Wednesday, May 25, 2005

The Marshall Plan: The Economic Recovery of Europe

Economics 110
Economic History of Europe

The Marshall Plan: The Economic Recovery of Europe

Europe; 1947. Only two years had passed since the defeat of Hitler’s Third Reich. The continent was divided between the American, British and French armies in the Western half of Germany and Europe, while Eastern half of Germany and East European countries were controlled by the Red Army under the protection of the Soviet Union.

Europe was at a serious crossroads at this time. The continent was devastated after 7 years of total war. Cities were in rubble. Industrial production centers were destroyed. Transportation centers such as roads and railways were smashed. European nations such as Great Britain and France were unable to export manufactured goods in order to raise capital so as to import food, raw materials to improve their industrial base, or even to pay down their war debts. In addition, this lack of industrial production would cause factories to lay off workers, increasing unemployment. With European people out of work, they would not have the means to provide for basic living necessities such as food and shelter. It was at this time that socialist and Marxist-based political movements began to grow in their numbers, membership, and their political power.

On June 5, 1947, Secretary of State George C. Marshall announced the European Recovery Program in his commencement address at Harvard University (Walker, 1997). This humble plan would allow the United States to provide aid and to rebuild the war-ravaged economies of Europe. George Marshall stressed that, “It would be neither fitting or efficacious for this government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of the Europeans. The initiative, I think, must come from Europe,” (Walker, 1997). The European Recovery Program, subsequently named The Marshall Plan, would become a successful lifeline to save Europe.

The Marshall Plan was a unique program in that not only did the program help rebuild Europe’s economy, but also cemented a stronger relationship between Europe and the United States, but also planted the seeds for European unification. Thus, the Marshall Plan was an economic and a political success. The European Recovery Program had three goals. The first goal was to remedy the “dollar gap,” (Kunz, 1997). In this dollar gap, European nations were short of U.S. dollars, which needed to import U.S goods (Kunz, 1997). European nations also lacked any substantial gold reserves since such gold reserves were used to purchase war materials from the United States early on in the Second World War. In 1945, the U.S. actually held half the world’s gold and currency reserves and produced half the world’s manufactured goods (Reynolds, 1997). Without gold or American dollars, European nations could not purchase goods from the United States. This problem brought a second integrated goal of the Marshall Plan aid. While the economic infrastructures of Europe and Asia were destroyed during the war, the U.S. infrastructure remained intact. American industry needed a market to sell their products. In the beginning of 1947, economic indicators were pointing to a possible recession in the United States. With the possible recession in the U.S., coupled with the poor economic conditions of Europe, the State Department feared such ramifications could cause trade protectionism by nations, followed by a drop in global trade and the possible rise of global fascism—conditions similar to the late 1930s and the aftermath of the Great Depression (Kunz, 1997). United States Under Secretary for Economic Affairs William L Clayton said, “Let us admit right off that our objective has at its background the needs and interests of the people of the United States. We need markets—big markets—in which to buy and sell (Reynolds, 1997). Finally, Marshall aid would provide debt relief for European nations. This allowed Europe to consolidate their balance sheets, freeing up currency that could be use to purchase more American goods in order to rebuild their economic infrastructure. Great Britain and Norway both used counterpart funds—funds the European governments were required to put up equal to the value of European Recovery Program goods in which Washington wanted earmarked for specific purposes—to reduce their debt (Reynolds, 1997).

The Marshall Plan called for the creation of the Economic Co-Operation Administration or ECA. The ECA would be an inter-governmental agency between Washington and the European countries, which would earmark Marshall aid dollars for reconstruction. Two individuals would head the ECA jointly. In Washington, Paul Hoffman, the former president of the Studebaker Automobile Company, would head the ECA. While in Europe, the ECA would be headed by former Secretary of Commerce Averall Harriman (Maddox, 1997). The ECA allocated grants and loans to European nations according to each countries dollar balance of payment deficit (Kunz, 1997). Great Britain received 23% of Marshall Plan aid, while France received 20% of Marshall Plan aid (Kunz, 1997). Overall, one-third of all Marshall aid imports were agricultural products (Kunz, 1997). Between 1948 and 1951, Congress authorized over $13 billion in Marshall aid for Europe (Maddox, 1997). The ECA also provided American technical and manufacturing expertise to help modernize European industry and brought European managers over to the U.S. to observe American manufacturing techniques (Maddox, 1997).

Was the Marshall Plan a success? In terms of industrial production, Marshall aid dollars provided an incredible catalyst to jump-start the European economies. In 1951, Italy’s industrial production was up 54% (Walker, 1997). In France, industrial production had increased 50% higher than it had been in 1939 (Walker, 1997). As a whole, Western European industrial production rose 62% in the two years after 1947 (Walker, 1997). However, the Marshall Plan provided an even greater political success in three areas. First, the Marshall Plan cemented American interests firmly into Western Europe. The years of 1947 to 1951 marked the beginning of the Cold War between the United States and Soviet Union. In March of 1947, President Harry Truman invoked the Truman Doctrine, which pledged U.S. support to nations threatened by subversions. Truman also offered $250 million in aid to Greece and $150 million in aid to Turkey in order to fight off communist insurgencies (Kunz, 1997). In Western European governments, socialist and communist parties were making inroads in gaining legislative seats among the governments of France and Italy (Kunz, 1997). George Kennan’s Policy Planning Staff reported that, “Economic maladjustment…makes European society vulnerable to exploitation by any and all totalitarian movements,” (Kunz, 1997). Marshall Plan aid allowed Washington to cement close ties towards Europe and allow the European leaders to avoid dealing with power-sharing arrangements with extreme leftist and Marxist parties. The second great political success of the Marshall Plan was that it allowed the coalescence of a defensive alliance between Europe and the United States while providing containment policy against the Soviet Union. Marshall aid helped rebuild a strong Western European economy. Yet at the same time, the development of a stronger European economy also meant the need for a stronger defensive force to counter Soviet military power in Eastern Europe. In the opening months of 1948, the United States and Great Britain started to develop the possibility of a security alliance. This security alliance evolved into the North Atlantic Treaty Organization on April 4, 1949 (Kunz, 1997). NATO and the deployment of U.S. troops in Europe deterred any Soviet attempts to militarily invade Western Europe. Finally, the Marshall Plan allowed for the early beginnings of European integration. The Marshall Plan forced the European nations to come together and hammer out an aid package, which they were to provide to the United States. Individual nations had to set aside their differences to achieve common ground. In addition, the ECA became an inter-European government agency, which was influential in shaping European monetary and fiscal policy as a whole, rather than shaping such policy within individual nations at the expense of others. Success of the ECA allowed for further European economic co-operation with the development of the European Economic Community, the Common Market, and finally the European Union.

The Marshall Plan was a unique economic program, which lifted a continent from the destruction of war to a plateau of strong prosperity. No other aid program could compare in scope or grand design—nor could such a plan hailed as successful. George Marshall reiterated in his Harvard address “Our policy is not directed against any country or doctrine, but against hunger, poverty, desperation, and chaos,” (Walker, 1997). For George Marshall, the people of the United States showed that resolve and humane gesture for the people of Europe.


Kunz. Diane B. (1997). The Marshall Plan Reconsidered: A Complex Of Motives. Foreign Affairs. Vol. 76. No. 3. Pg. 162.

Maddox, Robert James. (1997). Lifeline To A Sinking Continent. American Heritage. Vol 48. No. 4. Pg. 90.

Reynolds, David. (1997). The European Response: Primacy Of Politics. Foreign Affairs. Vol. 76. No. 3. Pg. 17.

Walker, Martin. (1997). George Marshall: His Plan Helped Save Europe. Europe. No. 365. Pg. 22.

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