Aspects of the Pathology of Money

8 Some Queries and Suggestions Concerning the ‘Marshall Plan’1

The extension of the Marshall plan appropriations for a second year is among the foremost issues to be faced immediately by the new Congress. In view of that Congressional consideration, the Organization for European Economic Cooperation (the European counterpart to E.C.A., with headquarters in Paris) has prepared an Interim Report and sent to Washington its top officials. Now, the impressions I brought back from my latest trip to Europe make me wonder whether the extension of the E.C.A. appropriations by Congress is enough or whether we should not, at this time, give serious consideration to the need for a revision and probably profound modification of our entire approach to the problem of assisting Europe in its economic rehabilitation.

It might be well to state at the outset that there is no doubt in my mind as to the need for continuation of the E.C.A. on an adequate financial basis. Politically, at least, it has fulfilled all reasonable expectations by strengthening non-communist elements in Western Europe, checking the communist advance, increasing the moral stature of the United States even behind the Iron Curtain, and giving the badly stricken European countries an opportunity to start working out their economic salvation in an atmosphere free from panic. There can be no doubt that there has been a substantial economic improvement all over Western Europe. That improvement is conditional, of course, on our help and would give way to dire distress should our help be discontinued. Once this is clearly stated it becomes possible to present critical observations concerning the first year of the Marshall plan operations, and submit suggestions for the future without offering support to those critics of the E.C.A. who opposed its adoption in Congress last year and might wish to put an end to it now.

The positive accomplishments of E.C.A.’s first year have been mentioned above. The following list cannot fail, however, to make us pause and reconsider the methods of action we have followed so far.

(1) E.C.A. involves a considerable element of economic planning. This is inherent in its approach to the problem of European reconstruction. Each Marshall plan country must present its plan of recovery from which follow that country’s specific requirements. So far there has been little, if any, co-ordination of these national plans. The two major joint achievements of these countries to date have been:

(a) mutual adjustment of each country’s total dollar requirements so as to distribute among them the American appropriations; and

(b) the establishment of an intra-European clearing system, operating with the help of the Bank for International Settlements in Basle, and of which it is too early yet to say whether it will have a large or small impact upon the future of economic relations in Western Europe.

The major failure of the O.E.E.C. to date (that is to say of the organization of the European Marshall plan countries) consists in their inability, so far, to produce a joint programme of reconstruction going above and beyond the seventeen separate programmes which are formulated in the above-mentioned Interim Report of the O.E.E.C. which has been presented recently in Washington. There are many indications that these purely national programmes lead to the growth of autarkic tendencies and to investments which can better be defended on the grounds of making a country independent in certain resources or industries from the rest of the world than on the grounds of economic advantage in a well-knit world economy. I have heard a number of criticisms coming from important European sources to the effect that in actual practice the E.C.A. fosters economic planning rather than a return to free markets.

(2) The efforts to take domestic steps necessary for the stabilization of currencies have been much smaller than hoped for in France and some other countries. To my mind, the E.C.A. and the O.E.E.C. place too exclusive an emphasis on production and devote insufficient attention to the monetary aspect of the problem. Increased production is, of course, the indispensable prerequisite for solving the main problem of the Marshall plan countries, which is that of being able to pay for their imports with the proceeds of their exports. As well as it is generally recognized that this is the problem, I am not at all satisfied that the prevalent way of handling it will bring a satisfactory solution. To my mind, there is too much emphasis on the problem of balancing dollar receipts with dollar expenditures through a variety of direct controls and not enough emphasis (if any at all) on the re-establishment of convertible currencies in the various countries so that international payments can be balanced in the future as they used to be in the past, not through direct controls but through the network of multilateral trade and payments.

(3) I am not at all sure that it is sound to discuss the problem of European reconstruction solely in terms of availability of so-called ‘hard currencies’, that is to say principally of the dollar. Unless the European currencies are also made ‘hard’ through arresting inflations and restoring convertibility, the dollar shortage will, I am sure, never end.

(4) This brings up the problem of the standard of living in European countries. Clearly, we cannot allow living conditions to deteriorate to the point where misery and despair will drive more and more people into the communist camp (communists have, of course, no alternative solution to offer but they can always derive much benefit from the failure of non-communists to provide acceptable living conditions for the large numbers of the people). Nevertheless it is essential that European governments should not promote standards of living which, in the long run, cannot be sustained without external assistance.

(5) So far there has been no striking display of solidarity among the Western European countries. I have heard many complaints in France concerning the effect upon the French economy of British import restrictions connected with the austerity programme of the British Government. There are no signs either that trade restrictions within Western Europe have grown smaller. Now surely the United States can attempt to exercise pressure in the direction of reducing trade barriers among O.E.E.C. countries and insist on a greater sense of solidarity among them. It will be argued that this will mean an interference with domestic policies. I see no reason why we should be too timid concerning such an interference; after all the E.C.A. is by its very nature an interference. It has changed the balance of political forces within the various countries to the detriment of communists and it aims to consolidate Western Europe for years to come. If things which are necessary for that aid to succeed are not done, I think we are entitled to ask that they should be done.

(6) This applies also to domestic economic policies. I see no reason why we should not tell the French Government that a country in France’s position cannot afford to work, in many fields, only five days a week. (The Monday closing of most shops in Paris, for instance, produces a most peculiar impression.) We should insist on tax reforms, etc., being carried out and try to help governments which would like to do so but meet with political resistances at home. I would think that the real question is how to interfere tactfully and not whether to interfere at all.

The Interim Report of the O.E.E.C. that has recently been submitted emphasizes the impossibility for the European countries to become independent of continued American help by 1952. This conclusion of the Interim Report has caused a widespread stir, though not perhaps for the right kind of reasons. Clearly, no one can predict the future well enough to say what the economic conditions of an important part of the world will be two, three, or four years from now. The 1952 deadline in European rehabilitation has been, at best, a reasonable hope. It would have been foolish to attach too much importance to it, just as I think that it would be unwise to put too much stock in the forecasts of the seventeen participating countries and in the summary drawn up by the O.E.E.C. headquarters in Paris. What I think justifies more concern than the expressed doubts about the possibility of achieving Europe’s recovery by 1952 is the way in which that recovery is being visualized by the individual European countries, by the O.E.E.C., and, who knows, maybe even by the Americans themselves. What are we to consider as a sound criterion of E.C.A.’s success and of Europe’s recovery?

Before dealing with the weighty question that appears at the end of the preceding paragraph, further comment should be made concerning the 1952 deadline. It should be admitted that we—and by that I mean the United States, as well as other countries—have been far too hasty and far too optimistic in the setting of time limits for various phases of post-war reconstruction. The first case of such exaggerated optimism appeared at the time of drafting the Bretton Woods Agreements and later at starting prematurely the transactions of the International Monetary Fund. The second case of dangerous over-optimism arose in connexion with the American loan to Britain, granted at the end of 1945. At that time Britain committed itself, under American pressure, to re-establish the convertible sterling by summer 1947. As we well know, this proved an impossible task and led to great difficulties and to a new suspension of convertibility. It might be added parenthetically that those elements in Great Britain which are opposed to making the pound sterling freely convertible and would like to maintain exchange control indefinitely (a point of view which is widely represented within the Labour Party as well as important sectors of the Conservative Party) found themselves very much strengthened by the mid-summer 1947 crisis of the pound. Similarly, to look upon the Marshall plan as a four-year plan is either to give proof of exaggerated optimism or to make merely a working hypothesis. The latter is by far the most reasonable interpretation to place on the date of 1952. As a matter of practical importance, what is of greatest concern is not whether we reach our goals in 1952 but whether between now and 1952 we are moving in the direction of our goals or in some other direction.

The more I study the European Recovery Programme and the more I discuss it with both Europeans and Americans, the more convinced I am that there exists at the present time an unavowed but very real misunderstanding as to the nature of the goals to be reached through E.C.A. and O.E.E.C. Two points of view can be discerned as to what are those goals and by what criteria to judge the degree of success of the Marshall plan. These two points of view or two interpretations of E.C.A.’s goals can be formulated as follows:

A. The criterion of success of E.C.A. and of the recovery of participating countries is to be found in the building of these countries to become independent of economic assistance while suppressing exchange control, import quotas, and export controls and re-establishing the convertibility of their currencies.

B. E.C.A. and O.E.E.C. will have reached their goals when participating countries cease having a dollar deficit on their balances of payments even while maintaining exchange control and import and export controls.

Concept A involves a return of participating countries into the network of multilateral trade and free international payments; concept B involves, on the other hand, a perpetuation of conditions under which neither trade nor payments conform to the liberal multilateral pattern. Concept A follows from all the previous American endeavours directed towards the building of a world economy, going back to the Atlantic Charter, the Master Lend-Lease Agreement, the Bretton Woods Agreements, and the original conception of an International Trade Organization. Concept B accepts the idea that governmental controls over trade and payments are here to stay for an indefinite duration and relegates the establishment of a liberal world economy into the realm of very distant and well-nigh unattainable ideals. Also, concept B is in line with post-war policies of a number of European countries, especially of Great Britain (as illustrated not only by policies of the British Labour Government but also of important business groups and such influential publications as the London Economist). Now clearly these two notions of what is the proper criterion of success for Europe’s reconstruction are incompatible with one another. We either wish to suppress exchange control, import quotas, and export controls, or to perpetuate them. We either are aiming at the re-establishment of full convertibility of currencies or we are not. There is a choice to be made and it must be made soon. ‘To make Europe independent of further American aid’ is a misleading and inadequate statement of objectives for E.C.A.—for the purpose of our aid is not merely to make further aid unnecessary but to help create the kind of world economy in which a private enterprise economy can prosper and in which international economic relations can be increasingly free from governmental interference. Concept A was, it seems to me, the original American idea behind the Marshall plan but, apparently, it has been diverted into concept B by the European countries themselves which are members of the O.E.E.C.

As far as I know, the issue between these two concepts of E.C.A. objectives has not yet been officially stated nor subjected to a comprehensive public debate. I do not know even whether it has been the object of confidential discussions on governmental level. I suggest that it should be squarely faced at the earliest possible time.

The matter is really extremely serious because if the second of the above-mentioned concepts should prevail we will have helped to consolidate a system which is the exact opposite of what we wish to establish. Where the adoption of that concept leads is illustrated by an important article entitled ‘Marshall Plan for Creditors’ which appeared in the January 8th issue of the London Economist. After analysing the first year of the Marshall plan and the prospects for the future, the Economist arrives at the following conclusion concerning the situation that will exist after the end of the Marshall plan operations (i.e. after 1952):

‘American export industry may have to reconcile itself to the permanent loss of its European markets; it may have to permit discrimination against itself.’

If this is the British conception of the recovery of Europe and of future American trade in the world economy, then we must face the fact that there exists a deep misunderstanding and one that should be cleared up at the earliest possible time and before it degenerates into an actual economic conflict. If we are to have a sound world economy again, then trade has to be directed by market forces and not by governmental fiats. It is quite conceivable that the United States may lose certain markets both in Europe and elsewhere once the economic recovery has been carried out; but this should be as a result of the efficiency of European industry and the spirit of enterprise of European business and not through exchange control, import quotas, and discriminatory practices.

As I suggested before, Europe’s problem should not be looked upon merely as one of a dollar deficit but one of establishing convertible currency and free payments. The former will have disappeared in the course of solving the latter. Yet there is no reference to the re-establishment of convertibility in any recent pronouncements of the O.E.E.C. One speaks, to be sure, of the convertibility of European currencies into one another under the recently inaugurated clearing system, but doubts are allowed as to the possibility of such a limited convertibility without important leakages taking place out of Europe. No, there is no substitute for a return to complete convertibility. The other day, in answer to a question of mine, a high official of the O.E.E.C. admitted that a return to convertibility by 1952 is not even envisaged. Now this I regard as a very serious admission indeed. It is very possible that by 1952 convertibility could not be fully achieved; but that is no reason to disregard the issue completely for the time being. Unless monetary stabilization and the suppression of exchange control are declared vital objectives of governmental policy and of the O.E.E.C. at large, we shall never get near their realization in the next three years.

The more I work on these problems, the more skeptical I become concerning the possibility of re-establishing convertible currencies and free payments by gradual steps. Exchange control and trade controls tend to perpetuate themselves: it is easy for their defenders to show how abandoning one or the other would entail growing difficulties and result in hardships. There is only one way to remove such controls and that is to remove them and to meet the resulting maladjustments through appropriate policies. I am increasingly of the opinion that it might be more worth our while to help European countries to get out of the difficulties arising from the liquidation of exchange control than to spend money on the assumption that they will remove these controls when conditions are sufficiently improved to make their painless removal possible, for to my mind the latter is sheer Utopia. Conditions will never be ripe for a painless removal of controls and if we do not insist on having them removed first and advance help afterwards, we will find ourselves spending in Europe as much money as we are willing to spend, without ever removing the controls.

I will admit that there is one very major obstacle to removing exchange control and import controls right away. That obstacle is due to the internal monetary situation of several of the European countries. So long as inflations go on it is impossible to make currencies convertible. Nevertheless steps could be taken to make this situation less bad than it is now. A high O.E.E.C. official said the other day, privately, that parity adjustments of certain European countries might have to be made eventually, but that it would be premature and mistaken to make such adjustments now. With that view I cannot agree. France, for instance, where the official rate is currently 320 francs to the dollar and where the rate on the so-called ‘parallel market’ fluctuates around roughly 500 francs to the dollar, finds that an important part of its dollar receipts goes into hoards instead of becoming available to finance French imports as they would be if there was only one rate for the franc. To keep a fixed rate of exchange where there is an inflationary rise of prices is complete folly. Especially when there is exchange control there is no reason whatsoever to stabilize the rate of exchange prior to checking inflation. The proper sequence of policies would be to allow the exchange rates to find their economic level while inflation is in process, to direct all efforts towards checking inflation, to stabilize currency in terms of foreign exchange once the monetary situation is under control, and then to abandon exchange control. The maintenance of artificial economically non-justifiable parities is a major stumbling block on the path of recovery of countries such as France.

In brief, I would regard the monetary aspect of European reconstruction as a foremost one at the present time, and I should think that a very different approach ought to be adopted by the E.C.A. to the problem of liquidating exchange control and quantitative trade restrictions.

There remains, as always in these discussions, the problem of Great Britain which presents certain special characteristics of its own. I think that we should sit down with the British and reach an agreement, secure a British commitment to the effect that they would abandon exchange control, re-establish the convertibility of sterling and do away with import quotas, all within a reasonably near future. Our commitment would be to help them solve the problem of sterling balances held by India, Egypt, etc. and to help them financially during the period of inevitable difficulties that would follow upon the abandonment of the various controls. For the moment, the British are working, it seems to me, at cross purposes with us and even with their European associates in O.E.E.C. We should, I think, make it clear that our continued assistance to Britain must depend upon a more co-operative and less nationalistic attitude on their part.

2 This short memorandum was written by me on January 30, 1949, and was confidentially circulated to a limited number of prominent American statesmen and businessmen, including Mr Paul G. Hoffman, who was at that time Administrator of the Marshall plan. For the sake of the record, it is now included in the present collection. I continue to be convinced that Europe might have reverted much faster to convertibility had the point of view which I expressed in these pages found favour with the powers that be.

• 1To illustrate, see for example the voluminous and penetrating Annual Reports of the Bank for International Settlements.
• 2The fifties were a period of increasingly obvious recovery, both in world monetary affairs and in the economic life of individual countries. The great opportunities offered during that decade, however, for carrying out a sweeping international monetary reform have not been utilized. True, the European Payments Union had been formed at the beginning of the decade, to be dissolved, due to improved conditions in Europe, towards the end of it. But this was at best an attempt at making inconvertibility more liveable with and at undoing part of its evil effects on intra-European commerce. The International Monetary Fund (established by the Bretton Woods Conference in June 1944) could have blossomed up, but did not do so, during the fifties, whereas what actually did take place was a great revival of the Gold Exchange Standard, amplified into the so-called ‘key currency system’. It should also be noted that the alleged (though never really existing) ‘dollar shortage’, which caused rivers of scholarly ink to flow for many years, has been reversed and a far more real dollar glut took its place at the end of the fifties as a result of the large balance-of-payments deficits which the U.S. started to experience in 1958.