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Europe's Failings Illuminate Marshall Plan

Author: Benn Steil, Senior Fellow and Director of International Economics
October 10, 2011
Financial News


With the eurozone in the throes of an existential crisis, there is good reason for the resurgence of interest in the famed American Marshall Plan for post-war Europe.

Unfortunately, knowledge of the actual Marshall story and the plan's intentions fails even remotely to match the popular passion for it.  Indeed, if all we knew of it was what we read in today's European press and blogs we might be forgiven for thinking it was an especially lavish tribute to Keynes's General Theory.

The truth is very different.

At the time of George Marshall's famed Harvard speech on June 5, 1947, American and British visions for Europe's economic organisation could hardly have been more divergent.  Prime Minister Clement Atlee's government was busy nationalising coal mines, railways, and electricity supply.  Central planning was to be the bedrock of British economic security. Marshall's economic deputy, Will Clayton, returned from a visit to Europe in May with a radically different blueprint.  Britain was to be part of an economically integrated Europe, which was itself to be unashamedly capitalist and free-trading.

In France in particular, Clayton was deeply disturbed by the failures of central planning.  The government was combating an inflation crisis with price controls, to which farmers reacted by holding back produce and starving the cities. Looting and hoarding were the rule; the economic bonds of civilised society were in tatters.

Clayton was under no illusion that the situation could be remedied without a radical change in policies, or that the policies could be changed on the basis of American lectures.  The United States would have to offer massive financial aid - grants, and not loans, lines of credit, or lend-lease - in return for major pro-market reforms.

The genius of General Marshall's speech, half of which owed directly to Clayton, lay not only in its vision but in its remarkably deft diplomatic touch. It threw a lifeline to America's European allies, who could not simultaneously fund immediate survival needs and the regeneration of vital business and trading connections.  In doing so, it put the onus on the Europeans themselves to craft a compelling plan for co-operation and recovery and to spell out for an ever-sceptical Congress and American public what assistance would be necessary to achieve it.

Over the next three months, Clayton worked doggedly on three fronts of what he saw as the same battle: extracting a compelling Marshall Plan assistance request from the European representatives working in Paris, achieving a breakthrough on global trade liberalisation, and encouraging the formation of a "European federation" to co-ordinate Europe's economic efforts.

On the Marshall Plan front, the eponymous author had rebuffed Clayton's repeated pleadings throughout the summer for interim assistance to the increasingly desperate Europeans.  In September Marshall relented; on the 10th he publicly pressed Congress for quick appropriations to mitigate "hunger and cold this winter".

This had a profound effect on the Paris discussions, and on the 22nd the Europeans finally submitted an initial assistance request that satisfied American expectations. Clayton immediately left Paris for London to press his case on trade liberalisation, which he saw as an essential complement to American aid.

Throughout the summer Clayton had struggled simultaneously with London over the dismantling of imperial preferences and with protectionists in his own capital determined to erect new wool import tariffs.  He ultimately won President Harry Truman over in the wool wars, thereby salvaging troubled global trade talks in Geneva.  The British resisted mightily in the face of Clayton's public upbraids on imperial preference. But in late September they offered a reduction in, rather than elimination of, preference margins, while cutting their reciprocal demands for US tariff reductions.

Clayton had wanted to go much further (he always did), but backed the compromise in order to achieve his more cherished end: a successful conclusion of the General Agreement on Tariffs and Trade, predecessor to the World Trade Organisation.

His lofty aspirations now realised, Clayton wrote his sixth and final letter resigning from the State Department on October 7.  Tributes in the British and French press were effusive in spite of - in some cases because of - Clayton's relentless pressure on European governments to co-operate more and nationalise less.

"A champion of liberalism," Le Monde called Clayton. "Our diplomats...will deplore the absence of one of the Americans who knew best European affairs."

Clayton's efforts to break down Europe's old national (and imperial) economic silos, and to lay the foundation for a new open market-based free-trade area in their place, yielded little in 1947. Yet by 1957 he could rightfully add this to his legacy.  Marshall aid was in the end conditioned on European governments pursuing market- and investment-friendly policies; conditions that happened to jibe well with French interests in securing long-term access to German resources such as coal and coke.

The Marshall Plan ultimately committed $13 billion ($122 billion in today's dollars) of economic and technical aid to 16 European countries, including defeated Germany, through the end of 1951.  In addition to providing vital immediate assistance in the form of food, staples, fuel, and machinery, Marshall intervention played an important longer-term role in areas such as industrial and agricultural modernisation, transport renewal, and trade revival, and provided a critical impetus to some of the watershed agreements along the road to European integration.

Clayton, future US Secretary of State Dean Acheson noted admiringly, "was nearly a decade ahead of the {1957} Treaty of Rome," the European Union's founding document.

That American self-interest was well served by the Marshall Plan should not detract from its merits as an act of enlightened internationalism unparalleled in modern history.  One has only to reflect on the failure of today's eurozone leadership to generate anything remotely comparable in response to a continental debt crisis to appreciate the Marshall Plan's enduring lustre.

Benn Steil is director of international economics at the Council on Foreign Relations and co-winner of the 2010 Hayek Book Prize for Money, Markets and Sovereignty.



This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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