Against the Tide

VII

Marshall Plan and Economic Policy*

THE EUROPEAN SIDE

The great idea of a joint aid program for the western world, as proposed by United States Secretary of State George C. Marshall in June this year, seems to be sharing the fate of so many of the ideas of our time once they are caught up in the vast apparatus that churns out the written and spoken words for the general public. The more that is written and said about them, the more confused and primitive they become. Finally the time comes to ask the classical question: de quoi s’agit-il?

The straitened economic circumstances of Europe have two causes: the war has destroyed so much, and the economic process is in disorder. The devastation wrought by the war is bad enough, but it would probably not have led to the present catastrophe had the economic process not fallen into a disorder which paralyzed the forces of recovery in the countries most plagued by the disorder. In its turn, this disorder of the economic process is the result of a certain economic policy that created chaos in the name of planning, confusion in the name of guidance, retrogression and autarky in the name of progress, and mass poverty in the name of justice. It is fairly generally known today what sort of economic policy this is, and even many socialists, who really should defend it as an outcome of their own philosophy, now turn their back on it, because it has simply become impossible to defend. I have in mind the combination of direct controls and inflationary pressure that I have called “repressed inflation.” Where it was introduced by a prosperous country spared by the war, such as Sweden, the same pathological symptoms soon developed as in other countries. Where, on the other hand, a poor and war-devastated country, such as Italy, allowed sufficient elbow room to the market economy, there was momentum, reconstruction, speedy recovery, and hope.

Once it was realized that what was required in Europe in the first place was to overcome an internal functional failure in the economic process with American help, and both Marshall and Bevin indicated that they knew it, then it must have been clear what the committee that met in Paris during the summer should do and what it should not do. It was not simply to draw up a list of holes into which the United States was to throw further billions. It was to diagnose the sickness of the European economy and propose a treatment to combine the promised blood transfusion with the patient’s own inner recovery. There was only one possible diagnosis: more or less advanced repressed inflation. And the treatment to be prescribed was this: Get rid of repressed inflation by a simultaneous diminution of inflationary pressure and controls, at the same time wisely using the American blood transfusion so that the patient can recover his own strength.

It did seem for a while as though the responsible statesmen had a reasonably clear grasp of this task of the Paris Committee of European Economic Co-operation. There was an impression that the committee would avoid compiling mere statistics of shortages and would instead work out a serious recovery program. Unfortunately it was a false impression. Today it has to be admitted that the Paris Committee did precisely what it should not have done and what, I believe, the more farsighted of its members initially did not want to do. The report had nothing to say about a real diagnosis of the trouble nor about a serious treatment, and it eventually turned out to be what it was not meant to be, a shopping list. Nothing much is altered by the fact that the committee, in its embarrassment as to what constructive proposals it might make, retreated into the higher regions of well-meant recommendations for better international economic co-ordination. These recommendations are so ineffective precisely because the individual countries’ collectivist economy policy is the strongest driving force of economic nationalism.

It must not be passed over in silence that those who had assumed the great responsibility of being Europe’s spokesmen when America was offering help have failed. It probably means that one of history’s great opportunities has been missed. To be sure, it is to be expected that America will go on handing out charity to hungry Europe, but perhaps it will be said later with bitterness that Western Europe, at the moment when it mattered, did not grasp that America was to be presented not with a letter to Father Christmas, but with a genuine and serious program for the inner recovery of the European economies. And the blame will fall upon a mentality prompted by collectivism and the contempt of economic freedom.

It is imperative to talk about these things openly, if only because a display of satisfaction might make the misfortune irrevocable. The Paris Committee had a unique opportunity to work out a bold and serious recovery program by which to inspire the U. S. Congress to a great gesture of solidarity and at the same time to give all European governments their cue for a reversal of their economic policy. This opportunity has been squandered. Nevertheless, the Marshall Plan can still be shunted onto the right track if the things left unsaid by the Paris Committee are now said by others in such words as to command the attention of the European governments and their advisers or, at least, of the people upon whom they depend. But what matters is that the European governments act accordingly and resolutely turn their back on the disastrous course of inflationary economic controls. Such a reversal, which derives from a clear knowledge of the causes of the economic paralysis and confusion, does not depend on the wisdom of international committees nor, for that matter, on American advice, excellent though some of it is. It is Europe’s own business, the business of every single European government and every single European nation. Should, therefore, the U. S. Congress decide on a generous aid program in spite of the obvious weaknesses of the joint report of the European governments, it will still be up to every beneficiary country in Europe whether or not to avail itself of this unique opportunity for liberating the economy from inflationary controls. Unless this is done, however, it is to be feared that the new American billions will trickle away just as the old ones did.

With American aid forthcoming in rather impressive measure, European governments will be able to deny even less convincingly than before that the responsibility for the economic recovery of their countries lies with themselves and nowhere else. Once, however, a government understands what has to be done and has the intention of doing it, then it is up to the country’s political forces to see to it that the government succeeds. What is meant thereby is best illustrated by the example of Italy. Here is a European country, poorly endowed by nature to begin with and one of the chief victims of the war, which would have fallen into chaos and misery without American aid, but also a country that knew how to use that aid for instilling new life into the economy, for, unlike other European countries, it allowed sufficiently free play to the regulatory and incentive forces of the market economy. Under the leadership of Luigi Einaudi, the doyen of Italian economists, the De Gasperi government’s economic policy follows the general line required by the situation, by using American aid in support of efforts to diminish inflationary pressure and dismantle controls. It is clearly intended to create in Italy a genuine market economy resting on the foundation of monetary stability. Having already succeeded in removing one of the two causes of inflation, namely, an overexpansion of bank credit, it now remains to plug up the other source of inflation, that is, deficit spending. Whether the government will succeed in this second task depends mainly upon whether it can hold out against the sabotage policies of the extreme left. Italy’s policy of using American aid for economic rehabilitation blazes a trail for the whole of Europe, but it also offers an example of the political, social, and psychological conditions in which the same policy will have to be carried through in Europe.

THE AMERICAN SIDE

As regards the European side of the Marshall Plan, it may be said that while the report of the Paris Committee has started it off on the wrong track, everything may still turn out aright provided the individual governments of Europe have enough good judgment and energy to take on their own initiative the road which the Paris Committee should have recommended. There is no salvation for a collectivist Europe; that much is clear. It is only as a plan to overcome economic planning that the—ambiguously so named—Marshall Plan can succeed. How, then, do things look on the American side? Do they, over there, have the clarity of mind that Europe lacks?

To judge by the bitter criticism rightly meted out to the Paris report and by an analysis of American opinion, it might be concluded that an obdurate patient can count on a wise helper. This conclusion is incorrect as regards the helper’s superior knowledge. It is not sufficiently taken into account that over there, too, there is a conflict of different trends of thought. Yet suspicions should be aroused by the mere fact that in the part of Europe for which the Americans are directly responsible, the American-occupied zone of Germany, they have for two-and-a-half years applied economic principles that cannot be described otherwise than as collectivist. But, above all, it should not be forgotten that many of the theories and trends that gave Roosevelt’s economic planning its determining impulse are still operative in America. A whole generation of American economists, after all, has been brought up to think of the permanent inflationary pressure implied in the “full employment” policy as an ideal and indeed a necessity. It is an easy step from there to accepting the idea of “guidance” that goes beyond the mere manipulation of money, especially for those who themselves sit at the steering wheel of bureaucracy.

Since Roosevelt, an economic policy dictated by the fear of deflation has become traditional, and it is this policy that is largely responsible for the inflationary pressure from which the American economy suffers today. The main trouble is that, as in Europe, this policy was continued in the United States even when it should have been obvious that it was not deflation but inflation that had to be fought. The accelerator kept being pressed down long after one should have stepped on the brakes. It is, of course, not an easy task in the first place to get the better of this inflationary pressure, and it will become a good deal harder if unrequited American exports expand in the future to the extent implied by the execution of the Marshall Plan. But this also makes the task all the more pressing, since a further growth of inflation in the United States would be bound to deprive the aid program of a considerable portion of its efficacy and would spell the gravest dangers for the American economy itself.

When it comes to mastering this task, the United States is basically in the same situation as so many of the countries of Europe, in the situation, that is, of an overstrained economy that reacts to the strain by inflationary pressure. The European countries concerned were so weak and so much in need of help for the very reason that they tried to tackle this inflationary pressure with the deceptive means of collectivist controls. They are rightly told by America that the help offered to them will lead to recovery only on condition that they at long last give up this attempt of keeping down inflationary pressure by police methods. But what conviction can such recommendations carry when the American government itself is about to embark on the same road of repressed inflation, as announced by President Truman in his message to Congress on November 17? If collectivist Europe is today at its wit’s end and has demonstrated where repressed inflation leads, how is it possible in good conscience to advise the United States to go the same way?

The consequences of this step would be so perilous that it would be hard to understand if Congress were to approve the government’s proposals without further ado. But since inflation should certainly not be allowed to go any further, the United States, in its turn, would have to adopt the course it recommends to Europe and already adopted by Italy, namely, to diminish the strain and inflationary pressure. The problem is that European demand for goods, for which under the Marshall Plan the American government or other American authorities issue assignments in the form of dollar checks, has to compete with the rest of demand for America’s goods. Somebody must give way. If American inflation continues unchecked, the price rise will curtail the amount of goods that Europe can get, and at the same time internal American developments will take a highly dangerous turn. President Truman rightly warns against that. But then there remain only two ways. Either the demand of the assisted countries is protected against the competing claims of domestic American demand by the power of the police and the threat of imprisonment, or else aggregate domestic demand in the United States is reduced by as much as new demand is added by the implementation of the Marshall Plan.

What the Truman administration is now asking of Congress is a mixture of the two methods, alleviation of the inflationary pressure combined with the compulsion of what in English is called by the dangerous euphemism of “physical controls.” But in this combined program the element of controls is much stronger. Both inside and outside Congress the proposal has met with sharp criticism, and unfortunately one cannot but agree with it, for the reasons indicated. The experiment of repressed inflation will be no more successful in the United States than in Europe, and slapping controls on the scarcest goods will only make them more scarce, as we should know from experience and reflection. And this means that the American economy, in its turn, will get its dose of the disorder and confusion that we know so well in Europe. Worst of all, perhaps, is that America’s example will have a very bad effect on Europe. Will America really get itself into a position where it must say, with Gretchen: “How scornfully I once reviled And now a living sin am I!”?* It needs thinking through to the end what this would mean. America is prepared to shoulder heavy sacrifices in order to help Europe out of its economic crisis. Better than any one else, Americans realize that the European economic crisis can be overcome only by liberating Europe from inflationary controls, and they have been at pains to convince the governments of Europe of this truth. Is America now seriously thinking of going over to inflationary controls itself so as to make possible its help in Europe?

It is hard to believe this. But if America rightly refuses to take this path, then there remains only the other way of a genuine and energetic fight against inflationary pressure far beyond the President’s proposals in his message. This would entail a break with a monetary and credit policy dominated all too long by the idea that everything that increases aggregate demand is good, and everything that diminishes it is bad. To do the right thing today, all that is needed is to do the opposite at critical points from what was thought right for the last ten years. Above all, this means abandoning the cheap money policy, and furthermore it would probably be well to consider to what extent an increase in indirect taxation (especially by means of a differentiated turnover tax) would serve the Truman administration’s goal better than physical controls.

Such a reversal of policy is exceedingly difficult for many reasons, especially in a country where the banking system has been overloaded with low-interest-bearing government securities during ten years of reckless deficit spending. But it has long been clear that sooner or later such a policy reversal would become necessary, even without the additional inflationary push deriving from the Marshall Plan.

* Neue Zürcher Zeitung, November 23, 1941.

* Faust, trans, by Bayard Taylor (London, 1911), p. 116.—Ed.