Sputnik Escalates the Cold War
Teaser Image

Marshall Plan

Title: Worker assists in rebuilding West Berlin
Button: Click to display an enlarged version of the image.
Massive U.S. economic aid program for Western Europe begun in 1947 and designed chiefly to rebuild war-torn economies and serve as a bulwark against communist encroachment. In the wake of World War II, Europe experienced a severe economic crisis because of the crippling effects of nearly six years of war. The United States had attempted to promote European recovery through limited reconstruction loans, relief assistance, German war reparation transfers, and new multilateral currency and trade arrangements. By the winter of 1947, however, it was apparent that these piecemeal stabilization efforts were not working. Millions of West Europeans were unemployed, inflation and shortages were rampant, and malnutrition had become a widespread concern.

The central problem facing Europe was low industrial productivity. Industrial and agricultural production lagged behind prewar levels, as the wartime destruction or disruption of factories and equipment had led to dramatically decreased industrial output. Adequate funds were not available for reconstruction and replacement, and none of the nations involved had the wherewithal to raise large amounts of capital. To make matters worse, basic building-block industrial materials such as steel and coal were scarce.

The growing economic troubles fed frustration, hopelessness, and despair. And many Europeans had begun to seek out political solutions to their troubles. Alienated from capitalism, some began turning to communism as an alternative. In France, Italy, and Germany, the crisis had eroded government support and lent credence to communist promises of economic stability. In Great Britain, serious financial woes forced policymakers to reduce international agreements that had helped resist the spread of communism. Only by eliminating the economic conditions that encouraged political extremism could European governments withstand the influence of communism, and nobody seemed to understand that better than the Americans.

U.S. policymakers believed that rejuvenated West European economies would provide a strong demand for American goods and help maintain the United States as the world's leading economic power. They also envisioned Western Europe as an integral part of a multilateral economic system of free world trade crucial to the liberal-capitalist world order that Washington had in mind for itself and its allies. Clearly, unity and prosperity in Western Europe would create an economy able to generate high productivity, decent living standards, and political stability.

The European Recovery Program, which came to be known as the Marshall Plan in honor of Secretary of State George C. Marshall, would serve to strengthen shaky pro-American governments and ward off the inroads being made by domestic communist parties and other left-wing organizations sympathetic to the Soviet Union. U.S. Undersecretary of State Dean G. Acheson, who helped formulate the plan, argued that American foreign policy had to harness American economic and financial resources to preserve democratic institutions and to expand capitalism abroad. He also saw the Marshall Plan as necessary for long-term national security. Thus, the plan emerged as an all-embracing effort to revive the economies of Western Europe. The plan was unprecedented in terms of the massive commitment of American dollars, resources, and international involvement.

First formally proposed by Secretary of State Marshall on 5 June 1947 in a speech at Harvard University, the plan applied to all of Europe. Aid was not directed against communism specifically but was directed toward the elimination of dangerous economic conditions across all of Europe. Accordingly, the United States controversially planned to reconstruct Germany as an industrial power. Marshall had concluded that German resources, manpower, expertise, and production were absolutely essential to European recovery. For success, the plan had to allow full German participation but at the same time prevent German industrial power from becoming a future threat to peace.

Additionally complicating matters was Marshall's belief that the objective of the Soviet Union was to delay European economic recovery and therefore exploit the consequent misery and political instability. Yet Marshall did not want his nation to assume the responsibility for permanently dividing Europe. Thus, to avoid having the plan viewed as anti-Soviet, he invited the Soviet Union and its East European satellite states to participate in implementation of the plan. Nations eligible to receive economic assistance would be defined by those countries that were willing to cooperate fully with the American proposal. All the while, U.S. policymakers fully counted on Moscow's rejection.

President Harry S. Truman believed that the United States should not unilaterally devise a plan for recovery and force it upon the Europeans. Instead, the particular aid initiatives came from the Europeans and represented not a series of individual requests but rather a joint undertaking by all of the countries in need of American assistance. In other words, the Americans wanted a lasting cure for Europe's problem and not a mere quick fix. America's role would be to assist in the drafting of a program and to support that program with American resources.

The Soviet Union together with Poland, Czechoslovakia, France, Great Britain, and twelve other European nations gathered at the first planning conference, convened in Paris on 27 June 1947. Soviet Foreign Minister Vyacheslav Molotov demanded that each country be allowed to fashion its own plan and present it to the United States. Georges Bidault and Ernest Bevin, the foreign ministers of France and Britain, respectively, opposed Molotov. Bidault and Bevin, in line with American wishes, stressed that the Marshall Plan had to be a continent-wide program in order to take advantage of the economies of the continent as a whole, or, seen in another light, to take advantage of the economies of scale rendered only through a jointly administered effort. As the United States had predicted, the Soviets quickly withdrew, denouncing the plan as an imperialist, anti-Soviet tool. Molotov warned that if Germany were to be revived, then the continent would be divided. Poland, Czechoslovakia, Hungary, and Romania still expressed interest in the Marshall Plan, but the Soviet Union pressured them into withdrawing.

The Soviets left Paris chiefly because participation in the plan would have required the disclosure of extensive statistical information about the Soviet Union's financial condition and also would have given the Americans some control over Russia's internal budget. Additionally, George Kennan, father of the U.S. containment policy and director of the State Department's policy planning staff, had earlier made it clear that aid would not be advanced to nations that refused to open their economies to U.S. exports. These requirements were unacceptable to the Soviets, as Kennan realized. The Soviets were not willing to abandon the exclusive orientation of their economy.

The Soviets kept their finances a well-guarded secret and set about weakening the Marshall Plan. In response, they formed the Cominform on 6 July 1947 to help coordinate international propaganda aimed at torpedoing the plan. On 12 July 1947, the Soviet Union negotiated trade agreements with its communist satellites that diverted to Eastern Europe a substantial amount of trade that had previously gone to Western Europe. Finally, later that year, the Soviets proposed the Molotov Plan for East European recovery as an alternative to the Marshall Plan.

Lengthy negotiations thus ensued without the Soviets or their client states. Participating nations laid the groundwork for the recovery plans and requested $28 billion to be spent over the course of four years. On 15 March 1948, the U.S. Senate endorsed the plan by a 69–17 vote after the House had approved it by a 329–74 margin but only allocated $17 billion in aid. The Marshall Plan passed despite growing conservative objections to international agreements. The communist-led overthrow of the Czechoslovakian government and the Soviet Union's badgering of Finland for military bases had apparently convinced U.S. legislators of the seriousness of the Soviet threat.

When the plans were finalized, the United States created the Economic Cooperation Administration (ECA) and named Paul Hoffman as its head. The ECA made the ultimate determination of specific aid and projects to be undertaken. The fundamental way in which the Marshall Plan contributed to increased European productivity was by furnishing capital, food, raw materials, and machinery that would have been unavailable without American help. The ECA made U.S. funds available to foreign governments to buy goods that were primarily obtained from their own private agricultural and industrial producers. The ECA also authorized purchases in other countries, especially Canada and Latin America. These policies also helped to reduce excessive demand on raw materials in the United States, thereby protecting the U.S. economy from inflationary pressures. The plan additionally benefited non-European countries and contributed to the development of multilateral trade. Recipients of the largest amounts of aid were Britain, France, Italy, the Federal Republic of Germany (FRG, West Germany), and the Netherlands.

Participating European governments sold American-financed goods to their own people. The payments received were placed in special funds that were employed where they could best serve economic recovery and ensure financial stability. Italy used its funds for public works projects, such as replacing bombed-out bridges. The British reduced government debt to check inflation.

During 1948–1952, approximately $13.5 billion in Marshall Plan aid went to the revitalization of Western Europe and guided it onto the path of long-term economic growth and integration. By 1950, industrial production in Marshall Plan countries was 25 percent higher than 1938 levels, while agricultural output had risen 14 percent from the prewar level. The volume of intra-European trade among Marshall Plan beneficiaries increased dramatically, while the balance-of-payments gap dropped significantly. Britain had sufficiently recovered by January 1951 so that Marshall Plan aid was suspended at that time, a full year and a half before the scheduled termination of the program. It should be noted, however, that the onset of the Korean War in June 1950 and the autumn 1950 decision to deploy American troops to Western Europe to bolster North Atlantic Treaty Organization (NATO) defenses also contributed to increased European productivity.

The Marshall Plan also advanced European unification and integration. The Americans sought a single large market in which quantitative restrictions on the movement of goods, monetary barriers, and trade tariffs had been largely eliminated. The creation of an integrated free market modeled after the United States would encourage the growth of consumer demand and large-scale industry. It would also permit more efficient use of materials and labor while stimulating competition. The West Europeans removed a number of economic barriers and established subregional agreements such as the European Coal and Steel Community (ECSC). The success of the Marshall Plan ultimately paved the way for the establishment of the Common Market in 1958.

The Marshall Plan did not cure all of Europe's problems. Productivity advanced considerably but leveled off by 1952, the last year of the plan. Europe's dollar gap had also begun to widen. The Korean War and concomitant rearmament program diverted resources and manpower to defense production, thereby creating scarcities of certain commodities. As a result, inflation became problematic.

The intensification of the Cold War and the onset of the Korean War hastened the end of the Marshall Plan. The Mutual Security Act of 1951, signed in the wake of the Korean War, provided a new strategy for European recovery that largely superseded the Marshall Plan. The act made military security rather than economic self-reliance the major objective of American policy in Western Europe. Aid recipients had to sign new agreements assuring the fulfillment of military obligations and promising to maintain European defensive strength. The ECA was abolished in favor of a Mutual Security Agency that was responsible for supervising and coordinating all foreign aid programs—military, technical, and economic.

Caryn E. Neumann

Further Reading
Hoffmann, Stanley, and Charles Maier, eds. The Marshall Plan: A Retrospective. Boulder, CO: Westview, 1984.; Hogan, Michael J. The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1948–1952. New York: Cambridge University Press, 1987.; Mayne, Richard. The Recovery of Europe: From Devastation to Unity. London: Weidenfeld and Nicolson, 1970.; Milward, Alan S. The Reconstruction of Western Europe, 1945–51. Berkeley: University of California Press, 1984.

©2011 ABC-CLIO. All rights reserved.

  About the Author/Editor
ABC-cLIO Footer