LEADERS IN AMERICA AND EUROPE will spend the next two weeks celebrating the fiftieth anniversary of the Marshall Plan, the American effort to lift the economies and the spirits of our allies at the dawn of the Cold War. But should they? As a standard critique of U.S. foreign aid has it, the Marshall Plan merely coincided with Western postwar revival. Some even argue it retarded European recovery, with significant growth coming only as the Marshall funds began running out.
For example, in a well-researched account of the plan's economic impact, George Mason University economist Tyler Cowen calls the "perceived successes" of the Marshall Plan a "myth." He denies that the plan was "a significant factor in West European postwar recovery" and that it encouraged "free enterprise and sound economic policy." If Cowen is right, the Marshall Plan would seem to have been a costly failure -- deservedly cited as a prize exhibit in the conservative indictment of foreign aid.
In fact, however, there is a strong case to be made that the Marshall Plan was effective; even that it realized its central, animating purpose: to rescue Europe by encouraging policies conducive to economic growth. The Marshall Plan, in this view, worked not because it was an act of generosity, an extension of the New Deal. It worked because it fit with the other great postwar free-market economic reforms -- the liberalization of commerce under the General Agreement on Tariffs and Trade, and the stabilization of currencies through the Bretton Woods system of fixed exchange rates. A study of the economic performance of participating countries gives a nuanced picture.
First, economic growth was not directly proportional to Marshall Plan dollars received. Countries that received more aid per capita than the Marshall average -- such as Sweden, Britain, and Greece -- experienced relatively weak economic recovery (from 1947 through 1955, GNP rose 39 percent in Sweden, 31 percent in Britain, and 21 percent in Greece). Countries that received less aid -- notably Germany and Italy -- grew faster (148 percent and 57 percent respectively; Germany's impressive growth, by the way, was not just a recovery from the devastation of war but a 96 percent increase over output in 1938).
Second, trade was clearly beneficial. Countries that received Marshall Plan aid and also joined the GATT significantly out-performed those that only received aid. Five countries that both received significant foreign aid and joined GATT -- Germany, France, Japan, Britain, and Sweden -- enjoyed annual average GNP growth of 8.3 percent from 1947 through 1955 and average unemployment of 2.6 percent. Another four countries that received significant Marshall aid but remained outside GATT for much of the period -- Italy, Denmark, Austria, and Greece -- had GNP growth of 3.7 percent and 7.6 percent unemployment.
Finally, the stabilization of currencies was a turning point. After significant devaluations in the early postwar years, the key European countries, starting with Germany in 1948, succeeded in adhering to the discipline of the Bretton Woods system. It was at precisely this point that each of their equity markets -- an excellent daily monitor of how market actors judge the likely future output of a nation's capital -- began to soar. Some six months later in each country, production surged as well.
Revisionists cite the indisputable importance of trade and monetary policies to argue that the Marshall Plan didn't matter; that the Europeans' own reform of their domestic economic policies is what did the trick. The problem with this argument is that the Marshall Plan encouraged just such reforms and enabled fragile governments in war-shattered countries to enact them. When Will Clayton -- architect not only of the Marshall Plan proposal of June 5, 1947, but also of the ensuing European Recovery Plan and the first GATT agreement -- was asked which piece of the scheme was most important to Europe's recovery, he answered, "I find it impossible to talk about them separately." The European Recovery Plan and GATT were both adopted by the participating countries in October 1947. The Bretton Woods framework had been in place since 1945 but began to be seriously implemented only with the German monetary reform of 1948. This came just as the Marshall aid began to flow.
In the weeks after Secretary of State George Marshall's announcement of America's intention to formulate an ambitious new aid plan -- "a great big carrot" to promote policy reforms in Europe, as Clayton put it -- a series of telling events transpired. France and Italy ejected the Communists from their coalition governments. Russia, which had received U.S. assistance under Lend- Lease and had played a sometimes disruptive role in administering United Nations relief in 1945-47, took itself and its satellites out of consideration for Marshall Plan aid, leaving the West a free hand. And Austria began to spin free of the Soviet orbit, establishing a government not accepted by Stalin and ultimately holding free elections.
In the Europe of 1947, the "fabric of civilization" was about to unravel, as Clayton, a self-made billionaire investor who knew something about markets, saw. It is all very well to praise the European reforms of 1948-53 for launching the continent's recovery; even accurate, up to a point. But would there have been democratic governments capable of enacting such policies without the Marshall Plan?
Ludwig Erhard, father of the German monetary and tax reforms of 1948, has been called the "real" author of European recovery. Yet Erhard himself, icon of the libertarian revisionists, deemed the Marshall Plan "absolutely essential" to the monetary reform that ensued. "Currency reform and the Marshall Plan," he told an audience in April 1948, "are both contributory factors of economic recovery . . . and must operate simultaneously, if they are to be fully effective." He continued: "Thanks to the aid we received, we could take the safe road of systematic reconstruction and recovery." The two, he said, "are inextricable." The plan provided a flow not only of money and imports, "but also of confidence, . . . preparing the ground for new capital to be raised." This capital helped produce an average annual rate of growth in German stocks of 47.9 percent from the summer of 1948 through December 1955. It would not have happened without the Erhard reforms; but the Erhard reforms, according to Erhard, in turn depended on the plan.
What is the Marshall Plan's relevance today? By some standards, Russia, Poland, Ukraine, and the rest of Central Europe are better off than Germany, France, and Britain were in 1947. All, in fact, have some industrial base and a work force that performs well on standard math and science tests. There has even been some Western aid, though as a share of current U.S. output it pales beside the Marshall Plan's eventual $ 15 billion.
What is missing this time is a vigorous Western policy of promoting economic growth among our former enemies. Trade integration with Western Europe has been sluggish. Aid has been mostly contingent on fiscal conditions laid down by the International Monetary Fund that have imposed burdensome income tax rates, crushed industrial production, and stimulated a mafia-based economy from Moscow to Kiev to Budapest. Foreign-aid critics of both right and left would do well to concentrate less on the cost and moral hazard attached to aid and more on the issue that matters most: what sort of policies our dollars are promoting.
Today, IMF policies are too often associated with high taxes, inflationary currency devaluations, and the slow or even negative economic growth they bring. This is especially so in the two regions where democratic capitalism is perhaps most fragile: Central and Eastern Europe and Africa. To its credit, the IMF participated in pro-growth tax relief in Latin America in the early 1990s, and it has contributed to currency stabilization in Eastern Europe recently. But even this latter achievement is imperiled by the fund's inability to help Russia, Ukraine, Poland, and other major clients to enact low-rate, base-broadening tax reforms.
Fifty years ago, under conditions less auspicious than today's, Americans launched a daring initiative that helped support democracy and economic freedom for hundreds of millions. Fortunately, no emergency effort on such a scale is necessary now. But certain efforts are appropriate, and it would be useful to apply the lessons learned -- just as it is right to respect a great act of free-market statecraft: one that made the world safe for the mistaken baby-boomer view that "foreign aid never works."
Gregory Fossedal, author of Our Finest Hour, a history of Will Clayton an the Marshall Plan, is chairman of the Alexis de Tocqueville Institution. Peggy Garvey, a researcher at the institution, assisted with this article.