There were repeated demands by the Federal Republic, which after 1951 ran a commodity trade surplus with every EPU member, for the settlements to be hardened. The great immediate beneficiary was the most persistently large debtor, financially unstable, inflationary France. It may well be, however, that in terms of GNP growth rates, rather than short-run financial advantage, the German Federal Republic was as big a beneficiary of this debtor-favorable system as France. Membership in the EPU forced it to finance its own manufactured exports with soft EPU debts. Had they had to be paid for in gold/dollars their expansion

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would have been much slower. If there is such a thing as export-led growth, West Germany in the 1950s must be the strongest example. While GDP in the Federal Republic grew at an annual average rate of 7.8 percent over the period 1950–58, the value of manufactured exports showed an annual average increase of 19.7 percent. Over the whole decade, 1950–60, the contribution of exports of goods and services to West German GNP grew from 11.6 percent to 20.7 percent. In France, to complete the picture, it fell slightly. Eichengreen could well reply to French critics of his hypothesis that EPU represented the social contract, that if powerful communist unions took no account whatsoever of that idea it mattered less when at the level of the international economy the golden fetters of the 1920s were now fixed so loosely that governments in Paris could satisfy labor’s demands by a higher rate of growth of per capita income than in any earlier period for which we have records. Growth, however, was a long-term and a complex process; EPU only a short-term institution. Its settlement terms were hardening from 1952 onwards. Furthermore, the argument that EPU represented the postwar social contract in action has to contend with the view that it was far more shaped by the exigencies of American foreign policy than by any transfer of a New Deal corporatist model across the Atlantic. What was the New Deal of the 1930s? There seems no clear answer. In contrast, there is a very clear answer to the question: what was American foreign policy after 1947? In American eyes EPU was a step towards integrating western Europe in the interests of the United States’ own national security and a step towards the eventual implementation of the worldwide convertibility and multilateralism announced at Bretton Woods. Neither of these objectives awoke much enthusiasm in the breasts of European labor, nor in the political parties on which it bestowed its votes. The discussion over whether Marshall Aid, by eliminating resource bottlenecks, did permit the continuation of the high western European growth rate apparent between summer 1945 and 1948 is inextricable from the discussion over whether western Europe was facing a ‘crisis’ in summer 1947 on the eve of Marshall’s announcement of the American offer. It should be noted that if Europe was facing a crisis, only three western European countries, Austria, France and Italy, received immediate US aid. They did so under the Interim Aid program intended to fill the gap before Congress finally approved the full Marshall Aid program. Marshall Aid only started from the end of June 1948. The immediate cause of the rush to announce the Marshall Plan, before indeed there actually was a plan, was not the weakness of investment, demand, employment or output in western Europe. All were high and rising. It was the combination of widening payments deficits and

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rapidly disappearing gold/dollar reserves in some countries, notably France, the Netherlands and the UK, and the much more apparent conflict with the communist system. What could the Bretton Woods agreements mean, and what would the chances of successful competition with the communist system be if major western European countries had to contemplate even more drastic, and longer-term trade and exchange controls than already existed in 1947? Marshall Aid had as its immediate purpose to facilitate dollar imports into western Europe. The recovery of postwar European output to prewar levels, and in some cases beyond them, could not continue, US officials argued, in the face of more severe balance of payments constraints, and they also believed the signs that it would not do so to be already apparent by June 1947. In a trading world without currency convertibility and only very restricted transferability the particular quality of Marshall Aid was that it allowed imports in the scarce currency, the US dollar. Borchardt and Buchheim, although their statistical method has not been left uncriticized, have been able to show that the sudden ability to be able to purchase and hold much larger stocks of cotton, for example, does seem to have improved the stability of the trend along which output of cotton goods grew in the West German textile industry.10 Cotton, being almost wholly imported into western Europe from the United States, would be the obvious example of a resources bottleneck. Close inspection of the foreign trade returns for all the aid recipients indicates, however, that resource bottlenecks would have been important had no extra dollars been made available, but that western European economic policies would not necessarily have had to change because of them.11 Fuel and cotton dominated Marshall Aid financed shipments of raw materials to western Europe. Between them they amounted to 29.5 percent of the total value of those imports. All other raw materials amounted to less than 8 percent of the total. Most raw material imports into western European manufacturing were not bought in dollars. More typically, they were purchased in sterling from Sterling Area countries or were found within the overseas territories of European states. Furthermore, as coal output recovered in Germany the importance of American coal shipments fell steeply. Dominant in 1948, in 1950 they were insignificant. If, however, we look only at the first full calendar (not fiscal) year of Marshall Aid, from 1 January 1949, it is food which constitutes the biggest single item in Marshall Aid-financed imports. An exact reckoning is unachievable, but food in that calendar year was at least one-third of the value of all Marshall Aid-financed imports. In 1950 it was roughly 27 percent. This was only to be expected, because North America was,

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with the exception of Australasia, where surpluses were much smaller, the only source of food surpluses in the world. The recovery of western European agricultural production to its prewar levels took five years from the end of the war. Was food a resource bottleneck? Would Europeans have been too hungry without Marshall Aid to sustain the growth of output? Could they have foregone the dollar food imports which Marshall Aid allowed and still sustained the same level of imports of capital goods and raw materials as they were running in the first six months of 1947? A strictly quantitative answer is that, if all the west European countries which accepted Marshall Aid had held food imports at their level as it existed on the eve of Marshall Aid for the duration of the whole program, all except France and the Netherlands could have imported the same level of capital goods and raw materials by spending their dollar earnings. This assumes the continuation of aid to Western Germany under the GARIOA program, most of which was spent on food imports. There is insufficient data to answer the question for Austria, which may well have been in a similar situation to France and the Netherlands. Hypothetically, the period of time over which the equivalent value of dollar capital goods imports to those that were actually purchased could have been bought would have had to be extended in France by about three months and in the Netherlands by about a year. Leaving Austria aside, all other Marshall Aid recipients would not have had to cut back on dollar food imports. While this does not demonstrate conclusively that food imports were not a bottleneck, it casts a doubt over that possibility. Average rations in West Germany, Italy and Austria in 1946–47, when people could get hold of them, were below the estimated minimum calorific value to sustain manual work. Furthermore, with rapid growth and rising expectations would it have been politically possible to suppress food consumption levels until 1951 in order not to run out of dollars for capital goods imports? Perhaps in a world where competition with the communist system became central to policy it would not. But that is a political judgment; food was not a resource bottleneck in 1947 in the sense in which people would have been too hungry to go on working. Work gave access to black market supply, which in the three countries with the lowest calorific consumption per capita was as important as ‘official’ rations – a fact which also implies that the official figures for the calorific value of daily consumption are almost certain to be, for the active population, underestimates. DeLong and Eichengreen argue that resource shortages were not, however, merely due to foreign exchange shortages.12 Postwar policies in

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western Europe had, they assert, induced a ‘marketing crisis’. Prices were controlled at levels so low that goods were hoarded. The shortages of food were caused by the refusal of farmers to bring their output to markets. The faltering in the growth of manufactured output observable in some countries in spring 1947 had, they argue, similar causes. Policy was creating ‘shortage economies’. How useful is this concept of the ‘shortage economy’ to understanding western Europe’s situation in 1947? The only evidence for hoarding that DeLong and Eichengreen offer is the wheat shortage in France in autumn 1947 when the bread ration had to be reduced. There is a case for blaming this on an error of central government pricing policy. In an effort to reduce the area sown to wheat, which had been expanded by German occupation policy during World War II, the centrally-set purchase price to farmers was reduced in 1946. The objective was laudable: a step towards market efficiency and away from the protectionism of the 1930s. The outcome was disastrous. The price set was far too low relative to the price of other grains, including fodder grains for livestock, and too low also relative to meat and dairy produce prices. The area sown to wheat over the 1946/47 winter was only 65 percent of the average of the period 1934–38. The problem was then compounded by what is still western Europe’s worst winter of the century, sending France in search of dollar wheat imports. Here, certainly, is a fine example of exactly those same central planning defects that were proliferating in eastern Europe at the same time. But the purpose of central planning in this case was quite different; it was intended as a step towards a more open international market. And there is no evidence that French farmers were withholding wheat from the market in autumn 1947, only that they did not have enough to offer because they were offering other things instead. The only good evidence of hoarding goods in western Europe in 1947 and 1948 comes from occupied Germany. It has usually been cited as evidence against the argument that the Marshall Plan had a dramatic impact on the German economy, but in fact it supports the arguments of Eichengreen and DeLong. Abelshauser demonstrated an increase in the output of manufactures in the American and British occupation zones of Germany from the end of the war until the 1948 currency reform. The increase in goods reaching the market did not correspond to the increase in output, but the phenomenon was widely reported that from the day following the currency reform there was an influx of goods into shops which did not abate. For this the only feasible explanation was that they were part of earlier output increases not marketed or diverted into black markets.13 But where else in western Europe was the currency so worth-

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less that it was replaced by cigarettes? Where else was there no effective central bank or central government? Physical controls, notably on imports, did reduce the quantity of goods coming onto markets relative to the postwar increases of purchasing power in most western European countries and this can fairly be described as suppressed inflation. In the UK physical controls diverted manufactured output into exports. Suppressed inflation, while it restricted consumption, did not reduce the supply of domestically produced food to markets. On the contrary, all over western Europe by the start of the Marshall Plan food prices, in response to worldwide food shortages, whose fundamental cause was the damage done by the war to world agriculture, were rising rapidly as farmers were incorporated into postwar political coalitions. High food prices, much higher than in North America, were already on their way to generating food surpluses. Governments relaxed physical controls over the resource supply in the domestic economy according to their particular political persuasions, not because Marshall Aid made it possible. In the UK, the biggest receiver of Marshall Aid, food rationing outlasted the Marshall Aid program. The argument at that point leads logically into an assessment of the value of conditionality in forcing the interactions which were responsible for Marshall Aid’s contribution to economic growth in Europe. Roughly, with much overlapping, the sequence of Marshall Aid conditionality was as follows. In the first year it was for relief and to allow for continued dollar imports without increased trade and currency controls. Of the two most onerous conditions, one was the insistence on cooperation within a European international organization which would itself work with ECA in enforcing a rational utilization of aid between its members as a whole. Marshall Aid was to be for ‘Europe’, not for a set of separate competing national economic objectives. The other was that each aid recipient must deposit in the national bank the equivalent in national currency of all grants received. These deposits, mostly coming from public or private sales of goods imported under Marshall Plan license, could only be used with ECA approval. Legislation setting up the Marshall Aid program specified for what purposes that approval could be given. Five percent of these so-called ‘counterpart funds’ was for the United States’ own administrative purposes. For the remainder three purposes were specified: fiscal and monetary stabilization; the extension of production capacity; and any objective that supported recovery. By the second year of the program the main use of conditionality became that of levering interwestern European trade and payments from bilateralism to multilateralism. At first this was through the allocation of ‘conditional’ Marshall Aid, later through the allocation of ‘drawing

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rights’. When countries received aid on which trading partners could draw to pay for imports from the original recipient it was the importer who had to make the counterpart deposit on its own national bank when the drawing rights were claimed. Already, however, in 1950 conditionality sought to impose a third condition: financial stability. It is on this third element of conditionality that DeLong and Eichengreen place great emphasis. Having sustained growth and then achieved multilateralism in settlements, the United States successfully used its leverage, they argue, to slow down the inflationary force behind the high reconstruction growth rates. Their argument has a further implication: sequential conditionality of this order could have been equally effective in a second Marshall Plan for eastern Europe. There are many difficulties in determining how strictly the conditionality of the terms was, or even could be, enforced. The original conditions of the Marshall Aid bilateral agreements to be signed by each accepting country were rejected, most emphatically where they demanded some US control over dollar exchange rates of European currencies. The United States was not providing for the most part for the poor or the weak, but for countries on which its national security in the widest sense was thought to depend, many of which were on the point of also becoming its military allies. Their bargaining power, as the history of the negotiations showed, was strong and the bilateral agreements once signed, American leverage over the recipients was always diminishing. Their economic position improved rapidly and for most of them dollar aid as a proportion of GNP shrank as rapidly. The common European organization, OEEC, which the United States demanded as one condition of the Marshall Aid program remained, in spite of American wishes, merely cooperative, when, that is, its cooperative activities were not thwarted by the fierce national struggles for shares of the available cash. The history of France, which received the second largest share of aid over the program’s duration, is instructive. The policy of the Department of State to ‘integrate’ western Europe could have no meaning without French participation. Indeed, before the close of the Marshall Aid program the State Department had to make a direct appeal to France to come forward with its own program of integration to substitute for the unsuccessful American efforts associated with the Marshall Plan. By then the United States was committed to keeping ground forces in Western Germany for a further 19 years, making French cooperation even more important. Any exaggerated report from Paris that the centrist coalition governments would be replaced by either communist or Gaullist majorities was a leverage which France could exercise over

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Washington as powerful as that of the United States over Paris.14 The effective power in this kind of bargaining lay as much in the hands of the weak, if they were important enough to US policy, as in the hands of the strong in Washington. A similar story about American–Italian relations under the Marshall Plan has been convincingly told, in which American policy in Italy had no choice but to support the policies of the indispensable Christian Democrats.15 It is difficult to find examples where either French or Italian governments were prevented by conditionality from doing whatever they wanted with Marshall Aid.16 Esposito has examined in detail for France and Italy the question of whether US control of the counterpart funds and the US administration’s many other ways of putting pressure on aid recipients did lead to greater financial stability. In France, she concluded, the United States had no choice but to support the centrist coalitions.17 Similarly, in Italy the Pella government had to be supported because it defended the interests of the essentially pro-American middle class. Supporting these coalitions meant releasing counterpart funds to sustain French and Italian economic policies, even when these displeased the ECA. Italian governments produced financial stability from this potentially inflationary situation by clearing the use of their counterpart funds for investment, especially in southern Italy, as ECA officials wanted them to, and then not spending the money, in spite of public US criticism. French governments spent the counterpart funds on investment, but in conformity with US pressures presented an appearance of trimming public expenditure, when financial stability became the condition for aid. They did this by cuts in the public budget. However, the official budget surpluses of 26.1 billion francs and 49.3 billion francs in the years 1948 and 1949 would have been deficits if the extraordinary budget which included expenditures on investment by the Modernization Fund were taken into account. In 1948 there would have been a deficit of 2.2 billion francs and in 1949 of 4.0 billion francs.18 Genuinely balanced budgets were achieved only in 1964. An overall balance of payments surplus on current account for metropolitan France and its overseas territories was reached only in 1954, for two years only, and it depended entirely on a level of American aid absolutely and relatively much higher than Marshall Aid. France’s commodity trade deficits, the result of sustained high levels of uncovered public expenditure, dominated the pattern of settlements in EPU and thwarted all efforts towards comprehensive trade liberalization between OEEC member states until the late 1950s. It can not be argued that American pressure on France brought financial stability. It could better be argued that that was not, after all, what the United States primarily wanted from France.

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As for the other objective of conditionality, multilateral payments settlements between aid recipients, that was achieved by reserving so large a share of the Marshall Aid allocation for fiscal year 1951 for this purpose that it did set the potential recipients, especially the UK and France, scrabbling to invent something that would qualify them for the dollars. Without the dollar contribution to its working capital EPU could not have functioned. However, of the 600 million dollars of the Marshall Aid appropriation set aside to further trade and payments liberalization, only 350 million dollars went into the working capital of EPU. The limits which bargaining with powerful partners placed on American leverage through conditionality were marked by the 150 million dollar slice of that appropriation which had to be set aside to guarantee any British gold losses incurred in allowing sterling to be used in EPU multilateral settlements under the same rules as the other currencies. Without sterling’s inclusion EPU would have fallen well short of America’s aims. Nor is it the case that conditionality, although it did lead to multilateral settlements, led to the liberalization of European commercial policies in other respects. Import quotas and, as a second defence, protectionist tariffs lasted well beyond the end of the Marshall Aid program, restricting trade between the larger west European economies. The extent of trade liberalization under Marshall Plan auspices has been greatly exaggerated by most authors, searching for explanations of western Europe’s high growth rates. The import quotas which had spread their barriers across intra-European trade in the 1930s probably reached their maximum restrictive effect in 1948–49. From 1950 the OEEC Trade Liberalization Program was intended to widen and eventually eliminate quotas. Tariffs were the province of GATT. On a wide range of imports between 1945 and 1955 tariffs were suspended, however, because quotas kept out goods irrespective of any global price differences related to differences in total factor productivity. Widening or removing an import quota within the OEEC Trade Liberalization Program thus usually had the effect of reactivating an inactive tariff. GATT’s effectiveness faded quickly after 1950. In western Europe it was mainly the smaller countries, for which tariff bargaining was an unpropitious activity, which wanted tariff reductions on intra-European trade, while the larger countries, committed in OEEC to weakening the force of quota restrictions, had no intention of lowering their tariffs at the same time. Between the reductions made in GATT in 1950 and the implementation of the 1957 Treaty of Rome from the start of 1958, British, French and Italian tariffs remained mostly unchanged. The United States was also protectionist. The OEEC Trade Liberalization Program was in fact a British initiative deliberately put

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forward in order to block any common European program of tariff reduction, lest it lead in the direction of a customs union and a federation and thus a reduction in United Kingdom tariffs and in the extent of discriminatory preferences on trade with the Commonwealth. British tariffs and preferences were held in reserve for an eventual major tariff bargain with the United States. It did not come in the 1950s. The OEEC program did widen and remove many import quotas in the first year of its operation. But in November 1951 the UK reimposed almost all its earlier quotas on imports from OEEC member-states and added some previously non-existent ones. In February 1952 France followed Britain’s example. It was only in 1955 that import quotas on intrawest-European trade were energetically removed, although much less so on French imports and not at all on agricultural trade if there was no other protective device which made them unnecessary. Quotas on imports from the United States did not begin to be dismantled until 1961. It was evidently not the Marshall Plan’s contribution to trade liberalization which accounted for the remarkably rapid expansion of intrawest-European trade in the 1950s. Reichlin in an otherwise carefully considered contribution writes, . . . while the degree of trade liberalization achieved over the period when the EPU was greasing the wheels of intra-European trade and finance varied across countries, overall results were impressive: after three months, 60 percent of intra-European trade was liberalised; this figure reached 84 percent in April 1955 and 89 percent in June 1959.19 These percentages are merely OEEC index numbers for purposes of cross-country comparison. They give no information about the total percentage of intra-west European trade value which had been freed from the restriction of physical controls by 1955. In April 1955 it would not have looked very different as a percentage figure from that of, for example, 1936.20 The liberalization of intra-western European trade was mostly a phenomenon of the 1960s and its origins are to be found in a western European prosperity so long-sustained that trade liberalization ceased to threaten it and became seen as a necessity for its continuation. There is, however, a longer view within a wider perspective which can be taken of the impact of the Marshall Plan on intra-European trade. Eichengreen’s work and my own eventually converge by different routes on a very strong shared conclusion; that it is ultimately through its part in the construction of a more durable and efficient international order after 1948 than after 1921 that the Marshall Plan made its contribution, not just to recovery but also to growth. Within the EPU it did not need

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trade liberalization to create trade expansion. Primarily it needed a payments framework within which West German exports could grow. EPU provided that: a major contribution to the international economic order compared to the framework not provided by ‘reparations’ after World War I. Outside the bilateral, lender–borrower, relationship which it established between Germany and France, EPU also sustained the imports of investment goods from Germany on which depended the dynamic industrialization of other western European economies; Austria, Denmark, Italy, the Netherlands, Norway, Portugal. The link between investment, imports and growth over the period 1945–60 does seem discernible, the correlation between investment ratios and imports of capital goods and steel even more so.21 If it was industrialization which was a major force for GNP growth in western Europe over the whole period from 1945 to 1968, there is a plausible case for saying that it would not have been possible in the initial period of recovery without EPU. By 1955 West Germany had become the main supplier to, the biggest market for, and also the most rapidly-growing market for, almost every OEEC member-state. By that date two-thirds of the value of world capital goods exports was made up of American and German exports, a return to the interwar pattern. Increases in capital goods imports into western European economies correlated closely with increases in investment. Without a settlements mechanism which obliged the country running a trade surplus with every other member of EPU to finance its own exports with what were only IOUs on the settlements mechanism, only to be effectively repaid within two years or longer, prevailing levels of investment and purchases of capital goods could not have been sustained across western Europe. This was not because the dollars with which to buy these imports would not have been available in sufficient quantity; it is easy to show that American and British capital goods output and exports could not have expanded rapidly enough to come anywhere near satisfying this level of demand. What seemed bad business to the German Ministry of Economics seemed good business to the very large number of medium-sized German machine and machine-tool producers. They got their money straight away in their own currency, leaving their government to beat vainly, and mistakenly, on diplomatic tables demanding a larger share of repayment from importers in gold/dollars. Had they succeeded, German exports would have grown more slowly. It was not conditionality, although that had its uses, which created an international order in which the interactions which seem to have made more of Marshall Aid than its simple quantitative contribution to par-

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ticular macroeconomic entities became effective. Rather, it was the broad area of common agreement between donor and recipients about the objectives of domestic and international reconstruction. In detail, they did not have enough in common to reach agreement, other than the obvious fact that a very hard, but not impossible, political choice faced recipients if they rejected aid. There was some general idea, of a ‘social contract’, but it was no more specific than a common sentiment that domestic policies in the interwar period had led to an instability too great to be accommodated in a viable international order. When it came to turning sentiment into policy there were as many different forms of ‘social contract’ as members of OEEC. But at the higher level of international strategy the band of disagreement was much narrower. What the Marshall Plan created, and it was its intention, was an entity called ‘The West’, with a set of common practices and, where necessary, rules. Its purposes were military security, social security based on economic success, and social and political cohesion. In all those areas it necessarily had to offer both a better present and a better future than the communist system. On that, participants in the plan did not disagree. From the plan’s announcement, there was a shaping force to the international order and its institutions, something vividly absent after 1918. This perception presents two strong temptations. One is to claim that the intense argument about Marshall Aid is narrow and misguided, because American aid was an ongoing system whose broad strategic objectives did not change. The difficulty of quantifying Marshall Aid, because it was both co-existent with and replaced by Mutual Security Aid after 1950, has been noted. Why separate it, if all aid ultimately had a similar purpose? Detailed analyses of US Mutual Security Aid programs are lacking, but no program subsequent to Marshall Aid had the same large political ambitions nor the same degree of political representation in so many European countries. Military aid, however similar some of its objectives, was provided for a much more narrowly defined material and political output. In all probability research will end in denying that American aid to Europe after 1948 was a continuous system. This temptation therefore should be spurned. The second temptation is to assume that the creation of ‘The West’ was in itself a cause of economic growth in western Europe, because it made easier, or inevitable as some writers imply, the transference of a set of American values into European societies of which the result was an increase in total factor productivity. Closing the gap in output per head between Europe and the United States, it is frequently assumed, was a matter of adopting American practices. During the Marshall Plan considerable sums of aid were spent in encouraging the transfer of technology,

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managerial practice, and cultural attitudes eastwards across the Atlantic. Killick’s recent study is a strong reassertion of this assumption. Citing the opinion of the Director of ECA, Paul Hoffman, that more important than what Europeans learned about technology in the United States was what they learned about America as the land of good wages, he adds: The entertainment media and the educational propaganda to a considerable extent acted together, collectively projecting the same text. The consequent increased demand for consumer goods and improved life-styles then operated together with the new technology, and improved organization to revolutionize European production and living standards.22 While it can be accepted that the level of overall productivity in any society is determined by the sum of its complex social, economic, and even political ideas and practices, because they all in some proportion contribute to shaping patterns of investment, work and decision making, that does not mean that it is improved by osmosis. Europeans neither caught higher total factor productivity through contact with infectious Americans nor through being shown American films. Many describable, even tangible changes have to happen when growth is so rapid. These seem rarely to be specified, described, or analyzed in the existing literature. Visits by ‘productivity teams’ of European businessmen under Marshall Plan auspices to see higher total factor productivity in action on the factory floor in the United States have proved difficult to link to any actual change in western European production methods. Claims that some American model of capitalism was grafted onto Europe read vaguely. Words like ‘Americanization’, ‘modernization’, ‘consumerism’, ‘convergence’, pour across the page in discourses which post-modernists will have no difficulty in tricking out in showier ambiguities. Much more specific comparative work is needed to demonstrate the precise point at which any of these ‘-ations’ and ‘-isms’ improved European growth rates. ‘Americanization’ is not a helpful concept when used to describe universal trends, such as an increase in cars as by Berghahn, to describe changes in company management and in managerial education in Germany that strongly resembled earlier changes in the United States.23 But even then, rather than coinciding with Berghahn’s analysis of the auto industry, there is no link to prove that these were translated into higher productivity, ownership and the introduction of flow production on the assembly line in car factories. The final inability of quantitative analyses precisely to demonstrate through what mechanisms the interactions of Marshall Aid may have led to higher European growth rates is evident, but even a dip into the shallow end of the present pool of liter-

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ature on ‘Americanization’ will send the intelligent enquirer scurrying back with relief to their dry numeracy. Yet, if the overall, ongoing impact of the Marshall Plan on western Europe’s economic growth is to be assessed, that assessment has to decide between two propositions. One is that American aid did build a bridge between postwar recovery and sustained growth. The other is that Europe’s growth was autonomous in the sense that its springs were almost wholly European and that without the Marshall Plan it would merely have been retarded a little in Austria, France and the Netherlands. Which is nearer to the truth? Discussion of the Marshall Plan has gone through a not untypical cycle of historical judgment. It began with a propagandistic emphasis in which the United States was presented as having rescued a hungry and collapsing western Europe from a disastrous crisis, a consensus from which the only dissenters were so extreme as to have no good case to argue. It passed through a stage in which a more exact quantitative enquiry reduced its economic impact to that of a useful, but not necessarily indispensable, contribution to an uninterrupted and powerful European recovery which led on into Europe’s greatest boom. While the quantitative conclusions have not been effectively challenged in their dimensions, it has been repeatedly suggested that they do not, and can not tell the whole story. They do however point to where the story needs to be completed. For that completion we are still waiting. In the interim some conclusions have become clear. One is that international donors and lenders do well to give and lend to the rich and the skilled. That, no doubt, is the way to get speedy ‘interactions’ from relatively small sums of aid and thus get quickly to a result which very few doubt was a notable success. A second is that the convergence of so many rich and powerful societies in a broadly agreed international strategy presents historians with an exceptionally complicated task of explanation, because the strands of influence between these societies were multiple. Explanations are not likely to get any better as long as they suppose that as far as productivity and growth were concerned the only flow of influence that mattered was from America. That is surely to regress to the simplification of the 1950s, that all that was essentially necessary was to copy from the country at the top of the per capita income league table. A third is that the diplomatic conformation, the Cold War, was crucial in leading to a broadly common set of strategic objectives whose existence overcame the weakness of conditionality. The final one is that although the anticipated forcefulness and thus the terms of conditionality might well both have been much stronger in any second Marshall Plan for the eastern bloc countries after 1992, this would not have improved its chances of success.

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Notes 1. For contemporary exaggerations, H.S. Ellis, The Economics of Freedom: The Progress and Future of Aid to Europe (New York: Harper, 1950). 2. B. Eichengreen and M. Uzan, ‘The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR’, Economic Policy, 14 (April 1992). 3. C.S. Maier, ‘The Politics of Productivity: Foundations of American International Economic Policy After World War II’, International Organization, 21 (1977). 4. M.J. Hogan, The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947–1952 (Cambridge: Cambridge University Press, 1987); Hogan, ‘American Marshall Planners and the Search for a European Neocapitalism’, American Historical Review, 90 (1985). 5. D. Ellwood, Rebuilding Europe; Western Europe, America and Postwar Reconstruction (Harlow: Longman, 1992). 6. J.B. DeLong and B. Eichengreen, ‘The Marshall Plan: History’s Most Successful Structural Adjustment Program’, in R. Dornbusch, W. Nölling and R. Layard (eds), Postwar Economic Reconstruction and Lessons for the East Today (Cambridge, MA: MIT Press, 1993). 7. A. Carew, Labor under the Marshall Plan: The Politics of Productivity and the Marketing of Management Science (Manchester: Manchester University Press, 1987); F. Romero, The United States and the European Trade Union Movement, 1944–1951 (Chapel Hill, NC: University of North Carolina Press, 1992). 8. B. Eichengreen, ‘The European Payments Union: An Efficient Mechanism for Rebuilding Europe’s Trade?’ in B. Eichengreen (ed.), Europe’s Post-War Recovery (Cambridge: Cambridge University Press, 1995), pp.169–95. 9. Eichengreen, 1995, p. 187. 10. K. Borchardt and C. Buchheim, ‘Die Wirkung der Marshall Plan – Hilfe in Schlüsselbranchen der deutschen Wirtschaft’, Vierteljahrshefte für Zeitgeschichte, vol. 35, iii (1987); Borchardt and Buchheim, ‘The Marshall Plan and Key Economic Sectors: A Microeconomic Perspective’, in C. S. Maier and G. Bischof (eds), The Marshall Plan and Germany (Oxford: Oxford University Press, 1991). 11. A.S. Milward, The Reconstruction of Western Europe 1945–1951 (London: Methuen, 1984), pp.105–9. 12. DeLong and Eichengreen, ‘The Marshall Plan’. 13. W. Abelshauser, Wirtschaft in Westdeutschland 1945–1948 Rekonstruktion und Wachstumsbedingungen in der amerikanischen und britischen Zone (Stuttgart: Deutsche Verlags-Anstalt, 1975). 14. G. Bossuat, La France, l’aide américaine et la construction européenne, 1944–1954, 2 vols (Paris: Imprimerie Nationale, 1992) traces Franco-American negotiations in detail. Bossuat, L’Europe Occidentale à l’heure américaine. Plan Marshall et unité européenne, 1945–1952 (Brussels: Editions Complexe, 1992) comments more generally on them. 15. J.L. Harper, America and the Reconstruction of Italy, 1945–1948 (Cambridge: Cambridge University Press, 1986). 16. F.M.B. Lynch, France and the International Economy. From Vichy to the Treaty of Rome (London: Routledge, 1997) shows the relationship of all forms of US aid to French international economic choices. There is no comparably comprehensive study on the influence of aid on Italy’s economic policies, but see C. Esposito, America’s Feeble Weapon. Funding the Marshall Plan in France and Italy, 1948–1950 (Westport, MA: Greenwood Press, 1994) which, while mainly confined to the issue of the use of Marshall Aid counterpart funds, does nevertheless provide a useful comparison. 17. C. Esposito (1994), pp.29–82. 18. Overall budget result from INSEE, Le Mouvement économique en France 1949–1979 (Paris: Imprimerie Nationale, 1981). Official budget result from INSEE Annuaire Statistique, vol. 58 (1951) (Paris: Imprimerie Nationale, 1952). Balance of current account from INSEE Le Mouvement économique en France de 1944 à 1957 (Paris: Imprimerie Nationale, 1958). 18. L. Reichlin, ‘The Marshall Plan Reconsidered’, in B. Eichengreen (ed.), Europe’s Post-War Recovery (Cambridge: Cambridge University Press, 1995), p.53.

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20. For an explanation of the index numbers and an account of the Trade Liberalization Program, A.S. Milward and G. Brennan, Britain’s Place in the World, 1945–1960. A Historical Enquiry into Import Controls (London: Routledge, 1994). 21. Eichengreen and Uzan (1992) calculate an increase in investment of 0.7% of GNP with one year’s lag for each allotment of Marshall Aid equivalent to 2% of GNP. To re-emphasize, allotments were not receipts. Over the Marshall Plan as a whole imports of capital goods financed by Marshall Aid correlate with increases in investment ratios (Milward, 1984). 22. J. Killick, The United States and European Reconstruction 1945–1960 (Edinburgh: Keele University Press, 1997), pp.167–8. 23. V.R. Berghahn, The Americanisation of West German Industry, 1945–1973 (Leamington Spa: Berg, 1986).

3 The Economic Effects of the Marshall Plan Revisited DAFNE C. REYMEN

This chapter aims to contribute to the literature analyzing the economic effects of the Marshall Plan, or European Recovery Program. The study of the plan’s institutional framework is taken as a starting point to identify those effects. The study of that framework casts doubt on a few commonly held beliefs about the European Recovery Program. In particular, due to the financial and organizational structure of the program, the aid actually received by each of the participating countries differed substantially from the aid allotted. It is nevertheless the latter that traditionally has been used in assessing the effect of the plan. Moreover, knowledge about how the plan operated institutionally allows us to formulate hypotheses on how it operated economically. The large discrepancy between allotments and aid actually received implies the need for reassessing the impact of the plan. The second part of the chapter thus examines the plan’s impact, using the ‘net inflow of funds’ as the empirical measure of aid for each country. It tries to estimate the plan’s contribution to growth, which is measured by the outcome of simulation experiments based on an econometric analysis similar to that of Eichengreen and Uzan (1992). Contrary to their findings, we cannot conclude that the Marshall aid was a substantial direct stimulus to growth. More specifically, the chapter confirms their results for two countries, but shows that a similar conclusion cannot be drawn for most countries. Europe-wide effects, however, may still have been significant. Introduction In view of the economic recovery of eastern Europe today, the Marshall Plan is subject to renewed interest. This aid program is often invoked as an important factor in the spectacular reconstruction of western Europe after World War II. Although the Marshall Plan, or European Recovery Program, is said to be one of the most successful programs of foreign policy, its economic

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effects for each of the recipients have been subject to debate. Over the past 50 years, the literature has put forward differing points of view on the contribution of the Marshall Plan to the economic growth of postwar western Europe. This chapter will shed new light on this discussion, stemming from understanding the institutional framework of the program. In particular, the last generation of authors engaged in this debate claim that the Marshall Plan did provide an important direct stimulus to growth, but not by operating through the traditional channels of increased investment on government spending. It solved a crisis of confidence in the market mechanism. Eichengreen and Uzan (1992) conducted an econometric analysis to sustain this claim and to isolate the impact of the plan in terms of additional growth for the recipient countries. The first step in assessing the economic impact of such an aid program is to determine the scope of the aid in quantitative terms. Although some authors have recognized that apportioning the total of Marshall aid received by each country is a difficult task, no attempt has yet been made to identify the exact net amount of aid received by each country. Indeed, to assess the magnitude of the plan, one needs to scrutinize its institutional framework, as will become clear from the discussion below, by studying the financial and organizational structure of the plan. This analysis casts doubt on allotments (dollars transferred from the United States to Europe per country and per fiscal year), used in all previous works, as the measure of aid received by each country. This chapter also explains why the aid actually received differs from the aid allotted and proposes a new measure of aid received compatible with the institutional framework of the plan. Consequently, that new measure of aid received will here be called the net inflow of funds. Second, knowledge about how the plan operated institutionally allows us to formulate some hypotheses about how it could have operated economically. More precisely, this chapter shows, starting from the institutional framework, that a) the Marshall Plan cannot have solved the food crisis of Europe in 1947, contrary to what some previous scholars have advocated, and b) that the Marshall Plan operated by relieving fiscal constraints. Third, given the more appropriate measure of aid received for each country put forward by the financial and organizational structure, an econometric analysis, similar to that of Eichengreen and Uzan (1992), is also conducted below (see pp.100–5) to re-examine the plan’s contribution to growth. The results of the econometric analysis diminish the direct association advocated herein between the Marshall Plan and postwar growth.

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The chapter argues that the finding of considerable additional growth thanks to the plan solving a crisis of confidence – a claim confirmed for France and the UK – cannot be generalized to the rest of Europe. A striking counterexample is Belgium. Moreover, it will be shown that in the two above-mentioned countries, there was another (institutional) reason that accounts for the effectiveness of the Marshall aid. Last but not least, I point to the fact that three generations of scholars who have studied the impact of the Marshall Plan have failed to recognize that it was in reality embedded in a complex system of postwar aid programs. The European Recovery Program did not operate as an isolated plan of assistance. This fact will be explored in separate research. The second section points to the current interest for the Marshall Plan in the political arena. The third section discusses some aspects of the literature studying the plan that are relevant for this paper. The fourth and fifth sections introduce the reader to the institutional framework of the plan and provide the building blocks of the paper. The sixth section explains the lessons we can draw from that framework and section seven conducts the econometric analysis, the results of which are then discussed in the next section. The ninth section provides suggestions for future research, and the last section concludes. Renewed interest in the Marshall Plan On 5 June 1997, it was 50 years ago that George C. Marshall, then Secretary of State for the United States, delivered a speech at the commencement exercises at Harvard University. That discourse would be at the origin of a plan that injected approximately 10 billion dollars into postwar Europe from 1948 to 1951. Although the audience present at the speech did not capture all of its full historical significance, immediately afterwards the State Department started working vigorously on the proposal.1 Marshall’s name has been attached ever since to the aid program that came into being as the European Recovery Program (ERP) by law in April 1948, through Title I of the Foreign Assistance Act. The 50th anniversary of the plan has brought it back into the spotlight with all kinds of commemorative celebratory events. Frequently the plan is invoked in relationship to the current eastern European economies in transition. Sometimes the Marshall Plan has been cited as an example-to-follow for aid provision for those newly emerging democracies, and sometimes the relationship is invoked in a more subtle way. At the Netherlands Celebration of the 50th anniversary in May 1996 (during the EU–US summit) Wim Kok, EU president,2 pleaded expli-

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citly for a new Marshall Plan for central and eastern European countries, mainly to restore and complete their infrastructure. On 16 July 1997, Jacques Santer, president of the European Commission, proposed the ‘Agenda 2000’.3 Invitations to start negotiating about their adherence to the European Union were addressed to a few eastern European economies.4 At the same time the European Union designed a pre-joining strategy, in part also to comfort the so-called ‘failed’ candidate members. The assistance within the framework of this strategy and the integration of the first new members in 2003 would amount to approximately 80 billion dollars for the period 2000–2006. Jacques Santer, president of the European Commission, called it ‘a real Marshall Plan’.5 Since the Marshall Plan is hailed as one of the most well-known constructs of foreign policy, and at the same time one of the greatest successes of foreign policy, it is probably not surprising that it is invoked by many politicians in the light of the challenges faced by the central and eastern European countries. Those countries are at present building (or even rebuilding) their infrastructure, market institutions and economies. Although a parallel can be drawn, the initial conditions are very different in these two cases, and thus the possible positive economic outcome of a generous aid program is not at all ensured. Moreover, over the past five decades, scholars have been debating whether the plan provided for a real economic stimulus at all. They have not reached a consensus about the role of the plan in the reconstruction and subsequent remarkable growth of western Europe, nor the channels through which it had its main effects. Literature Overview Given the incredible growth performances of the western European countries in the two decades after the war, the existence of causality between the Marshall aid and these growth performances has been examined extensively in the economic literature. In particular, its economic effects have been debated vigorously. The literature has put forward differing points of view on the importance of the plan for the economic growth of postwar western Europe. For a long time the Marshall Plan was explained as a response to an economic crisis so severe as to carry the inherent danger of collapse of the western European economies. The following paragraph explains the main elements of that crisis as it had been depicted for several decades. First of all, the devastation in western Europe after World War II was considerable. The infrastructure was seriously damaged. The resulting

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transportation difficulties rendered provision of goods difficult and thus hindered restarting industrial production. Coal production – coal still being a primary energy source at that time – had collapsed. Factories were damaged, destroyed or dismantled. Second, inflationary pressure was omnipresent in western Europe in those days. A general lack of investment and consumption goods, combined with strong demand conditions due to the important catch-up demand immediately after the war, put pressure on the general price level. Last but not least, there was a huge dollar shortage. The dollar-gap was due to increased imports of capital and consumption goods from the United States to Europe and the severely weakened exports from Europe to the United States. Moreover, and very importantly, the countries with dollar surpluses (on balance of trade) could not allocate them to other countries because they would get weak non-convertible currencies instead. This fact endangered the continuation of intra-European trade. On top of all these problems, the harvest failure of 1947, due to the biting cold, implied that grain had to be imported from the United States. This meant that, not to increase the dollar-gap further, the imports of capital goods had to be restricted despite their importance to restructuring. For several decades this was the story behind Europe’s distress, and several authors believed that the Marshall Plan effectively addressed these different elements in the crisis and provided the funds necessary to overcome the crisis and to put Europe onto its subsequent spectacular growth path. Schuker mentioned, in reaction to an article by Maier which will be discussed further, that ‘American economic aid provided the crucial margin that eliminated bottlenecks in transport and raw materials supply, coaxed hoarded goods and gold on to the market, and paved the way for the all important conquest of inflation.’6 Many others found the plan and the OEEC7 to be the decisive factors in the economic rebuilding of Europe.8 In the 1980s, however, doubts about this view were arising. Maier9 asserted that direct American aid only played a modest role in the recovery and that a ‘modulated judgment on the role of American capital’ was more appropriate. The discussion had begun about whether the previous line of thought was true and what it was that Europe had been saved from. This second generation of scholars, led by Alan Milward, was debating whether the program really was the crucial factor in the recovery. He argued that the alleged crisis of the summer of 1947 did not really exist, and thus that it could not have been the finishing stroke in an already unsustainable deficit, and the one which triggered the United States to initiate the program. In his book10 Milward undertook a series of counterfactual calculations which do not support the conclusion that

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Europe would have suffered from an economic collapse had the US government not come forward with the dollars. These assertions led to a debate between Hogan and Milward. Hogan does not agree with Milward that there is no case for attaching particular weight to the Marshall Plan. Kindleberger and Hogan are convinced about the existence of an (impending) crisis in 1947 linked to the poor harvest in that same year. The harvest failure of 1947, extending the need for increased food imports, would have induced governments to curtail on essential dollar imports from capital goods (to surmount the growing deficit in dollar trade). The Marshall Plan dollars did save Europe from this impending (production) crisis by avoiding the collapse of the critical dollar imports. Milward refutes this view, or in particular, the existence of the impending crisis. He argues that a time in which almost every western European country had investment as a share of GNP higher than in any year since 1917 can hardly be called a time of crisis. Moreover he says that the statistical evidence clearly shows that the increase in European dollar imports over the preceding years, in both 1947 and 1948, were not due to an increase in food imports, but rather to an increase in capital good imports. Consequently according to Milward, It follows that Marshall aid did not revive the economy of an area vital to America’s security; rather, it sustained a powerful investment boom already under way for two years by providing the dollars for a continued high level of capital-goods and industrial raw material imports from the dollar zone.11 More recently, a third generation of scholars, led by Barry Eichengreen, has revived the idea that the program was crucial for the recovery of Europe. This generation refutes and at the same time combines the views of the two previous ones by arguing that the Marshall Plan contributed enormously to Europe’s recovery from World War II, but not through the obvious channels of stimulating investment, augmenting imports and financing infra-structure repairs. Eichengreen and Uzan wrote: ‘Post-war Europe’s crisis was not a crisis of insufficient investment, inadequate capacity to import raw materials, or inability to repair devastated infrastructure. Rather, Europe was suffering from a “marketing” crisis.’12 In other words, for them the plan indeed had its merit as a remedy against an impending crisis, but a crisis of another nature than the one defined by Hogan. The plan’s crucial role was in restoring the market mechanism, which was in danger of breakdown: The city industries were not producing adequate goods to exchange with the farmer. The farmer was, due to lack of

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confidence in currencies, hoarding his goods rather than offering them for sale for money. These authors stress that the plan’s main role was to facilitate the restoration of financial stability and to liberalize production and prices, rather than to facilitate growth through the traditional channels such as stimulation of investment or increased government spending. This chapter will shed new light on this discussion by scrutinizing the institutional framework of the program more closely. All previous works have started by depicting the situation in Europe – its crisis (if any) or the nature of it, its position in the road to recovery etc. – to then deduce whether or in what part of Europe’s development the Marshall Plan (that is, the dollar allotments to Europe) stepped in. Unlike previous works, this chapter starts with the study of the financial and organizational structure of the plan itself to discern how it could have operated. This approach does not carry the inherent danger of attributing a role to the plan which it conceptually could not have fulfilled given the way it was conceived. The European Recovery Program: Organizational Characteristics This section explains the broad institutional framework created to execute and assure the smooth running of the program. First it argues, contrary to what is commonly believed, that the Marshall Plan operated for five years. This can be seen as a first immediate lesson to be drawn from the study of the institutional framework. Next, the Intra-European Payments Plans will be discussed. The ‘conditional aid’ mechanism, an essential part of the financial characteristics of the plan, is defined within the context of that institution. The Marshall Plan, a four-year plan? The US Economic Cooperation Act of 1948 laid down the terms, conditions and supporting institutions under which the European Recovery Program would function. According to this Act (Sec. 104 of Title I), the institution responsible for the execution of the program would be the Economic Cooperation Administration (ECA). The Act specified that aid would only be allocated if the participating countries pursued their economic recovery jointly, according to the specifications laid down in the report of the Committee on European Economic Cooperation (CEEC).13 For pursuing their recovery jointly, the participating countries were required to establish a permanent organization. The Organization of European Economic Cooperation (OEEC) was the institution they created. The task entrusted to the OEEC consisted of

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coordination of the effort to rebuild Europe from the economic disaster following World War II, or in other words, the coordination of the Marshall Plan.14 Sec. 122(a) of Title I of the Economic Cooperation Act determined the termination of the program to be 30 June 1952 (or earlier by passage of another resolution) with the provision that during the 12 months following this final date outstanding obligations might be fulfilled. However, effective 30 December 1951, the powers, function and responsibilities of the Economic Cooperation Administration were assumed by the Mutual Security Agency (MSA) in accordance with Section 502 of the Mutual Security Act and of Section 7(c) of Executive Order No. 10300. From then onwards, the above mentioned agency was deemed the successor of the ECA in all respects. So, if one wants to associate the Marshall Plan with the ECA, from an institutional point of view, the natural end date of the Marshall Plan would be 31 December 1951. The MSA was established with the aim that all programs of military, economic and technical assistance15 – assistance pursuant to the provisions of the Mutual Defense Assistance Act of 1949 as amended, assistance pursuant to the provisions of the Economic Cooperation Act of 1948 as amended, assistance for purposes, and under the provisions, of the United Nations Palestine Refugee Aid Act of 1950, assistance under the provisions of the Act for International Development – could be administered as a unified program. The ECA was thus no longer in existence after 31 December 1951. However, by December 1951, the fiscal year 1952 – running from 1 July 1951 to 30 June 1952 – had already started. Aid administered up to December 1951 thus already included aid awarded for the following fiscal year (which was administered under the MSA). Indeed, the fiscal 1952 programs were incorporated in the Mutual Security Act of 1951. The MSA was responsible for administering aid for fiscal years 1952 and 1953. All allotments, authorizations made from 1 July 1951 to 30 June 1953, are said to be allotments for ‘defense support’ and the period mentioned is the ‘defense support period’. The types of goods shipped to Europe during this period though, did not fundamentally differ from those shipped during the first three years of the European Recovery Program. In other words, the allotments for fiscal year 1952 were partly administered by the ECA and partly by the MSA. Moreover, some funds that are included in the allotments up to 30 June 1951 remained in existence after that date and were administered by the MSA. Indeed, to the extent that aid allocated to the European countries under the Mutual Defense Assistance Act of 1949 represents

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economic assistance, it was for each country included in the Marshall Plan allotments. The Mutual Defense Assistance Program’s economic assistance funds were transferred to the ECA, beginning with the fiscal year 1 July 1950 to 30 June 1951, and were included in all data on allotments, procurement authorizations and paid shipments. These same funds were also included in the data on aid administered by the MSA. From these arguments it should be clear that one cannot define 30 June 1952, as the end of the Marshall Plan. The institutional change from ECA to MSA blurred the distinction between the European Recovery Program and other aid programs. For the plan’s economic significance, 30 June 1952, is an arbitrary cut-off point. Given that the institutional change occurred during fiscal year 1952, and that funds for economic assistance administered first under ECA later continued to be administered under the MSA, we believe that from an economic point of view 30 June 1953, is a more meaningful point for defining the end of the Marshall Plan. Intra-European Payments Plans We will discuss some features of the Intra-European Payments Plans and its successor, the European Payments Union. It is within the framework of these institutions that ‘conditional aid’ is defined and the mechanism and results of its working become clear. Most trade relations governing trade in Europe after the war were bilateral, due to the non-transferability or non-convertibility of currencies. Because of the non-convertibility of the European currencies, all intra-European payments had to be honored in gold or convertible currencies (dollars in particular). Since there was a severe shortage of gold and dollars, countries tended to balance their payments with each of their trade partners individually in order to minimize settlements in gold or dollars. These bilateral trade relations were perceived as one of the main obstacles to growth in Europe. Two reasons were put forward to sustain this claim. First, to achieve growth, a minimum of competition is necessary. The fact that countries tended to balance their payments with each of their trade partners individually, prohibited them from choosing the best products at the best prices. Country A would curtail importation of goods from country B, even if and exactly because country A had payment surpluses with other countries. Consequently the resource allocation could not be optimal. Second, Europe was in desperate need of dollars to buy essential goods for recovery in the western hemisphere. The settling of intra-European surpluses and deficits with dollars only added to that dollar scarcity and induced countries to restrict European

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trade. Consequently, for the intra-European trade, already strongly reduced before the war, not to collapse, American aid had to intervene for the financing of intra-European deficits. To attain this goal, the agreements for Intra-European Payments and Compensations came into being, one for fiscal year 1949 and a second one for fiscal year 1950. The agreements aimed at overcoming the bilateral trade and payment practices. The second agreement went further and tried to remedy some of the shortcomings of the first agreement in easing the payments problems hampering development of trade within Europe. The operation of both payments plans depended directly on ECA-aid and thus carried the inherent danger that intra-European trade would convert to bilateralism in the post-ERP period. That was the reason why a new payments plan, calculated to maintain multilateral commerce after 1952, was conceived. That plan, signed in September 1950, is better known as the European Payments Union. For the first payments plan, the pattern of deficits and surpluses was estimated in advance. Creditor countries received ECA dollars under the condition that they would extend equivalent amounts in their local currency to their debtors. This portion of aid received by the creditor country and earmarked to be transferred to its debtor, was called ‘conditional aid’. The transfer, required for receiving the aid, amounted to the creditor country reallocating the aid to its debtor country.16 The transfer from creditor to debtor was called a contribution and the aid that the debtor received was called a drawing right. These drawing rights could be used by the debtor country only to cover its deficit with that particular creditor. The conditional aid allotment put a maximum on the dollar amount the creditor country could receive, and it would only be received if drawing rights were extended. This payment mechanism did not fundamentally alter the existing trade mechanisms and thus substantial gold payments were still required to settle the balances. The participating countries, together with Portugal and Switzerland, had a gross amount of surpluses and deficits of 1.8 billion dollars. After the operation of the payments plan, 1 billion dollars still had to be settled.17 These deficits were settled with payments in gold, dollars, mutually accepted third currencies or temporarily financed by the use of credit margins. Moreover, discrepancies between the estimates and the actual flow of trade were inevitable and entailed a certain inflexibility. Some drawing rights were used up to their maximum permissible amounts in the first few months of the plan and some remained unutilized. The following payments plan tried to improve upon the first one by revising drawing rights (conditional aid) at least twice a year. But, more

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importantly, some transferability of drawing rights was devised. As in the previous agreement, drawing rights were used by debtors to cover deficits with specific nations. Of these drawing rights however, 25 percent would be now transferable, that is, could be freely used by the debtor against any participating country. The conditional aid would of course be allotted to the nation on which drawing rights were used. To anticipate the arguments developed later in the paper, this rule entailed that the conditional aid portions in the allotments did not represent actual aid received for the country to which the conditional aid was allotted. That country was recipient but not beneficiary of that aid portion. This second payments plan also contained special provisions to take into account Belgium’s unique position in intra-European trade as a creditor country. Namely, its payments surplus resulting from intraEuropean trade was estimated to be larger than its dollar deficit. Consequently, part of Belgium’s surplus was to be financed by multilateral drawing rights and long-term credits extended by Belgium to France ($21.5 million), Netherlands ($38 million) and the UK ($28 million).18 It is also worth noting that Portugal became a full participant in this payments plan and received direct dollar aid for the first time in fiscal year 1950. Switzerland, on the other hand, remained the only member of the OEEC not receiving ECA aid. Since both of these plans fell far short of the complete transferability of drawing rights, following these two agreements, the European Payments Union (EPU) came into existence. The agreement was signed on 19 September 1950, and became effective retroactively from July 1st. The principal features of the agreement were as follows: •

•

•

The EPU was designed to promote intra-European trade through a clearing system which permitted each member to offset its deficit with any other member against a surplus with a third. Countries could thus freely incur deficits and surpluses in their trade with each other. Each government needed to be concerned only about its balance of payments with western Europe as a whole, and not with its balance against any single member country. To discourage excessive surpluses and deficits, the union required surplus countries to settle part of their surpluses with credits, and debtors to settle part of their deficits with gold or dollars. Each member country was assigned a quotum (15 percent of its total intraEuropean payments and receipts on current account in 1949) which determined the maximum cumulative deficits or surpluses which could be financed under the EPU. The ECA provided the initial working capital of 350 million dollars for

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the new institution. It also agreed to finance, if necessary, the deficits of certain countries should they encounter serious difficulties (a fund for special assistance amounting to 100 million dollars). Moreover, several countries – Austria, Greece, Iceland, the Netherlands, Norway and Turkey – were given initial credit balances totaling 314 million dollars. Prospective creditors – Belgium–Luxembourg Economic Union, Sweden and the United Kingdom – were also allotted initial debit balances comparable to conditional aid under the IntraEuropean Payments and Compensations agreement. These initial credit and debit balances were utilized before settlements were applied against a respective country quota. We will not discuss further all the mechanisms behind the working of the European Payments Union, since they have been examined elsewhere.19 We only consider here those which are relevant in order to realize the true scope of the Marshall Plan aid. Table 3.1 shows the initial debit or credit balances defined at the start of the EPU, together with the type of aid financing them (which will be explained in the next section). The initial debit balance for Belgium was later reduced from 44 to 29.4. By June 1951, no initial balances were left unused. The European Recovery Program: financial characteristics First, the mechanisms and financing of the aid allocation will be discussed. Next Marshall Plan allotments are defined and the notion of counterpart funds explained, a fundamental aspect of the financial structure of the program. Modes of aid allocation The aid was not allocated all at once for several years, but rather the US Congress appropriated a certain amount per fiscal year. The ECA had to divide the amounts of aid appropriated by the Congress among the participating countries (allotments) and determine the proportion of grants, loans and conditional aid for each of the countries (more about these different forms of aid in the following paragraphs). Another main task of the ECA was to determine the supply-programs per country per type of good and/or service. In particular, the ECA announced before the start of each quarter a country’s dollar allotment for that quarter. The country then provided the Administration with a proposal of its needs in goods and services. The ECA had to examine and approve the proposed supply-programs, and finally the goods and services had to be

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shipped and delivered. This defines in a nutshell the functioning of the aid allocations. Procurement Authorizations Given a well-defined supply-program, the Administration issued (against the allotment) procurement authorizations defining the origins of goods to be delivered to the country during that quarter.20 In other words, such an ‘authorization’ was a permission given by ECA to a foreign government or its agent to purchase a commodity with ECA funds. Apart from deliveries made by procurement agencies of the US government that were paid directly by the ECA, the two main ways of financing procurement were: 1) through letters of commitment to the US bank of the supplier, or directly to the suppliers to cover specific authorizations, or 2) by reimbursement to the participating countries. It should be clear that this system amounted to the United States granting these goods to Europe; the money spent was grant aid provided to Europe. Sometimes the procurement authorized would be financed through loans approved by the Administrator. These loans were also issued against the allotment and would be administered by the Export–Import Bank. Intra-European purchases The participating countries could also buy supplies from each other; they could inter-aid each other. Such inter-aid (inter-trade) was even strongly encouraged since, as already mentioned, expansion of trade within Europe was seen as the motor of Europe’s recovery and growth. These intra-European purchases were financed through the conditional aid mechanism explained in the section on Intra-European Payment Plans. A debtor country could use its drawing rights on its creditor’s conditional aid portion to finance its supplies. The creditor country was the recipient of the conditional aid, but the debtor country the actual beneficiary. The latter received the goods for free as it would through procurement authorizations, with the difference that the goods came from a European country rather than from the United States. Technical Assistance There was a third form under which aid was allocated, namely, productivity and technical assistance. Experts would be sent to Europe with the goal of improving industrial productivity. They would provide advice about marketing research, financial practices, economic reporting, manpower utilization, et cetera. Delegations from European countries would

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also come to the United States to learn about the latest management techniques and production technologies. The ECA would usually finance the travel of the persons involved in the delegations. ECA funds for such missions were not allotted to certain countries in advance; they were available for use wherever the need would occur. Also some strategic materials (rubber, diamonds, bauxite), as well as investment guarantees, were supplied to the European countries with ECA funds without advance allocation to a particular country. Allotments Aid was thus allocated mainly under three different forms, either as a grant, or as a loan, or as conditional aid. The dollar amounts of aid per country and per fiscal year consisting of the grants, loans and conditional aid were called Marshall Plan allotments. In Table 3.2 we can see the total of the allotments to the participating countries and their division into these different types of aid. If a country received aid under the form of a grant, it basically received a gift. No repayments had to be made nor were there any conditions attached to receiving that aid. The only requirement attached to the grants was that the country had to put an equivalent amount in domestic currency into special accounts called counterpart funds. A country could also get a loan, to be understood in the ordinary sense of the word. The loans were procured by the intermediary of the Export–Import Bank. The interest rate attached to these loans was relatively cheap at the time, and repayment did not have to start until after the termination of the program. Luxembourg, for example, received a loan of three million dollars to be repaid from 30 June 1956 to 31 December 1983, with an interest rate of 2.5 percent.21 Conditional aid was a particular form of aid aimed at solving the problem of financing the intra-European payment deficits, with the peculiar characteristic that the recipient of that aid is not the beneficiary. Counterpart Funds Each country participating in the European Recovery Program agreed to deposit, for all assistance received in the form of grants, amounts in local currency commensurate with the dollar cost of the grant aid received into a special account. This special account was called a counterpart fund. What source of funds did the countries draw upon to fulfill this requirement? Most of the goods shipped to Europe were not distributed as gifts to its population. The end-consumers had to buy the goods in the

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market at the regular (local) market price. These goods were sold through private commercial channels, either directly or by the recipient governments. The proceeds from the sales were put into the counterpart funds. This deposit requirement applied to all assistance received under the form of grants. This means: (1) the grant part of the allotments, (2) aid attributed as grants but not included in the allotments, and (3) the drawing rights exercised on a trade partner. Notice that within the conditional aid mechanism, the local currency deposit requirement applied to the country using drawing rights (on another country’s conditional aid allotment). The country receiving the conditional aid (on which drawing rights were exercised) only acted as an intermediary and consequently, there was no deposit requirement for its conditional aid portion. Aid provided under the form of a loan did not require local currency deposit either. Part of the local currency deposited, namely 5 percent, was reserved for use by the United States. In particular, the funds were first used for the administrative expenses of the ECA and then for production or purchase of strategic materials. Funds not needed by the ECA were transferred to other United States government agencies. The remaining 95 percent was available for use by the country itself. The money could be used for different purposes in accordance with the Economic Cooperation Act: (1) to ensure stabilization of the fiscal and monetary situation of the country, (2) to extend its production capacity, and (3) in general for any aim that supported the recovery of the country. Agreement of the ECA for the use of the funds was required and, in particular, the agency had to approve withdrawal of the funds. Lessons from the institutional framework The first section explains why the aid actually received differed from the aid allotted, and provides the arguments for why the counterpart fund deposits are a more appropriate measure for the net inflow of Marshall funds in each country. The following sections point to other lessons we can draw from the study of the institutional framework. Counterpart fund deposits as a measure of aid received Aid requiring deposits There are at least two elements that render allotments a poor indicator of actual aid received. The first element that biases the allotments as a measure of actual aid received is the conditional aid portion. The second element is that some of the aid granted was not included in the allotments.

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From the discussion above on the institutional characteristics of the plan, it should be clear that the conditional aid scheme makes the data on Marshall Plan allotments an inappropriate measure of total aid received per country. Substantial parts of the conditional aid had to be made available to the country’s debtor. As such, that money received is then only payment (in dollars however) for goods and services delivered and not actual aid received. In Table 3.2 we can see that the conditional aid portion is a non-negligible portion of the allotments. By 30 June 1951, the conditional aid amounted to approximately 13.4 percent of the total allotments. That portion obviously varies from country to country. In particular it varies in a range from 0 percent (for example, Greece) to 82 percent for Belgium. For some countries the allotments thus seriously misrepresent the actual aid received. From the discussion above we also recall that some parts of the grant aid given were not included in the allotments: industrial guarantees, productivity and technical assistance, and commitment for strategic materials. Although this portion of aid is quite small, namely 2 percent of the total allotments as of 30 June 1953, they are a further indication that the allotments are not a good indicator of actual aid received. To measure the total value of all goods and services received through the Marshall Plan, one needs to consider all the grant aid, loans, and drawing rights utilized. Except for the loans, this value is exactly represented by ‘aid requiring deposits’.22 The required deposits into counterpart funds thus