A Marshall Plan for Iraq?
by Asa Janney
When I was in my teens I got a big dose of the Marshall Plan in history class because George C. Marshall had lived in my home county of Loudoun in Virginia. A bronze statue of him stands on the courthouse lawn. My history teacher told us that the Marshall Plan was a great success, and I’ve heard the same many times in other forums since then. Several times I have heard foreign aid proposals described as a new Marshall Plan. It is held up as the shining example of how foreign aid can work. Would it work for Iraq?
The Marshall Plan began in April 1948 when Congress passed the Economic Cooperation Act. Eventually, $13 billion in various kinds of aid for Western Europe over four years was distributed by the Economic Cooperation Administration (ECA). Many have claimed that this aid sparked the economic recovery of European countries, that it encouraged free enterprise, and boosted the American economy. Also, it is said to have done all this without becoming a toy of U.S. special interest groups.
I doubt all these claims. The first reason is that the levels of aid provided by the Marshall Plan were small, never exceeding five percent of the GNP of the receiving countries. Second, if the Marshall Plan aid had caused economic recovery, the countries that received relatively large amounts, such as Austria and Greece, would recover faster, but in fact they took the longest. Meanwhile, France, Italy, and West Germany started to recover before getting help from the Marshall Plan.
The real hindrance to economic recovery in Europe was bad economic policies. In most of the countries they occupied, the Nazis had imposed strict economic controls. Oddly enough, these controls were maintained after the war by either the restored governments or the Allied occupation authorities. In each case, rapid economic recovery took place only after the controls had been abolished.
Germany’s spectacular recovery is cited as a Marshall Plan success, but I think otherwise. In 1948 to 1949 West Germany was paying eleven to fifteen percent of its GNP for Allied occupation costs and reparations. During that time the Marshall Plan assistance never exceeded five percent, and West Germany repaid half of that in the mid-1950s. The Allied Control Commission (ACC) maintained the Nazi rent and other price controls, imposed industrial output restrictions, and conscripted labor and other resources. The ACC raised taxes by 50 percent and allowed no foreign trade in 1945-1946, not even barter trades for food.
West Germany’s recovery stemmed from two events in 1948. First, confidence in the money supply was restored by currency reform. The stock of money was reduced to one-tenth in an overnight exchange of old marks for new ones. Germans became convinced that the days of hyperinflation were over and began to accept German currency for goods and services (instead of cigarettes and dollars, as previously).
Second, Ludwig Erhard, the German economic director of the American-British occupation area, took advantage of a loophole in the regulations regarding price and other economic controls imposed by the Allies. The regulations stated that he could not modify controls without approval, so he simply abolished them over a weekend when the authorities were out of the office and got away with it. Later, a general told him, Herr Erhard, my advisors tell me you are making a terrible mistake. Erhard replied, Don’t listen to them, General, my advisors tell me the same. The market recovered; production shot up; and incomes rose.
Belgium placed great and immediate reliance on free markets to recover. In October 1944, only one month after liberation, the government moved to counter the monetary expansion forced on them by the Nazis. They also adopted conservative fiscal and unrestricted import policies. Price controls were mostly avoided. As a result the food and housing shortages experienced in the rest of Europe did not happen there, and the economy was in a strong recovery before U.S. aid arrived.
Contrary to the claim that the Marshall Plan encouraged free enterprise and market solutions, state intervention was built into the Plan. For every dollar a foreign government received it had to spend an equivalent amount on public projects. So taking Marshall Plan money took resources from their private sector.
One of the strangest features of the Marshall Plan was its link during its first two years to a system that let irresponsible governments spend even more beyond their means. International drawing rights were granted to countries that ran high trade deficits. These rights were nothing more than claims on the resources of their neighbors that had run surpluses. So, counterproductive incentives were created.
Let’s review the claim that the Marshall Plan was not influenced by U.S. special interests. Before the Marshall Plan, a sizable share of U.S. aid to Europe was administered by the United Nations, and those U.S. dollars were not required to be spent on American goods. But the Marshall Plan was used to funnel lots of U.S. taxpayer dollars to special interests by requiring that U.S. aid be used to buy U.S. surplus goods at prices set by the U.S. government.
At first, half of these U.S. goods had to be shipped in vessels with U.S. registries. This added to the cost and reduced the quantity of goods shipped. Marshall Plan credits used to buy American crude oil and petroleum products were charged particularly high prices. Those credits could not be used to buy petroleum from any other country, no matter how low the price. The U.S. discouraged the development of refineries in Europe and encouraged the importation of U.S. oil.
The Marshall Plan rules also disrupted normal trade relationships and ignored the recovery needs of Europe’s industries. The Commission for European Economic Cooperation (CEEC) would send requests for Marshall Plan aid. Although the CEEC never asked for tobacco, it got 40,000 tons of it from influential Virginia tobacco farmers, which ruined the Greek tobacco industry. The CEEC did ask for railroad cars and tractors to help the agricultural recovery; it got half or less of each request. By 1949 the value of tobacco shipments was about three times that of farm equipment. The CEEC asked for no trucks, because of fuel shortages, bad road conditions, and the lack of demand for them among Europe’s farmers; it got 65,000. Peanuts were in surplus in the U.S., so they were sent in response to a request for lard.
When a country accepted Marshall Plan aid it found that the aid came with restrictions on its external trade and economic policies. For example, participating countries were prevented from exporting military related goods to Eastern Europe. The list of items classified as military related included medicines and typewriters. The Greek economy, already struggling with government regulations, was hurt by American pressures for even tighter price and exchange controls. It did not start to recover until 1953 when U.S. aid was cut to only $25 million. Austria, too, started to recover from 1951 to 1953, when Marshall Plan aid was reduced. The cuts in aid forced Austria to adopt tough anti-inflation and other stabilization policies, and its economy turned around.
One of the reasons given for the establishment of the Marshall Plan was a dollar shortage in Europe. Americans were not importing much from Europe, so giving dollars to Europe seemed like an obvious solution. But lowering trade barriers would have been better for both sides of the Atlantic. The U.S. had tariffs on 45 percent of its imports. Agricultural products had quotas. In 1948 the U.S. imposed a complete embargo on agricultural imports. These and other restrictions caused a decrease in imports from Europe of one-third in the first half of 1949. Arguments that the Marshall Plan was based on free trade and open-door policies are simply wrong.
Despite all this evidence, the supposed success of the Marshall Plan retains a life of its own. This is unfortunate because it diverts attention from more effective principles of recovery. Foreign aid in the form of gifts discourages sound economic policy, which is the most important determinant of economic growth. Manipulating how the aid is given is also an irresistible temptation for the politicians of the donor nation; using it to political advantage is a temptation for the receiving government. Then, as now, some countries that receive aid from the U.S. are asking that instead they should simply be given an opportunity for free trade.
Is this a lesson for the U.S. government as it considers how to rebuild Iraq? I certainly think so. Our government should consider alternative forms of aid rather than using the Marshall Plan as a template. I believe that countering the notion that the Marshall Plan was a success would promote discussion on alternative, better forms of aid for economic recovery.
Sincerely your friend,
I read your piece on the Marshall Plan. If I ever get some free time, I plan to point out what I consider to be serious weaknesses in the arguments you present. One example is the failure to focus on the devastating effects on European recovery of their shortage of dollars to buy goods they needed for recovery. Another weakness is the absence of a discussion of the integration efforts we supported such as the European Payments Union.
Well, you've got us all thinking more about the important issues of the day.
John Craig, Friends Meeting of Washington DC.
Much of what Mr. Janney ascribes to the Marshall Plan is biased and highly selective. The Marshall Plan may not have caused the recovery, but it certainly did "spark" it, to use one of Mr. Janney's words. I would compare the Marshall Plan 5% of the money to the extra 5% of money going to church or college pledges. Most of the money going to those institutions is to pay the minister, the heat, the building, and other basic costs -- the extra 5% beyond the basics is what pays for our outreach and other good causes which do real good in the community.
Gordon Johnson, Episcopalian, Arlington VA.
I am so grateful to you for you Marshall Plan article. My, but you dispelled my sunny approbation. But I remain ignorant of why Europe fell apart after WWI and eventually thrived after WWII, a difference that I (and many others) had assumed was due to the Marshall Plan and to a non-punitive approach after WWII. Any enlightenment appreciated.
Connie Battaile, formerly attended South Mountain Meeting, Ashland OR.
RSVP: Write to "tqe-comment," followed by "@quaker.org" to comment on this or any future Letter. (I say "followed by" to interrupt the address, so it will not be picked up by SPAM senders.) Use as Subject the number of the Letter to which you refer. Permission to publish your comment is presumed unless you say otherwise. Please keep it short. Letters over approximately 100 words may be returned without being read. Please mention your home meeting, church, or synagogue, if any (this is not required), and your location.
To subscribe, at no cost (or unsubscribe) send an email letter (subject "subscribe," but no text necessary) to tqe-subscribe (or tqe-unsubscribe), followed by "@quaker.org".
If you want to see earlier Letters, or if you want to see any letter in HTML format (including this one), which is clearer than the emailed letter format, visit TQE Home.
Each letter of The Quaker Economist is copyright by its author. However, you have permission to forward it to your friends (Quaker or no) as you wish and invite them to subscribe at no cost. Please mention The Quaker Economist as you do so, and tell your recipient how to find it.
The Quaker Economist is not designed to persuade anyone of anything (although viewpoints are expressed). Its purpose is to stimulate discussions, both electronically and within Meetings.
Publisher and Editorial Board
Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting
Members of the Editorial Board receive Letters a week in advance for their criticisms, but they do not necessarily endorse the contents of any of them.
Copyright © 2003 by Asa Janney. All rights reserved. Permission is hereby granted for non-commercial reproduction.