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The Marshall Plan, 1948-1951

Albrecht Ritschl, Humboldt Universitaet – Berlin

Between 1948 and 1951, the United States poured financial aiding totaling $13 billion (about $100 billion at 2003 prices) into the economies of Western Europe. Officially termed the European Recovery Program (ERP), the Marshall Plan was approved by Congress in the Economic Cooperation Act of April 1948. After a transitory 90-Days Recovery Program, the Marshall Plan spanned three ERP years from July 1948 to June 1951. Congress appropriated payments to European countries in annual installments. Most of U.S. assistance under the ERP took the form of grants; the loan component had deliberately been kept low to avoid transfer problems. Distribution of the ERP funds among the recipient countries and their allocation to key sectors were placed in the hands of a U.S. board operating in Europe, the Economic Cooperation Agency (ECA). Countries would present requests for deliveries of goods to the ECA, which evaluated and decided them according to a set scheme of priorities. Dollar payments by the ECA for any deliveries were complemented by a system of national matching funds in the recipient countries, called counterpart funds. Countries would pay for ERP deliveries, not in U.S. dollars but in their own national currencies. These payments were credited to their respective counterpart funds. With a view to the German transfer problem of the inter-war period, no attempt was made to transfer these payments into U.S. dollars. Instead, the ECA employed these counterpart funds to channel investment into bottleneck sectors of the respective national economies. Repayment to the U.S. of the ERP’s loan component was effected in the mid-1950s.

The Marshall Plan was by no means the first U.S. aid program for post-war Europe. Already during 1945-1947, the U.S. paid out substantial financial assistance to Europe under various different schemes. In total annual amount, these payments were actually larger than the Marshall Plan itself. One key element of the Marshall Plan was to bundle existing, rival programs in a package and to identify and iron out inconsistencies. The origin of the Marshall Plan lay precisely in a crisis of the previous aid schemes. Extreme weather conditions in Europe in 1946/47 had disrupted an already shaky system of food rationing, exacerbated a coal and power shortage, and threatened to slow down the pace of recovery in Western Europe. Faced with increasing doubts in Congress about the efficiency of existing programs, the Truman administration felt the need to come up with a unifying concept. The Marshall Plan differed from previous programs mainly in the centralized administration of aid allotments and the strengthened link with America’s political agenda. Researchers currently agree that any effects of the Marshall Plan must have operated through its political conditionality, far less so through its size.

The Marshall Plan also did not bring about the immediate integration of Europe into international markets. Large external debts presented a serious obstacle to liberalization of Europe’s foreign exchange markets. A British attempt in 1947 to lift capital controls triggered a run on Britain’s foreign exchange reserves, and was abandoned after six weeks. As a result, markets would not easily provide the large capital imports needed for European reconstruction. The prospect of having to finance Europe’s so-called dollar gap out of U.S. aid indefinitely was instrumental in shaping the Marshall Plan. During the three years of the Plan’s operation, U.S. policy temporarily turned away from the goal of implementing the Bretton Woods system. Instead, it focused on the more modest goal of liberalizing trade and payments within Europe. To this end, the European Payments Union (EPU) was established in 1950. It lifted most capital controls within Europe, and combined a European fixed exchange rate system with a first round of trade liberalization among its members (Kaplan and Schleiminger (1989)). Although itself independent of the Marshall Plan, the EPU’s system of overdrafts and drawing rights was backed by ECA funds. The EPU was designed to smooth Europe’s transition to full convertibility with the Bretton Woods system, and had largely achieved this goal when it was dissolved formally in 1958 (Eichengreen (1993)).

Competing Interpretations of the Effects of the Marshall Plan

The Marshall Plan is still renowned as a showcase of successful U.S. intervention abroad. It was hailed by contemporaries as the decisive kick that pushed Western Europe beyond the threshold of sustained recovery (e.g., Ellis (1950), Wallich (1982 [1955]). Later observers sympathetic to the Marshall Plan pointed to its high political payoff and its allegedly strong multiplier effects (e.g., Arkes (1972), van der Wee (1986)). Still today, economic folklore credits the Marshall Plan with everything that improved in Europe after the war: the restoration of decent food supplies, the opening of supply bottlenecks in industry, and most importantly, the reconstruction of capital equipment and housing stocks in the devastated economies of Western Europe.

Later analyses of the Marshall Plan have disagreed fundamentally with this favorable interpretation, and have offered more skeptical views. An older literature interpreted the Marshall Plan largely as an American export program, inspired by Keynesian fears about stagnation in the U.S. post-war economy. At times enriched with a good dose of political Anti-Americanism, this interpretation was quick to assume that Marshall Aid primarily served the interests of U.S. big business.

A revision to this doctrine highlighted the small relative magnitude of the Marshall Plan. U.S. assistance hardly exceeded 2.5% of GNP of the recipient countries, and accounted for less than 20% of capital formation in that period. The allocation of aid often seemed to follow political, not economic needs: nearly half the resources never arrived in the disaster areas on the former European battlefields but served to buy political support in England and France, and to fend off communist threats in various countries. Also, the overall political outcome hardly seemed to fit with U.S. plans. Post-war Europe emerged from the Marshall Plan as a largely protectionist bloc of countries under French leadership. Rather than integrating smoothly into the Bretton Woods system as envisaged by the U.S., Europe seemed to work towards its own economic and financial integration. Epitomized by the work of Milward (1984), this line of research sees France as the main winner over the U.S. in a contest over political dominance in post-war Europe. In this perspective, Marshall Aid appears as a frustrated, economically less-than-significant attempt to influence the course of events in Europe.

This interpretation has seen its own revision. In spite of its small contribution to aggregate output growth, the Marshall Plan may have played a critical role in opening strategic bottlenecks in key industries. Borchardt and Buchheim (1991) argued that raw material imports under the Marshall Plan accelerated the recovery of West German manufacturing. De Long and Eichengreen (1993) argued for Marshall Plan conditionality as a key element in breaking up structural rigidities and bringing about readjustment in the recipient economies. This perspective is a classical story about backward and forward linkages: according to it, the Marshall Plan relaxed binding constraints in a complex input-output framework. Consequently, a purely macroeconomic perspective would be misleading. However, as Eichengreen and Uzan (1992) pointed out, most of these effects were probably temporary, and even their magnitude is questionable. Conditionality and the investment of counterpart funds into strategic sectors may have accelerated the speed of Europe’s convergence back to its steady state. However, to affect the conditional steady state itself, the Marshall Plan would have had to accomplish more than that, and solve a cooperation problem that free markets could not easily handle.

One such cooperation problem was a hold-up problem in labor markets, a theme recurrent also in Eichengreen (1996). Agents in Europe’s highly cartelized labor markets had the choice between reverting to an uncooperative equilibrium with high wage demands and low investment, or a new equilibrium with temporary wage restraint and high investment rates. To the extent that the ECA successfully linked Marshall Plan deliveries to wage restraint in collective bargaining, it implemented a low-wage, high-investment equilibrium. Again, however, from a neoclassical perspective this may have affected the speed of convergence more than the steady state itself.

There was also a bigger, international cooperation problem in whose solution the Marshall Plan was instrumental. Germany’s financial war machinery had left behind large amounts of debts owed to the formerly occupied countries. To this were added reparation demands that potentially dwarfed those of World War I. Any scheme for economic recovery and cooperation in Western Europe would have to deal with these unsettled financial consequences of World War II. At the same time, it had to address the security concerns of America’s allies, which perceived any reconstruction of Germany beyond the necessary minimum as a future threat. All of this implied defining a role for postwar Germany, a delicate task that had initially been left open.

The Monnet Plan for French postwar reconstruction envisioned shifting the center of European heavy industry from Germany’s Ruhr valley to France. U.S. postwar policies were initially built on similar principles: under the Morgenthau Plan, Germany’s heavy industry would be cut back and the German economy would be restructured to be based on light industry and agriculture. The price of these policies consisted of continued U.S. assistance to Europe. Coal and steel as well as machinery were shipped to Europe across the Atlantic, while German heavy industry, a traditional exporter of such items, was operating far below capacity. Among other things, the Marshall Plan was also a reaction to this problem of deficient German deliveries to Europe.

Diplomatic historians have long argued that German reconstruction under U.S. political aegis was the core of the Marshall Plan (see particularly Gimbel (1976) and Hogan (1987)). Given continued U.S. military presence in Europe, self-sustained recovery and economic cooperation could be implemented, such that U.S. deliveries to Western Europe were substituted with German exports. Berger and Ritschl (1995) document the diplomatic arm-twisting especially of France by the U.S., and interpret the Marshall Plan as a set of institutions, designed to serve as a commitment device for economic cooperation within Europe. To implement a cooperative equilibrium, U.S. policies linked Marshall Aid to free trade within Europe, to an agreement over the economic reconstruction of West Germany, and to a standstill regarding reparations and war debts as long as Germany was divided. Viewed from this perspective, Marshall Aid and its conditionality were merely the outer shell of a program whose core was a far wider political agenda for economic cooperation in Western Europe.

References

Arkes, Hadley. Bureaucracy, the Marshall Plan, and the National Interest. Princeton: Princeton University Press, 1972.

Berger, Helge and Albrecht Ritschl. “Germany and the Political Economy of the Marshall Plan, 1947-1952: A Re-Revisionist View.” In Europe’s Postwar Recovery, edited by Barry Eichengreen, 199-245. Cambridge: Cambridge University Press, 1995

Borchardt, Knut and Christoph Buchheim. “The Marshall Plan and Key Economic Sectors: A Microeconomic Perspective.” In The Marshall Plan and Germany, edited by Charles S. Maier and Gunter Bischof, 410-451. Oxford: Berg, 1991

De Long, J. Bradford and Barry Eichengreen. “The Marshall Plan: History’s Most Successful Structural Adjustment Program.” In Postwar Economic Reconstruction and Lessons for the East Today, edited by Rudiger Dornbusch et al, 189-230. Cambridge: MIT Press, 1993

Eichengreen, Barry. Reconstructing Europe’s Trade and Payments: The European Payments System. Manchester: Manchester University Press, 1993.

Eichengreen, Barry. “Institutions and Economic Growth: Europe after World War II.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo, 38-70. Cambridge: Cambridge University Press, 1996

Eichengreen, Barry and Marc Uzan. “The Marshall Plan: Economic Effects and Implications for Eastern Europe and the USSR.” Economic Policy 14 (1992): 14-75.

Ellis, Howard. The Economics of Freedom: The Progress and Future of Aid to Europe. New York: Harper & Row, 1950

Gimbel, John. The Origins of the Marshall Plan. Stanford: Stanford University Press, 1976

Hogan, Michael J. The Marshall Plan, Britain, and the Reconstruction of Western Europe, 1947-1952. Cambridge: Cambridge University Press, 1987.

Kaplan, Jacob and Gunter Schleiminger. The European Payments Union: Financial Diplomacy in the 1950s. Oxford: Oxford University Press, 1989.

Milward, Alan S. The Reconstruction of Western Europe, 1945-1951. London: Methuen, 1984.

van der Wee, Herman. Prosperity and Upheaval: The World Economy, 1945-1980. Berkeley: University of California Press, 1986.

Wallich, Henry. Mainsprings of the German Revival. New Haven: Yale University Press, 1982 (1955).

Citation: Ritschl, Albrecht. “The Marshall Plan, 1948-1951″. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/the-marshall-plan-1948-1951/