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Conceptualizing the Marshall Plan: Chapter 1 – Monograph Collection

Publisher: George C Marshall Foundation

War-torn western Europe experienced an unexpectedly rapid recov-
ery right after World War II. By the end of 1945, industrial produc-
tion had already bounced back to 60% of prewar output, with
France, Belgium, and the Netherlands reaching 90% levels the following
spring. Economic revival in Great Britain and Norway pushed production to
110–115%. In France and Italy Gross Domestic Product (GDP) rose more
than 50%. Then, in early 1947, what had seemed strong proved fragile and
unsustainable. A fundamentally unhealthy system relapsed. In the estima-
tion of one historian, economic conditions on the subcontinent turned “des-
perate” at midyear.
Nemesis, goddess of retributive justice, made her delayed appearance two
years after mass killing stopped. For many, her arrival, principally in the
modern guise of malfunctioning market mechanisms, now made peace
almost as bad as the war that had cursed millions of people since 1939. Six
years of World War II battered and staggered Europe economically. To its sur-
vivors, the conflict bequeathed acute devastation, dislocations, imbalances,
and shortages. Besides war’s widespread human and material destruction,
accompanied by scarcities of fuel, housing, and food, huge dollar shortages
resulted from too few exports and too many imports from the United States,
a “universal emporium” at the time. A massive balance of payments gap
opened up, growing worse with time. A dearth of foreign exchange put grains,
raw materials, and machinery from abroad, all crucial to peacetime recuper-
ation, out of reach of the needy. The sole surplus seemed to be rubble.
Europe’s structural damage was exacerbated by both the fierce winter of
1946–47 and what soon followed, crop failures and the century’s worst har-
vest. Abruptly, its production of milk, meat, and grains fell 20% to 30%. In
the frigid months of 1947, railroads could not deliver coal, then an indispen-
sable source of heat and energy, while Germany’s coal mines in the Ruhr
provided but a small fraction of their potential. Symptomatic of the priva-
tion and suffering afflicting Europe’s cities, Londoners tightened their belts
on rationed bread and shivered without heat from 8 A.M. until 4 P.M. The
French government sliced the daily bread ration of Parisians in half, to just
200 grams. Whatever their ordeal, they were still better off than Berliners
living on a shoestring, homeless in bombed-out ruins. An exception to the

Barry Machado
Vienna food protest, May 14, 1947.
general postwar upswing that stalled, Germany suffered greatly as GDP
plummeted 70% between 1945 and 1947.
War’s aftereffects sapped morale and bred despair as well. Underfed,
unemployed, and unpaid workers meant that by late spring hope had slack-
ened along with industrial and agricultural production. But there was still
one other weakness in postwar Europe’s economic system. Unlike millions
of Europeans, Nemesis labored overtime. An inflationary fever spiked,
depreciating incomes, currencies, and savings. In places like Germany and
Austria, a sharp rise in prices, caused by an unlimited production of occu-
pation currency by the Soviets, fostered hoarding, black markets, and labor
unrest. George W. Ball, then an American lawyer working in Paris, remem-
bered those days as “a nervous time, with the economies of the European
countries declining alarmingly.” One Englishman likened the crisis to “an
economic Dunkirk,” while a leading French economist thought that Europe
in 1947 was “on the brink of the precipice.”1
Rising prices and declining production fueled not only widespread pover-
ty and pessimism but also its frequent companion, political extremism. The
steady growth and mounting influence of indigenous Communist parties,
especially in France, Italy, and Greece, mirrored popular disaffection with
unregulated capitalism and visions of a better Europe. Indeed, a
Communist-led insurgency, supported by neighboring Communist govern-

Conceptualizing the Marshall Plan
ments in the Balkans, had already convulsed Greece in a civil war. Another
astute Englishman, the historian Arnold Toynbee, had been proven wrong.
Given its hazardous economic, political, and psychological conditions, 1947
had replaced 1931 as the twentieth century’s real annus terribilis. They
were, moreover, the dire circumstances that provoked and prodded an
unprecedented American action, George C. Marshall’s countervision.
The (Inter)twin(ed) Goals
That the European economy might, as a consequence of enormous mal-
adies and pressures, suffer a wholesale collapse like the 1930s seemed prob-
able at the time to concerned Americans. Hard times, economically, and
ominous trends, politically, convinced official Washington by June 1947 that
an American response was imperative. With its conceptual origins and ini-
tial nurture in the State Department, the resulting Marshall Plan, it should
be underscored, emerged primarily from powerful impressions and unset-
tling forebodings rather than hard, irrefutable evidence of an imminent
western European breakdown. Upon Secretary of State Marshall’s insistence,
there was to be no paralysis by analysis. Perfect proof was beyond reach, and
the situation was too risky to await its demonstration anyway. Who could
calculate how much misery was enough?
The Marshall Plan originated, in other words, as a qualitative judgment
in search of quantitative proof. Subsequently, historians and economists on
both sides of the Atlantic, armed with masses of data, as well as counterfac-
tual and econometric analyses, have taken up the question, not of contem-
porary perceptions, but of whether the Marshall Plan was economically nec-
essary after all. Their quest for understanding has been an exemplary schol-
arly inquiry, divorced from the cynicism and denigration implied in
Benjamin Disraeli’s “lies, damn lies, and statistics.” The historical guild sit-
ting in judgment has yet to render its final verdict.2
Unlike today’s historians and economists, Secretary of State George C.
Marshall’s principal advisers were of one mind about the absolute necessity
of doing something. Various first-hand accounts, perhaps the most influen-
tial being those of William D. Clayton, Under Secretary of State for Economic
Affairs, raised alarm and frightened policymakers. In response, the Marshall
Plan’s broad outlines were roughly sketched during the fifteen weeks
between February 21 and June 5, 1947, the date of Marshall’s famous
Harvard Address. Under Secretary of State Dean Acheson’s “Delta Council”
speech, pulling together ideas from many sources, first identified food and
fuel as the precarious determinants of Europe’s economic well-being. In also
emphasizing ample reserves of foreign exchange as critical to the resump-
tion of a flourishing export-import trade, Acheson echoed many in his
department who regarded its shortage as the “decisive limiting factor”

Recently returned from visits to Paris and Berlin and the Moscow Conference of Foreign
Ministers, where he endured forty-five days of meetings, Marshall spoke to a national
radio audience on April 28, 1947, regarding the conference’s failures on Germany and
its relation to Europe’s economy. He blamed Soviet intransigence for the conference’s fail-
ure to make progress on German issues. He observed: “The recovery of Europe has been
far slower than had been expected. Disintegrating forces are becoming evident. The
patient is sinking while the doctors deliberate. So I believe that action cannot await
compromise through exhaustion.”

Conceptualizing the Marshall Plan
retarding Europe’s economic recovery. At the outset of the Marshall Plan,
grains, coal, oil, cotton, and dollar exchange all achieved urgency as bottle-
necks to be targeted and widened.
Later, in his Harvard Commencement Speech to which George F. Kennan,
head of the State Department’s Policy Planning Staff, and Clayton con-
tributed substantially, Secretary Marshall highlighted the vital links between
agriculture and industry, between farms and cities, in Europe’s return to
economic health. One of Marshall’s pressing priorities, rivaled only by, or
perhaps even exceeded by, his concern for Europe’s psychological state
(“confidence in the economic future”), was the reestablishment of balanced
economies on the continent. The dual objectives of elevated morale and bal-
anced economies guided Marshall Planners in their work, too.
At the bedrock of George Marshall’s thinking about aid to Europe were
two articles of faith: a devout belief in “economic health” as prerequisite to
“political stability” and a conviction that western Europe could achieve nei-
ther without both initiative and cooperation. Marshall rejected as unwork-
able a unilateral American solution to the perceived crisis in Europe. He
foresaw no lasting improvements through a strictly bilateral approach either.
Only within a regional, multinational framework—and in close partnership
rather than through charity—could permanent recovery emerge. Recipients
had to be centrally involved in planning for their own assistance. Though
written by someone else, the opening sentence of the so-called “Harriman
Report” captured the crux of his creed: “Only Europeans can save Europe.”
A realist, Marshall knew that trying to deliver Europe from itself was folly as
well as harmful to his country’s true interests. America’s self-assigned role
was to be what Paul G. Hoffman, Marshall Plan head as Administrator of the
Economic Cooperation Administration (ECA), later described in words
befitting a carmaker: “a catalytic agent and never the main driving force.”3
An agriculturalist might very well regard the nearly $13,000,000,000 that
the United States spent on the Marshall Plan as “seed money.” Marshall, an
amateur gardener, would have agreed.
Three months after “The Speech,” sixteen European nations—encour-
aged by Ernest Bevin, British Foreign Minister, and his French counterpart,
Georges Bidault—organized themselves as the Committee on European
Economic Cooperation (CEEC), assembling in Paris under the leadership of
Oxford don Oliver Franks. At first estimating their basic needs at
$29,000,000,000 in order to return to self-sufficiency in four years, their
reply to Marshall’s request for a blueprint was completed, after a false start,
by late September. Paring down their dollar requirements in stages by
$12,000,000,000 while blending the vague with the explicit, their compre-
hensive report singled out for special attention bottlenecks in wheat, coal,
steel, industrial equipment, and agricultural machinery, among other need-
ed subsidies. It also provided what would be, for some, the eventual meas-
ures of a successful joint program.

Barry Machado
In 1947, western European industrial production varied hugely among
countries and industries. With wartime neutrals like Sweden and
Switzerland in much better shape than former belligerents, the aggregate
was just 70% of its prewar level. If by 1952 Europe surpassed 1938 levels of
industrial and agricultural production by 30% and 15%, respectively, then
none dare call a future Marshall Plan a failure. In addition, the Committee
for European Economic Cooperation agreed to a host of reforms: expansion
of foreign trade, elimination of trade barriers, reduction of inflation, and
shrinkage of the dollar gap. In order to attain their targeted production fig-
ures, along with internal financial stability, Europeans promised in writing
unprecedented collective action. Maximum self-help and maximum mutual
aid would be the keys to a healthier continent. For the Englishman Franks,
the Marshall Plan’s “most remarkable feature” as it took shape was the
absence of any bullying by the United States. At a time when America was
“dominant” and Europe “dependent,” Washington “did not assert its domi-
nance. What it did was to urge the Europeans together.” Great Power swag-
ger was absent, along with diktats. Secretary Marshall and his close advisers
had struck the proper note which Josef Stalin never played. From the foun-
dation of mutual respect, the rest of the collaborative enterprise arose.4
On April 3, 1948, President Harry S. Truman signed into law the Foreign
Assistance Act, which launched the Marshall Plan by creating the Economic
Cooperation Administration. An independent government agency, the ECA
would be run by an administrator, Paul Hoffman, responsible only to the
President himself. It would function in an unusual triangular arrangement,
with a headquarters in Washington, one in Paris under the supervision of
W. Averell Harriman, and country missions in sixteen (ultimately, seven-
teen) European capitals. Duties were apportioned, with Hoffman attending
to Congress and the American public while Harriman dealt with recipient
nations. For the first fifteen months of its operation Congress provided
$5,300,000,000. All subsequent appropriations would be determined annu-
ally after a yearly review, and in gradually scaled-back amounts. A section of
the Act merely rephrased the goals spelled out earlier in the CEEC’s report,
with Congress largely mandating what the Europeans had recommended.
With his signature, President Truman broke fundamentally and irreversibly
with America’s isolationist past. A sense of national emergency had rede-
fined traditional foreign policy.
While altruism comprised one motive, the commitment of the Marshall
Planners to reconstruct western Europe using a European template was also
impelled by minor and major anxieties. The minor worry was over the long-
range domestic impact of the possible loss of America’s traditional trading
partners and their big market. After all, in 1947 the United States exported
to Europe twice as much as it imported, providing an $8,000,000,000 sur-
plus and stimulus. Winning the peace was crucial, but sliding back into the
economic stagnation of the 1930s was intolerable. “Our export market,” the

Above left: William D. Clayton, Under Secretary of State for Economic Affairs,
1946–47. Above right: George F. Kennan, Soviet expert and head of the State
Department’s Policy Planning Staff, 1947–49.
Below: Secretary of State George C. Marshall walks to the Harvard University
postgraduation Alumni Ceremony to receive an honorary degree and to deliver a
short speech, June 5, 1947.

Barry Machado
State Department’s Ernest Gross reminded his colleagues, is in “an exposed
and unsatisfactory position.”5
The major unappetizing prospect that justified preemptive action was
that serious market dislocations in western Europe might facilitate Soviet
ambitions and Communist electoral victories. With his Marxist blinders in
place, Josef Stalin was anticipating capitalism’s imminent collapse. To nudge
history along, and to promote the illusion of independent western European
Communist parties, he decreed for a time that the faithful involve them-
selves in “popular fronts,” as well as policies of moderation and reformism.
The dread and specter of an ideological foe energized lifeless exchange rates,
dry export figures, and bloodless trade deficits. American fears, probably
justified, overrode the possibility that Communist governments in France
and Italy might—in practice—be travesties of Leninism and Stalinism, given
their respective cultures and customs. Apprehension had been growing ever
since the end of the war. In October 1945 in France’s elections for the
National Assembly, the French Communist Party (PCF) received 26% of the
vote and the highest percentage of seats. The following November
Communists increased their electoral strength, getting 29% of the vote and
electing numerous mayors and other local officials throughout the country.
In 1946 and 1947 they were France’s largest political party. In May 1947, the
French government had five Communist ministers in its ruling coalition cab-
inet. The head of the Communist Party served as Deputy Premier, and the
Minister of Defense was also a Communist. On the eve of Marshall’s
Harvard Speech, the 618-member Parliament included 182 Communists.
In Italy, Communists obtained a troubling 19% of the vote in the June
1946 general election for the Constituent Assembly. In the fall’s municipal
elections a disturbing swelling in Red popularity occurred, with more
Communist gains in regional elections in Sicily the following spring. By
1947, the Italian Communist Party (PCI) was widely regarded as larger and
more powerful than its French counterpart. Besides being the most formida-
ble in all of western Europe, it seemed to be the boldest. In May 1947,
Palmiro Togliatti, popular leader of Italy’s Communist movement who had
spent the war in Moscow, announced openly that “direct action” by his fol-
lowers was a possibility. What also distressed the State Department were
Communist-dominated unions that fomented chaos in both countries in
1947. They flexed their power in food riots and a series of strikes and work
stoppages—by railroad workers, dock workers, and garbagemen.6 At the end
of the annus terribilis, George Kennan of the Policy Planning Staff interpret-
ed a Marshall Plan yet to be passed by Congress as an “effective tool in the
strategy of containment.”7
American historian Melvyn P. Leffler believes that one of the two pri-
mary motives behind the Marshall Plan was fear that the “Communist left
would triumph, perhaps even through free elections” and that the “appeal of
Communist parties” had to be “undermined” in western Europe. Prior to his

Conceptualizing the Marshall Plan
President Truman signs the Foreign Assistance Act, authorizing the Marshall Plan, April 3,
1948. The audience includes (left to right), Under Secretary of State Robert A. Lovett,
Senator Arthur Vandenberg, Treasury Secretary John Snyder, Representative Charles
Eaton, Senator Tom Connally, Secretary of the Interior Julius A. Krug, Representative
Joseph Martin, Secretary of Agriculture Clinton Anderson, Representative Sol Bloom,
Attorney General Tom Clark, and Postmaster General Jesse M. Donaldson. Marshall was in
Bogotá, Colombia, attending the Ninth International Conference of American States.
trip to Cambridge, Secretary Marshall warned Italy’s Prime Minister, rather
fittingly on May Day, that additional American aid hinged on the exclusion
of the radical left from the ruling coalition. Shortly thereafter, Marshall’s
Ambassador in Paris told the French Premier: “no Communists in gov. or
else.” Before the month of May was over, Marshall did authorize more emer-
gency assistance to Italy because Communists were in fact barred from the
cabinet. At the end of that extraordinary year, Robert A. Lovett, Marshall’s
right-hand man, confided to his diary that Marshall Plan assistance would be
contingent on Communist-free governments.8
As Averell Harriman prepared to assume his duties at the ECA’s Office of
the Special Representative (OSR) in Paris, he too conceived of the Marshall
Plan as a strategic weapon in the emerging Cold War. “Stalin was convinced
he could move into Western Europe,” recalled America’s wartime ambassa-
dor to the Soviet Union. He elaborated on this point in the same interview:

Barry Machado
Stalin was “undoubtedly told by leaders in the Communist parties in Italy and
France that their organizations were very strong” and that “with some help
they would be able to take over Italy and France.” Though certainly arguable,
in Harriman’s judgment “they would have done so if it hadn’t been for the
Marshall Plan.” Writing in 1978, the journalist Theodore H. White, who lived
in Paris from 1948 until 1952, painted the European scene with a broader
brush than even Harriman had. “The Marshall Plan was,” he declared, “the
most successful anti-Communist concept in the past fifty years.”9
Like DNA’s double-helical molecular structure, the strands of economics
and politics are apparently discrete yet tightly linked. They were frequently
treated by Marshall Planners as separate yet generally understood by them
as inseparable. Perhaps no more profoundly than by the realist George
Kennan before he left the State Department and by Lincoln Gordon,
Director of the Program Division at OSR during 1949 and 1950, most
grasped that he who pursues economics without reference to politics pur-
sues essentially a construct of the mind. The Marshall Plan’s second-in-com-
mand in Paris, Milton Katz, understood the “heart” of American policy from
1947 until 1952 to be “the integration of economic, political and psycholog-
ical factors.” The difficult “German Problem” constantly reminded Kennan,
Gordon, and Katz that postwar European politics demanded regional eco-
nomic integration for a lasting solution. In the end, they would fail to
achieve some of their intertwined goals, but not because the concept of
political economy escaped them.10
Keeping with the original CEEC diagnosis of Europe’s condition and the
follow-up prescription by its successor organization, the Organization for
European Economic Cooperation or OEEC, the first fifteen months of the
Marshall Plan involved mostly emergency commodity relief. The Four F’s—
foodstuffs, feed, fuel, and fertilizers—comprised 60% of all aid. Such assis-
tance also helped to close the dollar gap. Since few dollars, in effect, crossed
the ocean, exchange and convertibility barriers were effectively bypassed.
Afterwards, America’s reformist zeal took over and the emphasis switched to
subsidies and expenditures that promoted economic development, enhanced
productivity, battled inflation, expanded intra-European trade, built self-sus-
tainable and balanced national economies, provided technical expertise,
fought protectionism, and pushed regional economic integration through new
mechanisms. All of these manifold objectives were pursued by means of an
ultimate mix of 90% grant and 10% loan, and by regulating the uses to which
counterpart funds in local currencies were put (see Chapter III).11
While the Marshall Plan was much more than an economic enterprise, in
the late 1940s there existed, at least in theory, a variety of ways to get a con-

Conceptualizing the Marshall Plan
ceptual handle on Europe’s predicament. Since national income accounting
was, as David Reynolds has pointed out, “still in its infancy,” a fairly crude
method—heavily dependent on shaky projections—was adopted. To attain
the overriding goals of expanding industrial and agricultural production
beyond the levels of 1938, which the CEEC recommended, the OEEC later
ratified, and Congress ultimately required, Marshall Planners settled on
Europe’s war-induced balance of payments gap that had opened wide in
1946 and 1947 as the appropriate problem to solve. They selected each
recipient nation’s trade deficit as the principal determinant for apportioning
Marshall Plan aid: the greater the estimated shortage of dollars, the larger
the ECA’s allotments. To the chagrin of some nations, measures of national
income played no part in their calculations. Western Europe’s investment
needs were simply disregarded or downplayed.12
As recovery progressed towards the 1938 figures—in effect back to the
future—concerns about permanence, about sustaining and improving upon
those gains, came to the fore. Lincoln Gordon thought that “the ECA job in
the first two years was deceptively easy, since it was essentially a restoration
of pre-war economic conditions.” Fellow Marshall Planner Van Cleveland
regarded the first phase of the Marshall Plan as briefer, lasting just nine
months rather than until the end of 1949.13 Whichever the case, a reorien-
tation did occur in the ECA’s point of view, towards what some have called
an investment banking perspective. In order to establish preconditions for
continuous growth, ideas changed about how to program assistance. In pur-
suit of ends more complicated than 1938 production levels—creating sound
and convertible currencies, liberalizing European trade and stimulating
intra-European trade, controlling inflation, and improving standards of liv-
ing, for example—the balance of payments method and the goal of a conti-
nental balance of payments equilibrium were absorbed into a national
accounts–national income approach. Keynesianism eventually reigned
supreme in the ECA’s decision-making process.
Head of economic planning in Washington was a transplanted profes-
sor of economics at the Massachusetts Institute of Technology, Richard
Bissell. After graduation from Yale, Bissell studied for a year at the London
School of Economics. During the 1930s, to the dismay of his staunch
Republican father, a wealthy Hartford insurance executive, he sympa-
thized with Franklin D. Roosevelt’s New Deal, as did many future Marshall
Planners. As a new convert to an old progressive faith in the beneficence
of government intervention in the economy, Bissell actually taught the
very first course on Keynesian economics at Yale, once the pulpit for
William Graham Sumner’s laissez faire doctrines. In the United States,
World War II validated Keynesian doctrines to the extent that by 1948
most government economists considered themselves disciples. Not sur-
prisingly, Bissell employed Keynesian analysis in co-authoring the influen-
tial Harriman Report.

Barry Machado
With his “strong background in Keynesian doctrine and a consequent
belief in the value of governmental activism,” Bissell made the Marshall Plan
into a proving ground for the monetary and fiscal ideas of John Maynard
Keynes. Employing the master’s tools, he and his cohorts sought to balance
Europe’s need to achieve high levels of investment required to modernize its
economy with its requirement to keep inflation, trade deficits, unemploy-
ment, and especially dollar shortages under control. With their expertise in
taming business cycles and managing demand, they confidently prescribed
economic measures for national and regional growth in western Europe.
Often, the skills of a nimble juggler were essential.14
By fall of 1949, with Hoffman and Bissell in the forefront, Marshall
Planners were already pushing strenuously for greater European production,
productivity, and economic interdependence as antidotes to the poisons of
class consciousness and class hatreds that circulated widely throughout
European society. Indeed, they sought to foster new values among
Europeans towards market forces, particularly towards the expansion of
Gross National Product (GNP). According to Paul Hoffman, the ECA’s “end
goal” became truly ambitious, “nothing less than the creation of a ‘new’
Europe.”15 For the European historian David Ellwood, the Marshall Plan now
“aim[ed] to change attitudes and outlooks, aspirations and mentalities . . .
[and] wants [and] needs” of European businessmen and workers, rendering
the former more enlightened and the latter less revolutionary. The
Americans had rolled the dice in a high-stakes game. After all, a transformed
western Europe would not only be less distinctive, politically and culturally,
but also much better able to challenge the United States for global econom-
ic supremacy. In the context of the Cold War, the gamble seemed worth it.16
But before Phase Two had a fair chance to play itself out, war on the
Korean peninsula gradually redefined the Marshall Plan after the midpoint of
its projected four-year life. Thereafter, concerns for international security
and the defense of western Europe inexorably transformed the ECA into a
quasi-armaments program that undercut its purely economic and political
objectives in the prewar era. In October 1951, Congress passed the Mutual
Security Act, abolishing ECA as an independent agency and making it a part
of the Mutual Security Agency, or MSA. In a practical sense, the Marshall
Plan as an economic recovery program with accompanying political aims
ended prematurely. After forty-five months, the Plan officially shut down on
December 31, 1951. By that time, the impact of the “catalyst” had been pro-
found, justifying the difficulties of its installation. To get congressional and
public approval, and then to make it function properly, had called for a great
mobilization of effort in both the United States and western Europe.17