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Created 11/20/1997
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Dear Barry,

You asked for "details" on what I had described as a frustrating weekend spent in Los Angeles (at what Thomas Schelling said was the last Marshall Plan commemoration) trying to figure out what Alan Milward believes.

It is clear that Alan Milward strongly disagrees with our 1993 paper on the Marshall Plan (J. Bradford DeLong and Barry Eichengreen, "The Marshall Plan as a Structural Adjustment Programme," in Rüdiger Dornbusch, Wilhelm Nölling, and Richard Layard, eds., Postwar Economic Reconstruction: Lessons for Eastern Europe (London: Anglo-German Foundation for the Study of Industrial Society, 1993)).

But I can't figure out why he disagrees with us. Or, rather, I can't figure out *what* he believes--what he thinks the likely distribution of possible destinies for Europe would be in the absence of the Marshall Plan.

Let me try to summarize what he did say:

• That the Marshall Plan needs to be analyzed in isolation: that UNRRA aid before was a separate business--aimed at "relief" rather than "reconstruction", and that MSA after was part of "security policy". He said this in a comment on Tom Schelling--who had said, extremely emphatically, that the key behind the MSA was to get dollars to European central banks (and that the "security policy" rationale was simply to make it easier for congress to vote for what Schelling saw as a continuation of the Marshall Plan).
  
• Milward gave no reasons for separating out the Marshall Plan from the rest of the arch of post-WWII U.S. policy. He seemed to think that the reasons were obvious.
  
• That the Marshall Plan had no material impact on the pace of European reconstruction.
  
• That U.S. post-WWII poilcy to encourage European integration was a failure: that when integration came,it came not on the pattern that the U.S. had been pushing but as the result of detailed negotiations among national bureaucracies concerned with narraow national advantages. (He seems to reject the point that bureaucracies maneuver in a field of force determined by visionaries--and that bureaucrats do, once in a while, actually obey their political masters on some subset of the priorities that their political masters sense are important. He seems not to credit the point that American policy makers wanted *any* form of European integration they could get, believing in free trade and desperately wanting to bind western Europe together.)
  
• That he found it interesting that figures like Jean Monnet and Robert Schuman are "cult figures" in the United States, while they were quickly marginalized in Europe in the 1950s and have been totally ignored since. (This seemed rich to me, coming from a guy whose current (European) university has both Monnet fellows and a Schuman Center; part of the fight over "Europe" today is over whether figures like Monnet and Schuman will become histrical demigods, after all--to prejudge this issue is to prejudge the issue of what "Europe" will become.)

 

Now it seems pretty clear to me what would have happened in the absence of the Marshall Plan.

Western European countries at the end of 1947 would have seen their foreign exchange reserves running dry, as they continued to import from the dollar area some 3% of GDP more than they were able to export. The European countries had virtually no chance of attracting private capital flows in order to finance this dollar gap: U.S. private investors had, after all, lost a fortune by investing in Europe in the decade after World War I. So in 1948 the western European countries would have had to take action to close their balance of payments deficits quickly and nearly completely.

How to do this? One way would be through devaluation. But devaluation takes two years or so to boost exports and lower imports. In the short run, the J-curve means that devaluation is more likely to boost than to reduce a balance of payments deficit. Almost surely some if not all western European economies would have resorted to large devaluations in 1948 in the absence of a Marshall Plan. But the closing of the balance of payments deficits would have required other measures.

One of the other measures would have been old-fashioned deflation: defend the international economy and your exchange rate by attacking the economy. Stop recovery for a year--have national product fall by 10 instead of growing by 5 percent. The political consequences of this might not have been pleasant. The second measure would have been to slap on additional import controls and licenses--creating a domestic interest group that lived off of access to the licenses, another group of hothouse domestic producers who would be devastated by moves to freer trade. And so forth. How much damage would deflation, import licenses, steps away from free trade, and so on--including the political consequences of the interruption of recovery--done? I don't know. The fact that economic miracles of the scale of post-WWII Europe are rare makes me think that they are probably quite fragile.

A Europe that started out on either of these paths would have had a difficult time becoming the open-to-international-trade European Common Market that we actually saw.

So that is my counterfactual. What is Alan Milward's? After all, we know that all historical judgments of importance or unimportance are really statements about counterfactual worlds...

I went back and read Milward's Reconstruction of Western Europe. I read it late into the night, annoying my wife. And I did not come up with anything satisfactory.

You can put together the thread of an argument from Milward's conclusion. But it is not coherent.

It starts with: "...the economic crisis of 1947 which... produced the European Recovery Program was not caused by the deteriorating domestic economic situation of the western European economies.... It was... attributable to the remarkable speed and success of western Europe's economic recovery.... The main cause [of the balance of payments deficit] ...was the sustained high level of capital investment in western Europe, expressed in a marked increase in capital goods imports from the United States in 1947. The response of the European economies to their increasing international payments difficulties was not, however, as it had been in 1920, to deflate but, with the exception of Italy, to maintain inflatonary boom conditions while increasing the level of control over foreign trade." (p. 465).

So far this seems unexceptionable. I might wish for some acknowledgement that policies of deflation to deal with balance-of-payments difficulties in the 1920s had bad effects, but his start is not false.

However, he continues: "The underlying causes of the dollar shortage were more diffuse, but they did not lie, as is sometimes argued, in a reduction of dollar outflows from America after 1946 nor in long-run structural alterations in the pattern of world trade and payments caused by the war." (p. 465).

And this seems to me a bad misstep. Europe's balance of payments difficulties in the late 1940s had *multiple* causes: structural alterations in the pattern of world trade, heavy European demand for dollar-zone products, and a lack of private investment money willing to bet on the recovery of Europe, to name three. To claim that any one of these was not a "cause" is simply wrong.

And then we have the declaration that "...[Marshall aid] allowed some western European governments to continue to pursue... the extremely ambitious, expansionist domestic policies which had provoked the 1947 payments crisis.... It thus postponed, without resolving, the problem of combining self-sustained recovery with foreign equilibrium." (p. 466).

Note that there is a sense in which *all* fixes for whatever problem "postpone, without resolving" some fundamental issues. I thought that that was the entire point of U.S. aid: to allow western Europe governments to postpone dealing with the dollar shortage until something else came along that would eliminate it. So I amnodding "yes, yes." And I expected Milward to make a bold declaration of the importance of the Marshall Plan immediately after I read his statement that: "High and increasing output, increasing foreign trade, full employment, industrialization and modernization had become in different countries, as a result of the experience of the 1930s and the war, inescapable policy choices, because governments could find no other basis for political consensus. The ERP permitted European governments to continue to translate these domestic political imperatives into economic policy." (p. 466).

But such a declaration of the importance of the Marshall Plan never comes. It trails off, and a few pages later we have: "Whether the degree of deflation which might have had to be pursued in western Europe after August 1947, had the ERP not been announced, would have seriously interrupted the reconstruction boom is a hypothetical question which need not be pursued since, in the context of the argument, Marshall Aid only postponed the hour of reckoning until an American recession did arrive or the ERP came to an end. The question was, what would happen then?" (p. 471). And the answer is that strong demand from Germany made up the slack: "The reabsorption [of West Germany] into the western European trade and payments framework... was essential for sustaining... recovery." (pp. 471-2).

So I am left scratching my head. The argument seems to be that the permanent problem of maintaining high demand in Europe was resolved by West Germany reintegration and recovery. And in the back of my head I hear Will Clayton, Charlie Kindleberger, Dean Acheson, and John McCloy saying "Yes! Yes!" But then Milward seems to take this as a reason to think that the Marshall Plan was unimportant because it was only a "temporary" measure that only "postponed the hour of reckoning."

And so I wonder: does Milward's belief that the Marshall Plan was unimportant hinge on a counterfactual in which the Marshall Plan is defeated, the U.S. withdraws into isolation--and Germany's rapid economic recovery comes on line three years earlier than it actually did, and makes up the slack by supplying Europe's factories with both capital goods and demand for products? There was no German boom in 1948 that would have allowed European countries to quickly eliminate the dollar gap by switching the source of their imports from New York to Frankfurt.

That is the only argument that I can tease out of Milward--either his book or his presentation. And it is too incoherent a counterfactual to be credited.

Best,

Brad

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Created 11/20/1997
Go to Brad DeLong's Home Page