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Last Modified: 2000-03-05
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The Marshall Plan

J. Bradford DeLong
http://www.j-bradford-delong.net/
delong@econ.berkeley.edu

 


I just spent a frustrating weekend in Los Angeles, at what Thomas Schelling said was the last Marshall Plan commemoration. The weekend was frustrating because Alan Milward strongly disagrees with Barry Eichengreen's and my 1993 paper on the Marshall Plan (J. Bradford De Long and Barry Eichengreen, "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, 1993)). And I can't figure out why he disagrees with us. Or, rather, I can't figure out *what* he believes--what he thinks the likely distribution of possible destinies for Europe would be in the absence of the Marshall Plan.

I have listened to him. I have read his 1984 book, _The Reconstruction of Western Europe_. I have re-read his 1984 book far into the night, annoying my wife. And I still cannot figure out what he thinks.

Does anyone out there who has recently read _The Reconstruction of Western Europe_ think that they understand the structure of Alan Milward's argument? Does anyone understand why he thinks that the Marshall Plan was trivial (if not positively harmful) in its effects on the post-WWII economies of western Europe?

It seems pretty clear to me what would have happened in the absence of the Marshall Plan. Western European countries at the end of 1947 would have seen their foreign exchange reserves running dry, as they continued to import from the dollar area some 3% of GDP more than they were able to export. The European countries had virtually no chance of attracting private capital flows in order to finance this dollar gap: U.S. private investors had, after all, lost a fortune by investing in Europe in the decade after World War I. So in 1948 the western European countries would have had to take action to close their balance of payments deficits quickly and nearly completely.

How to do this? One way would be through devaluation. But devaluation takes two years or so to boost exports and lower imports. In the short run, the J-curve means that devaluation is more likely to boost than to reduce a balance of payments deficit. Almost surely some if not all western European economies would have resorted to large devaluations in 1948 in the absence of a Marshall Plan. But the closing of the balance of payments deficits would have required other measures.

One of the other measures would have been old-fashioned deflation: defend the international economy and your exchange rate by attacking the economy. Stop recovery for a year--have national product fall by 10 instead of growing by 5 percent. The political consequences of this would not have been pleasant.

The second measure would have been to slap on additional import controls and licenses--creating a domestic interest group that lived off of access to the licenses, another group of hothouse domestic producers who would be devastated by moves to freer trade. And so forth. A Europe that starts out on that path would have had a very hard time becoming the open-to-international-trade European Common Market that we actually saw.

How much damage would deflation, import licenses, steps away from free trade, and so on--including the political consequences of the interruption of recovery--done? I don't know. The fact that economic miracles of the scale of post-WWII Europe are rare makes me think that they are probably quite fragile.

At any rate, that's my counterfactual. Can anyone help me figure out what Alan Milward's is?

Brad De Long


Dear _____,

You asked for "details" on what I had described as a frustrating weekend spent in Los Angeles (at what Thomas Schelling said was the last Marshall Plan commemoration) trying to figure out what Alan Milward believes.

It is clear that Alan Milward strongly disagrees with my 1993 paper on the Marshall Plan (J. Bradford De Long and Barry Eichengreen, "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, 1993)).

But I can't figure out why he disagrees with us. Or, rather, I can't figure out *what* he believes--what he thinks the likely distribution of possible destinies for Europe would be in the absence of the Marshall Plan.

Let me try to summarize what he did say:

--That the Marshall Plan needs to be analyzed in isolation: that UNRRA aid before was a separate business--aimed at "relief" rather than "reconstruction", and that MSA after was part of "security policy". He said this in a comment on Tom Schelling--who had said, extremely emphatically, that the key behind the MSA was to get dollars to European central banks (and that the "security policy" rationale was simply to make it easier for congress to vote for what Schelling saw as a continuation of the Marshall Plan).

--Milward gave no reasons for separating out the Marshall Plan from the rest of the arch of post-WWII U.S. policy. He seemed to think that the reasons were obvious.

--That the Marshall Plan had no material impact on the pace of European reconstruction.

--That U.S. post-WWII poilcy to encourage European integration was a failure: that when integration came,it came not on the pattern that the U.S. had been pushing but as the result of detailed negotiations among national bureaucracies concerned with narraow national advantages.

--He explicitly rejected the point that bureaucracies maneuver in a field of force determined by visionaries--and that bureaucrats do, once in a while, actually obey their political masters on some subset of the priorities that their political masters sense are important. He seems not to credit the point that American policy makers wanted *any* form of European integration they could get, believing in free trade and desperately wanting to bind western Europe together.

--That he found it interesting that figures like Jean Monnet and Robert Schuman are "cult figures" in the United States, while they were quickly marginalized in Europe in the 1950s and have been totally ignored since. (Yet he is the one who resides at a university that has both Monnet fellows and a Schuman Center.)

Now it seems pretty clear to me what would have happened in the absence of the Marshall Plan.

Western European countries at the end of 1947 would have seen their foreign exchange reserves running dry, as they continued to import from the dollar area some 3% of GDP more than they were able to export. The European countries had virtually no chance of attracting private capital flows in order to finance this dollar gap: U.S. private investors had, after all, lost a fortune by investing in Europe in the decade after World War I. So in 1948 the western European countries would have had to take action to close their balance of payments deficits quickly and nearly completely.

How to do this? One way would be through devaluation. But devaluation takes two years or so to boost exports and lower imports. In the short run, the J-curve means that devaluation is more likely to boost than to reduce a balance of payments deficit. Almost surely some if not all western European economies would have resorted to large devaluations in 1948 in the absence of a Marshall Plan. But the closing of the balance of payments deficits would have required other measures.

One of the other measures would have been old-fashioned deflation: defend the international economy and your exchange rate by attacking the economy. Stop recovery for a year--have national product fall by 10 instead of growing by 5 percent. The political consequences of this might not have been pleasant. The second measure would have been to slap on additional import controls and licenses--creating a domestic interest group that lived off of access to the licenses, another group of hothouse domestic producers who would be devastated by moves to freer trade. And so forth. How much damage would deflation, import licenses, steps away from free trade, and so on--including the political consequences of the interruption of recovery--done? I don't know. The fact that economic miracles of the scale of post-WWII Europe are rare makes me think that they are probably quite fragile.

A Europe that started out on either of these paths would have had a difficult time becoming the open-to-international-trade European Common Market that we actually saw.

So that is my counterfactual. What is Alan Milward's? After all, we know that all historical judgments of importance or unimportance are really statements about counterfactual worlds...

I went back and read Milward's Reconstruction of Western Europe. I read it late into the night, annoying my wife. And I did not come up with anything satisfactory.

The closest I came was a statement that: "Whether the degree of deflation which might have had to be pursued in western Europe after August 1947, had the ERP not been announced, would have seriously interrupted the reconstruction boom is a hypothetical question which need not be pursued since, in the context of the argument, Marshall Aid only postponed the hour of reckoning until an American recession did arrive or the ERP came to an end. The question was, what would happen then?" (p. 471). And the answer is that strong demand from Germany made up the slack: "The reabsorption [of West Germany] into the western European trade and payments framework... was essential for sustaining... recovery." (pp. 471-2).

This left me scratching my head. Is Milward really saying that the Marshall Plan was unimportant in 1948-1949 because West Germany boomed in 1951-1952, selling machinery to and buying other products from western Europe? That makes no sense. So I cannot figure out what the thread of his argument is.

Best,

 

Brad Delong


Context:

>Only with the extension of Marshall Plan aid beginning in 1948 was the
>contradiction between these short-term and long-term goals overcome. The
>Marshall Plan has traditionally been viewed as having promoted Western
>Europe's economic recovery. Milward has effectively demonstrated that the
>principal economic significance of the aid was not that it promoted
>economic recovery-for recovery was already under way-but that it provided
>offsetting financing to resolve the European balance-of-payments crisis.


My Comment:

Strike one (against Milward, not Helleiner): There is no difference between "promoting economic recovery" and "resolving the European balance-of-payments crisis." Had the balance-of-payments crisis been "unresolved" as East Asia's balance-of-payments crisis over the past year and a half has been "unresolved," there would have been no post-1947 economic recovery in Europe.

Milward knows perfectly well that balance-of-payments crises destroy economic growth. However, he prefers to split hairs, argue that people like Kindleberger are wrong to claim that "the Marshall Plan caused recovery" because recovery was already underway, and then casually admit when pressed in seminars that "the Marshall Plan allowed the *fundamental* resolution of Europe's balance-of-payments crisis to be postponed for three years"--which as I understand it is Charlie Kindleberger's maximal claim.

Thus as I read the debate, Milward has shown *nothing* and will admit to this when pressed. As you can guess, Milward really annoys me...


Context:

>Milward has in mind the offsetting of deficits caused by European imports;
>however, Marshall Plan aid was also crucial in offsetting capital flight
>from Europe to the United States. Indeed, according to the "able and
>authoritative" New York Times correspondent Michael Hoffman, the total
>volume of U.S. aid to Western Europe in the early postwar years was
>exceeded by the total volume of European capital moving in the other
>direction.[18]


My Comment:

Strike two (against Helleiner this time): We can't directly track international capital flows. The best we can do is talk to people who are undertaking international capital flows to figure out why they are doing what they are doing, and then to look at the balance-of-trade figures to infer net capital flows. If a country is earning a lot of foreign currency via exports (tracked fairly well by recipient countries' customs services) and not spending much of that hard currency on imports (tracked fairly well by the home country's customs service), then we infer that capital must be flowing out. Balance-of-trade-based estimates of capital flows are poor because capital flows are the difference between two numbers, imports and exports, that are themselves not measured that well. But balance-of-trade-based estimates are by far the most reliable.

Thus when one finds the "able and authoritative" New York Times correspondent saying x about international capital flows, one should first ask: (a) Is what he is saying consistent with the import, export, and official settlement totals of the country in question? If not, then ask: (b) Does he have magic sources of information that make his observations much more reliable than those gotten from the balance-of-trade statistics? The answer to (b) is "no." There are times and places where balance-of-trade statistics are really badly messed up, but post-World War II western Europe is not one of them.

Since the answer to (a) is "no" as well, the right thing to conclude is that Mr. Hoffman (able and authoritative as he may be) is simply one more example of the fact that in a world this big you can find five people willing to say anything. And Mr. Helleiner suffers from one of the big vices of political historians: taking what some observer says about economics as evidence without inquiring whether said observer could have known what he was talking about.


Context:

>American policymakers were in fact keenly aware of the link between
>Marshall Plan aid and European capital flight. In late 1947, particularly
>vocal demands from the French government for help in locating the concealed
>assets of its citizens in the United States increased the visibility of
>this issue in Congress. Many members wondered if the cost of the Marshall
>Plan to the American taxpayer could be reduced by forcing wealthy Europeans
>to keep their money at home. They deplored the "small, bloated, selfish
>class of people [in Europe] whose assets have been spread all over the
>place" and questioned "whether or not [the United States] should become a
>sanctuary for refugee money."[20] The view of the American Veterans
>Committee, for example, was that "the American taxpayer should not be
>obliged to provide the necessary funds for the program while well-to-do
>Europeans continue to hold on to their private hidden investments in the
>United States."[21]


My Comment:

Strike three: We are now talking not about capital flight made possible by the Marshall Plan, but about wealth owned by French citizens who had moved their assets to the U.S. before the June 1940 fall of France to the Nazis. We have now drifted very, very far from the initial claim that Marshall Plan dollars coming in was immediately grabbed by rich Europeans and deposited in their bank accounts in New York...

Did U.S. policymakers worry that Marshall Plan aid might generate capital flight, and thus fail to do its job of aiding western Europe's recovery? Yes, they worried about it a lot. Does the fact that they worried about it mean that it happened? No, it doesn't: and the best evidence we have on capital movements suggests strongly that it didn't. Did U.S. policymakers think that it would be good to allow the French government to tap assets of French nationals who had moved their money out of France before June 1940? Some did, some didn't, and in the end little was done. (Although note that we are only talking about *French* assets here: Britain had grabbed the American assets of British nationals to finance World War II, and the U.S. had grabbed many of the American assets of German nationals.) Did a lot of European capital flee to the U.S. between the end of the war in Europe and the start of the Marshall Plan? Almost surely not: capital flight requires that you export *something*, take the proceeds, and invest them in the country that you are fleeing to. Western Europe was exporting very little in 1945, 1946, and 1947.


Context:

>Kindleberger also trips over himself and supports Milward's claim when
>he quotes a key player, Dean Acheson, as saying that the Soviet walk
>out of talks was "the desired result". (Acheson, *Present at the
>Creation*, pp. 234-5; cited in Kindleberger, ibid, p. 92).


My Comment:

A few words about "trips over himself" and Stalin's "exclusion" of the Soviet Union from the Marshall Plan.

As I understand it, there were four factors present in the U.S. extension of an invitation to participate in the Marshall Plan to the Soviet Union: (a) a fear that if the Soviet Union accepted, then it would be impossible to get the aid program through a Republican-dominated Congress, (b) a hope that the escalation of the Cold War could be stopped and ratcheted down as Stalin began to focus on how U.S. aid could help with post-WWII reconstruction, (c) a desire not to be seen as further breaking the wartime alliance--as not taking another step to ratchet up the Cold War--and (d) a belief that the more rapid and successful the reconstruction of Europe proceeded, the better for everybody.

All four of these motives were present, to differing degrees, in all of the people helping design the Marshall Plan. I do not know what the balance of motives was in George Marshall's mind (though recall that this is someone who had just spent a year of his life trying to construct a Mao-Chiang condominium in the belief that such a power-sharing agreement was possible). I do not know the exact balance of motives in whatever combination of thoughts of individual minds one wishes to call the "State Department view" (although I do know that all four factors were present). But neither does anyone else now.

Alan Milward, however, says that he knows the balance and that the balance was extreme--that the invitation to the Soviet Union was a *sham*, a propaganda move extended in the firm belief that Stalin would never accept it. How Milward knows this is unclear--as Kindleberger says, the "evidence that makes [Milward] so sure is not presented" in Milward's book. And I agree with Kindleberger: whatever makes Milward so sure is not presented in his book.

But there is no doubt that Dean Acheson was by then a hawk on the Soviet Union, and did breathe much easier once Molotov left--that having offered aid to the wartime ally and then not having to explain to Republican senators why American taxpayers' money was being used to prop up Stalin's totalitarian regime was from Acheson's perspective the best possible result. And Kindleberger quotes from _Present at the Creation_.

In so doing, Kindleberger doesn't "trip over himself," he merely tries to fulfill his duty to tell the story "wie es eigentlich gewesen."

To say of someone that they "trip over themselves" when they report important facts that tend to bear against their general case reveals a failure to understand what it is to be a historian

 

Brad DeLong


Context:

On both questions--the importance of economics and the current wave of
triumphalism--I have the same reaction: who wins and who loses? To
suggest that the Williams/New Left thesis is wrong ignores the nature of
the world political economy over the past few decades. To suggest that
foreign trade or investment isn't important, statistically, to "America"
overlooks just how profitable it has been to certain Americans.


My Comment:

This is an evasion.

Certainly there have been times when narrow interest groups have seized control of policy in democratic states and used state power to promote their narrow material interest. But (oil aside, and (sometimes) trade relations with the rest of the industrial core aside), I have never seen any convincing evidence that this was the case for U.S. foreign policy.

The U.S. got into World War I for ideological reasons--not to safeguard the value of British and French government bonds sold by J.P. Morgan and Kuhn Loeb. Dean Acheson embargoed the export of oil to Japan in 1941 for a number of reasons, but a desire for American firms to displace Japanese firms in the China trade was not high among them. Truman sent MacArthur into South Korea because of the lessons that had been drawn from Munich, not because South Korea would serve as a source of "cheap sweatshop labor" to enrich the profits of American companies. (Indeed, South Korean labor today is neither "cheap" nor "sweatshop.") Kennedy and Johnson's fear of being painted as soft on Communism, not a desire to secure oil concessions in the South China Sea, was the principal force behind the U.S. move into Vietnam. Nixon and Kissinger's geopolitics, not Anaconda, were the driving force behind the U.S. government-sponsored assassination of General Schneider, U.S. government applause for Pinochet's coup, and the U.S. government's overlooking the assassination of an American citizen and an ex-Chilean cabinet minister ten blocks from the White House.

Lenin's "Imperialism: The Highest Stage of Capitalism" was written more than eighty years ago. We have good reason to think that it was wrong then. We have more reason to think that it is wrong now--and thus to avoid the silly leap (without substantial evidence) from the proposition that it is theoretically possible for foreign policy to be shaped in the material interest of elites to the conclusion that it *was* so shaped...

 

Brad DeLong


Context:

...Regions and nations didn't "win"
the Cold War--a particular class of individuals did: Wall Street bankers,
arms manufacturers and dealers; particular high-tech industries;
collaborating elites in targeted nations, and so forth. And what was the
price? Proxy wars with devastating impact [Vietnam being just the best
example but only one of many]; diminished standards of living globally
amid a rush toward militarized economies; diminished democracy virtually
everywhere. Yes, that's a "victory" but only for those who had a
meaningful stake in the system.


My Comment:

Gee. Arriving in this week's mail was the 1999 United Nations _Human Development Report_. Its centerpiece is something called the Human Development Index--HDI--a weighted average of life expectancy, material standards of living, school enrollment rates, and adult literacy rates. You can quarrel with it as a measure of human happiness (it has no place for, say, the memory of having watched your relatives be hacked to death by their neighbors--and in years after the hacking-to-death is over it no longer affects life expectancy measures). But it is an honest attempt to construct a summary measure of human progress.

You can use the HDI to see how representative anecdote-based claims that human progress has been confined to "Wall Street bankers... arms manufacturers... collaborating elites" and that the world has seen "diminished standards of living globally." It is an interesting fact that *every* single country for which the U.N. has an HDI measure for 1975 and 1997 shows an improvement. (However, I daresay that would not be the case if it had 1975 estimates for countries like the Russian Federation, North Korea, and perhaps Cuba).

 

 

Rank Country 1975 1997
1 Canada 0.862 0.932
2 Norway 0.850 0.927
3 United States 0.865 0.927
4 Japan 0.851 0.924
6 Sweden 0.859 0.923
7 Australia 0.838 0.922
8 Netherlands 0.856 0.921
9 Iceland 0.853 0.919
10 United Kingdom 0.840 0.918
11 France 0.848 0.918
13 Finland 0.834 0.913
15 Denmark 0.861 0.905
16 Austria 0.836 0.904
18 New Zealand 0.843 0.901
19 Italy 0.824 0.900
20 Ireland 0.811 0.900
21 Spain 0.814 0.894
22 Singapore 0.737 0.888
24 Hong Kong 0.757 0.880
27 Greece 0.792 0.867
28 Portugal 0.735 0.858
30 Korea, Rep. 0.680 0.852
39 Argentina 0.776 0.827
40 Uruguay 0.759 0.826
43 U.A.E. 0.735 0.812
45 Costa Rica 0.741 0.801
46 Trinidad 0.746 0.797
48 Venezuela 0.740 0.792
56 Malaysia 0.614 0.768
59 Mauritius 0.635 0.764
61 Fiji 0.674 0.763
67 Thailand 0.604 0.753
68 Romania 0.722 0.752
72 Ecuador 0.645 0.747
77 Philippines 0.646 0.740
78 Saudi Arabia 0.595 0.740
79 Brazil 0.639 0.739
80 Peru 0.641 0.739
84 Paraguay 0.655 0.730
88 Dominican R. 0.617 0.726
90 Sri Lanka 0.605 0.721
98 China 0.521 0.701
101 South Africa 0.637 0.695
102 Tunisia 0.510 0.695
105 Indonesia 0.471 0.681
112 Bolivia 0.524 0.652
113 Swaziland 0.497 0.644
114 Honduras 0.515 0.641
117 Guatemala 0.517 0.624
120 Egypt 0.432 0.616
122 Botswana 0.501 0.609
126 Morocco 0.426 0.582
127 Lesotho 0.471 0.582
130 Zimbabwe 0.539 0.560
133 Ghana 0.431 0.544
134 Cameroon 0.422 0.536
135 Congo 0.450 0.533
136 Kenya 0.453 0.519
138 Pakistan 0.347 0.508
143 Togo 0.395 0.469
146 Nigeria 0.322 0.456
149 Mauritania 0.343 0.447
150 Bangladesh 0.318 0.440
151 Zambia 0.453 0.431
153 Senegal 0.326 0.426
154 Côte d'Ivoire 0.374 0.422
155 Benin 0.306 0.421
159 Malawi 0.328 0.399
162 Chad 0.286 0.393
163 Gambia 0.270 0.391
164 Rwanda 0.323 0.379
165 C.A.R. 0.342 0.378
166 Mali 0.246 0.375
168 Guinea-Bissau 0.249 0.343
170 Burundi 0.282 0.324
171 Burkina Faso 0.237 0.304
173 Niger 0.247 0.298


Context:

>Kindleberger also trips over himself and supports Milward's claim when
>he quotes a key player, Dean Acheson, as saying that the Soviet walk
>out of talks was "the desired result". (Acheson, *Present at the
>Creation*, pp. 234-5; cited in Kindleberger, ibid, p. 92).


My Comment:

A few words about "trips over himself" and Stalin's "exclusion" of the Soviet Union from the Marshall Plan.

As I understand it, there were four factors present in the U.S. extension of an invitation to participate in the Marshall Plan to the Soviet Union: (a) a fear that if the Soviet Union accepted, then it would be impossible to get the aid program through a Republican-dominated Congress, (b) a hope that the escalation of the Cold War could be stopped and ratcheted down as Stalin began to focus on how U.S. aid could help with post-WWII reconstruction, (c) a desire not to be seen as further breaking the wartime alliance--as not taking another step to ratchet up the Cold War--and (d) a belief that the more rapid and successful the reconstruction of Europe proceeded, the better for everybody.

All four of these motives were present, to differing degrees, in all of the people helping design the Marshall Plan. I do not know what the balance of motives was in George Marshall's mind (though recall that this is someone who had just spent a year of his life trying to construct a Mao-Chiang condominium in the belief that such a power-sharing agreement was possible). I do not know the exact balance of motives in whatever combination of thoughts of individual minds one wishes to call the "State Department view" (although I do know that all four factors were present). But neither does anyone else now.

Alan Milward, however, says that he knows the balance and that the balance was extreme--that the invitation to the Soviet Union was a *sham*, a propaganda move extended in the firm belief that Stalin would never accept it. How Milward knows this is unclear--as Kindleberger says, the "evidence that makes [Milward] so sure is not presented" in Milward's book. And I agree with Kindleberger: whatever makes Milward so sure is not presented in his book.

But there is no doubt that Dean Acheson was by then a hawk on the Soviet Union, and did breathe much easier once Molotov left--that having offered aid to the wartime ally and then not having to explain to Republican senators why American taxpayers' money was being used to prop up Stalin's totalitarian regime was from Acheson's perspective the best possible result. And Kindleberger quotes from _Present at the Creation_.

In so doing, Kindleberger doesn't "trip over himself," he merely tries to fulfill his duty to tell the story "wie es eigentlich gewesen."

To say of someone that they "trip over themselves" when they report important facts that tend to bear against their generatl case reveals

 

 

Brad DeLong


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