The Marshall Plan Part 1: State-planned Capitalism

The Marshall Plan will be a familiar term to most of the older generation in British society, but over time it will be forgotten by all but students of history. This is a shame, as it yields potential lessons for the kind of steps that are likely to be effective in creating a society that provides enough for everyone.

However, analysing these lessons is difficult, as the impact and effectiveness of the Marshall Plan is highly disputed. Some hail it as a triumphant success on the part of the US Government. Others suggest that European recovery had actually begun before the Plan itself kicked in and that the funding provided was so low as a proportion of GDP that it cannot possibly have had a significant impact. And in between is the view that the Plan made a significant and distinctive contribution in assisting this recovery, particularly in the way it focused funding on activities likely to promote industrial development.

It is impossible for me to undertake the extent of research that would qualify me to offer an opinion on these debates. However, it is possible to draw out three distinctive features of this Plan and the lessons it offers to development economics in general and the conclusions of this blog:

  1. That this was a state-planned and state-funded effort to stimulate economic development, involving some of those countries that would later become the most forceful proponents of unregulated, small-government, free market capitalism.
  2. That it involved utilising the wealth generated through a trade surplus to stimulate economic development in deficit countries, with the knowledge that a stronger international economy would actually benefit this donor country.
  3. That this action was systemically necessary, and in the best interests of the country providing the funding, so it is not helpful to think of this as “aid” or “charity”.

Unfortunately, my initial draft of this post became so long that I’ve had to divide it into 3 separate posts, dealing with each of these points in turn (this has happened a lot in writing the blog). I was tempted to leave it out altogether, but I feel this lesson of history is just too useful as an example in action of some of the concepts I have written about.

To draw the first point out, it is helpful to first contrast the Marshall Plan with its often-forgotten predecessor, the Morgenthau Plan. Henry Morgenthau was the US Secretary of the Treasury in 1945. His plan was aimed at making it impossible for Germany ever again to threaten world peace, which he said could be achieved through the radical step of deindustrialising the economy and turning it into an agricultural nation. It is quite remarkable the extent to which this failed to learn the lessons of history, given that it was the extent of economic decline as a result of the Treaty of Versailles after World War One – which was explicitly seeking to punish Germany – that created the social conditions and discontent that enabled the rise of Hitler as a nationalist demagogue.

At that time an economist called Moses Abramovitz was a US advisor on the Allied Reparations Commission. His team wrote a report arguing that Morgenthau’s Plan would destroy Germany’s export capacity, leaving it unable to earn the foreign currency needed to import food, and leading to mass poverty and even starvation. When this report was presented to Morgenthau he left the meeting with a migraine! But his plan was implemented anyway. (This is reported on page 278 of Reinert’s book discussed last week – as Reinert met Abramovitz several times I suspect that he heard this account personally and I haven’t been able to find a source to verify it.)

In early 1947 former US President Hoover was sent to Germany to investigate reports of deepening poverty. His report concluded:

“There is the illusion that the New Germany … can be reduced to a ‘pastoral state’. It cannot be done unless we exterminate or move 25,000,000 out of it.”

In an earlier post I suggested that an unregulated free market will simply let surplus labour starve, and this is exactly what would have happened in Germany. Abramovitz’s predictions were coming true, and the US State quickly performed a U-turn. By June of that year Secretary of State George Marshall announced a new plan with a new goal: to reindustrialise Western Europe (including Germany). A similar plan was subsequently implemented in Asia, including Japan.

The Marshall Plan has now become synonymous with a huge aid effort, but this misses its essential features: it was a state-funded, state-planned effort specifically to reindustrialise the targeted nations.

The US provided over $13bn, mostly as grants, but some as loans which would be constantly recycled (as the funding was repaid, it was loaned out again). The exact use of funding in each country was agreed by the domestic governments, but always within the parameters of the overarching plan agreed by the Organisation for European Economic Cooperation (OEEC). Indeed, one US objective in the Plan was to encourage as sense of European identity and integration, as a bulwark against further advances of socialism or communism. Much of the funding went to the private sector (though frequently a condition of funding was that supplies and raw materials had to be purchased from the US).

It’s important to emphasise these last two points. The US Government did not sit in Washington and decide how to spend money to rebuild Europe. Rather, it agreed an overarching framework with the OEEC, and then individual governments decided how to utilise the funding in their territories, within the parameters of this framework. And neither was this funding used on monolithic state projects – rather, much of it went to stimulate the development of the private sector in specific industries.

In last week’s post I pointed out that state planning does not need to mean the “central planning” of a “command economy”. The Marshall Plan exemplifies the alternative approach to planning I described – state funding was targeted to develop infrastructure and sectors of industry considered vital to economic development. In the beginning it was essential for some funding to go to simply providing essentials such as food to relieve the post-war poverty, but the intention was not merely to provide palliative aid but primarily to fund economic reconstruction, and this is arguably where the Plan made a distinctive contribution to the recovery effort.

So why has this approach not been repeated in countries across the world? Why is this not the accepted approach to international development? Even as this Plan was being enacted, the new global institutions of the World Bank and International Monetary Fund were finding their feet, and would over the coming decades implement the exact opposite policies, working in partnership with the US Government – the ‘Washington consensus’. Indeed, Reinert has brilliantly described this approach as a Morgenthau Plan for the Third World (page 179).

One argument might be that this was a special situation – a crisis response to the decimation caused by the War. But is not poverty and starvation throughout the world a crisis? And just because we took these steps in such circumstances is not evidence that these steps wouldn’t work in the poorest countries today.

Another aspect of the Plan needs to be acknowledged: the US was explicitly seeking to create a buffer against the communist states. They were willing to pour resources (‘aid’) into the Plan and thereby rebuild these economies lest discontent with their economic situation would tempt the populations to seek socialist solutions. But again, this isn’t evidence that such an approach would not work in countries of the world today. Indeed, this argument actually implies that faced with a political need to stimulate economic development, the political and economic arguments of leaving everything to the free market went out the window. In other words, these free market approaches don’t actually work. But since the days of the Marshall Plan, the ideology of individualism has risen to such dominance that this truth cannot now be admitted. Perhaps the answer to the increasing political instability we see in the world is a Marshall-style plan for global economic development.

The Marshall Plan was a state-planned and state-funded effort at economic development, carried out by the country that has become the flag-bearer of unrestrained free market capitalism, in the nations that supposedly illustrate the success of capitalism over state-sponsored efforts!

Next week I will draw out a distinctive but important aspect of the use of funding – that the Plan effectively (if not consciously) involved the redistribution of trade surpluses.

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