Catallaxy blog posts 2006

Mythology of the Marshall Plan

Under the Marshall Plan the US provided massive financial assistance to European nations to help them rebuild after World War II. This is almost universally regarded as a great success and among other triumphs it is credited with the “German Miracle” when the most damaged nation of all recovered in spectacular fashion. It also provided the model for most of the programs of international economic aid from that time to the present day.

Tyler Cowen has demonstrated that the usual view of the Plan is quite wrong. Just to give two examples before proceeding to more details. (1) the Belgians recovered before the Germans and both were on the rise before any aid arrived. (2) Britain received more aid per capita than any other state but had the slowest rate of economic recovery. That incidentally kills another widespread myth that it was the losers and bystanders rather than gallant Britain who got the best deal after the war.

The Marshall Plan

Secretary of State George Marshall gave a speech at Harvard University on 5 June 1947, with the idea of a comprehensive aid package "directed not against any country of doctrine but against hunger, poverty, desperation and chaos". Aid was offered to all European nations except Spain and in April 1948 Congress approved $1.7 billion (what is that today?) for a four-year package of grants to buy American products. Interesting? The Europeans got the goods but Americans got the money! The countries behind the iron curtain did not agree to participate.

"Assistance was officially given to promote industrial and agricultural production, attain and maintain internal financial stability, and stimulate trade with Europe and the outside world. The Economic Cooperation Administration (ECA) was created to oversee the aid program".

The myth of the role of aid in recovery.

The German and Belgian examples are illuminating. Aid never exceeded 5% of Germany's GNP, even at the peak of the program in 1948-49. Allied occupation costs and reparations absorbed over 10% of West German GDP and the net outflow out of Germany persisted into the mid 1950s because Germany repaid half the ECA aid. The Allied Control Commission (ACC) persisted with comprehensive system of Nazi controls, including constraints on foreign trade.

Although most of the German populace were consuming food at a rate just slightly above the starvation level, the Allies forced Germany to refuse numerous barter deals, like food for coal and steel, offered by other European nations. In addition, the ACC limited West German industrial output to levels ranging from 10 to 70 percent of those in the mid-1930s. Until mid-1948 the German economy hobbled along at near subsistence level, sustained only by black markets and private scavenging.

The turn about came in mid 1948 when the Allies instituted a drastic reduction in the money supply and a month later Ludwig Erhard set the famous bonfire of regulations on a Sunday afternoon when the allied authorities were not on duty to reverse the decision.

Erhard's free market philosophy worked well. Monthly production indices rose at rates exceeding many later yearly increases. The West German miracle was under way. Several months later, Marshall Plan aid began to arrive. The West German miracle was sustained through a combination of sound monetary policy, supply-side fiscal policy, and a relatively free market.

The Belgians moved faster in the appropriate direction. In October 1944, a month after liberation, they devalued the currency and embarked on deflationary fiscal policy to correct the wartime Nazi monetary expansion. They also had liberal import policies and conservative fiscal policy. Price controls, including rent controls were minimal and so they never had the severe shortages of food and housing that were standard elsewhere in Europe.

"A study noted that Belgium recovered fastest from the war and placed the greatest immediate reliance upon capitalism. The Belgian recovery thus was due to sound economic policy and predated US aid".

Ironic to note that Brussels is now the head of the EU octopus.

Other myths harpooned

The Plan encouraged the development of free enterprise and sound economic policy Europe.

The Plan boosted the American economy.

The operation of the Plan was not strongly influenced by domestic US special interests.

American postwar policy was one of free trade and the open door.

The arguments are all on line so there is no need to repeat a lot of detail. Just a few snippets.

On economic policy, it has to be recalled that the US administration was full of people who administered the New Deal, the maze of bureaucratic interventions that kept the US anchored in depression from the late 1920s to the start of World War II.

State intervention was built into the plan; for every dollar that the ECA gave a foreign government, that government had to set aside an equivalent amount of domestic currency to be used for public works, public investments and similar state projects. The plan also subsidized the extensive postwar monetary and fiscal policies that caused enormous problems for many West European governments.

The plan caused huge distortions in trade because the Europeans were obliged to spend the aid money on goods from the US. So the US tractor people gained at the expense of the Italians. US exports of tobacco wrecked the Greek tobacco industry and diminished the trade from Turkey, Rhodesia and Algeria. "Militarily related items" could not be exported to the East and that was defined to include most machinery, chemicals, medicines and even typewriters.

Special interests ruled supreme on the home front.

Cowen reports "The Virginia tobacco manufacturers were particularly influential at ECA. Europe was desperate for farm equipment, yet as of June 1949 the ECA had shipped only $40 million of farm equipment and $111 million worth of tobacco. In 1948 more than 175 million pounds of expensive, inferior-quality spaghetti were shipped to Italy [and] 65,00 trucks were shipped to Europe despite the dreadful condition of the roads and the serious petrol shortage."

On a humorous note for those familiar with the old joke about going back to the Old Dart with tins of dripping as presents, the Chief of food procurement in Germany reported that the US Dept of Agriculture was pushing sales of peanuts to the Plan (due to a surplus) and so hundreds of millions of pounds of peanuts were shipped to Europe instead of the lard that he had requested.

Anyway, it just gets worse and less amusing when you read about the compulsory purchase of Texas gulf oil instead of closer and cheaper mideast oil, and the tariff protection in the US.

Some of the lessons from the Marshall Plan

This is according to Tyler Cowen, in contrast with the conventional wisdom that the Plan was a Good Thing.

Sound economic policy is the most important factor in economic growth.

Foreign aid frequently discouraged sound economic policy.

Foreign aid does not help the donor nation, it simply drains resources from its private sector.

Foreign aid programs will not be run in the public interest.

Free trade is the best way to help other nations.

All of these lessons have been repeated by the subsequent experience of aid to the Third World as explained a long time ago by Peter Bauer and Stanislav Andreski. The aid recipients have more often than not gone backwards rather than forwards due to the provision of government to government aid.

Rafe Champion, writing on Catallaxy 28 January 2006.