Advances in Historical Studies
2012. Vol.1, No.1, 1-7
Published Online December 2012 in SciRes (http://www.SciRP.org/journal/ahs) http://dx.doi.org/10.4236/ahs.2012.11001
The Marshall Plan
Jacob Magid
History Department, Boston University, Boston, USA
Received November 18th, 2 01 2 ; revised December 15th, 2012; accepted December 26th, 2012
This paper discusses the European Marshall Plan in three subsections: the impetus for its creation, its lo-
gistical implementation, and the results to both Europe as a whole and the United States. The conse-
quences of the Marshall Plan are further broken down into three pieces: direct economic effects, indirect
economic effects, and political effects. I argue that there is little evidence that direct economic effects ac-
count for the Marshall Plan’s success. Instead, the indirect economic effects, particularly in the imple-
mentation of liberal capitalistic policies, and the political effects, particularly the ideal of European inte-
gration and government-business partnerships, are the major reasons for Europe’s unsurpassed growth.
Keywords: Marshall Plan; Cold War; Economics; Aid
Post WWII Europe and the Need for Aid
World War II ranks as one of the most destructive events in
the history of Europe.1 Along with the tens of millions who
died, the War uprooted millions more and devastated the entire
European business structure. The international division of labor
that had existed before the war, where Europe shipped finished
goods to the Americas, Asia, and Africa in return for foodstuffs
and raw materials, virtually vanished. Many overseas holdings
by European countries were sold off to pay for war imports. As
the war wound down, currency and gold deposits were used to
purchase relief material, leaving little for capital formation and
long-term reconstruction. All told, Europe’s capacity for im-
ports was reduced to 40% of its prewar levels (De Long & Ei-
chengreen, 1991). Additionally, many assumed the US would
withdraw from Europe into isolationism as it had done after
WWI: lend-lease ended immediately after the Japanese surren-
der, Truman’s internationalist Democratic administration was
weak, and Congress was increasingly calling for balanced
budgets.
To cope with the massive need for aid, the newly-formed
United Nations created the United Nations Relief and Rehabili-
tation Administration (UNRRA) which served to deliver food,
clothing, medical supplies, and other necessities. UNRRA was
an ad hoc program that could be discontinued at any time and,
thus, impeded the planning necessary for reconstruction. To
address this problem, the UN created the International Bank for
Reconstruction and Development (IBRD). After reconstruction,
the International Trade Organization (ITO) and the Interna-
tional Monetary Fund (IMF), created at Bretton Woods, would
step in to normalize economic policies and short-term funding.
The Rise of Unilateral Aid
Yet very quickly this multilateral approach for aid and re-
construction fell apart. The amount of aid, its terms, and the
speed at which it was delivered were critically failing. In the
summer of 1945, as a stopgap measure until the IBRD could be
formed, the United States Export-Import Bank increased its
capital from $750 million to $3.75 billion (Kindleberger,
1968).2 The US was already giving unilateral aid directly
through the Government Relief in Occupied Areas (GARIOA)
program which, between July 1945 and 1947 amounted to $13
billion. Additionally, the United Kingdom, which benefitted
from its “special relationship” with the United States, received
a $3.75 billion loan under the Anglo-American Financial
Agreement of 1946 (Crafts, 2011).
Tensions with the Soviets only made matters worse. The
friction began over the treatment of Germany, before the war
had even ended. The Western allies wanted Germany punished
but also to play a key role in European recovery and regain a
stable economy. The Soviets, on the other hand, wanted Ger-
many permanently weak. Since they bore a disproportionate
burden in terms of deaths and damages during the war, the So-
viets also demanded reparations, much as they had after WWI.
When the Western powers dragged their feet, the Soviets looted
their part of occupied Germany, sending machinery and equip-
ment back to Russia as “war prizes.” In an attempt to compro-
mise, the Western allies agreed to hand over to the Soviets all
capital stock in their occupied zones that was above the amount
deemed necessary to maintain a standard of living no greater
than the average of Germany’s surrounding countries. The So-
viets, however, began to replace capital machinery reparations
with current production output reparations, in clear violation of
the Potsdam Agreement; the Soviet appetite for second-hand
capital stock was quickly diminishing. This prompted General
Clay, the Military Governor of the US-controlled West German
occupied zones, to stop sending reparations to Russia (Kindle-
berger, 1968).
The discord only continued to intensify. After much political
wrangling over the role of centralized planning versus free
market allocation, the Soviet Union refused to join the IMF or
the IBRD. As for the UNRRA, the Soviet Union was techni-
1This paper will deal exclusively with the effects of the Marshall Plan in
Europe and the United States; the Marshall Plan for Japan and China will
not be discussed.
2Original ly, a third of this in crease was ear marked f or the So viet Union b ut,
for a variety of reasons stemming mainly from the increasing hostilities
b
etween the two su
p
er
p
owers, was never actuall
y
transferred.

J. MAGID
cally listed as a donor but fought hard to allow Ukraine and
Belorussia to function as net recipients. At the same time, Can-
ada, another donor, decided not to participate while the UK
wriggled out of most of its commitments because of military
relief obligations to Austria and Italy. What’s more, the US was
concerned that funds being sent to Eastern European countries
were being illicitly used to bolster Communist parties. All told,
the US bore 3/4 of the costs yet held only 1 of 17 votes regard-
ing UNRRA’s management (Kindleberger, 1968).
As the Soviets began to turn away from multilateral aid and
reconstruction, the calls for more US assistance grew louder.
The European winter of 1946-7 was one of the worst in re-
corded history with heavy snowfalls and low temperatures
shutting down transportation throughout northern and western
Europe and destroying the winter wheat. Yet even before the
devastating winter and subsequent dry spring, French, German,
Belgian, and Italian harvests were still only half of pre-war
levels in 1945-6 (De Long & Eichengreen, 1991)! Govern-
ments tried to cope with low food supplies by enforcing low
price ceilings which, coupled with high inflation and taxation,
discouraged farmers from bringing their produce to market.
Even after accounting for all the deaths due to the war, the
population in Europe had increased by 10% while only pos-
sessing 80% of the food supply (De Long & Eichengreen,
1991).
As Europeans increasingly relied on agricultural imports
from the US, their gold and dollar reserves began to dwindle:
Europe had a current account balance deficit of $9 billion a
year in 1946 (Crafts, 2011). Simply put, European exports were
too low to finance the necessary imports. Private capital was
unwilling to lend to Europe because of the poor returns, out-
sized default rates, and rampant inflation experienced after
WWI. Domestic taxes were unable to balance budgets or pay
for relief. Inflation hampered business planning as well as ef-
forts to accelerate reconstruction. Both the IBRD and IMF were
stretched to their limits and unable to provide any more aid. By
1947, German coal production was still only about half of its
pre-war level. In other countries, like Britain and Belgium, coal
production was down 10% - 20% from 1938 levels (De Long &
Eichengreen, 1991). Because of the cold winter, much of the
coal that was still available was diverted to heating, increasing
the coal shortage for industrial purposes. In fact, by the end of
the year, Western European industrial production was still only
88% of its pre-war levels (Hogan, 1987).
Europe’s outlook was dim. Wartime controls had created a
habit of government involvement in market mechanisms; the
Soviet’s had great success during the war in churning out ma-
chinery and equipment as well as high reported growth rates.
This left many convinced that centrally planned economies
were the way of the future, especially in the aftermath of the
Great Depression.
America Steps In
As a result of these domestic crises, Britain began backing
out of its commitments in Greece, Turkey, and its occupation
zone in West Germany . While American and British occupation
zones were relatively easily merged under US military jurisdic-
tion, financial support for Greece required congressional ap-
proval. By February 1947, the British had formally asked the
US to take over their commitments in both Greece and Turkey.
On March 12, 1947, President Truman addressed Congress,
calling for economic support for both these two countries under
the auspices of helping them in their struggles against Commu-
nism. He then broadened his foreign policy to what is now re-
ferred to as the Truman Doctrine:
I believe that it must be the policy of the United States to
support free peoples who are resisting attempted subjuga-
tion by armed minorities or by outside pressures. I believe
that we must assist free peoples to work out their own
destinies in their own way. I believe that our help should
be primarily through economic and financial aid which is
essential to economic stability and orderly political proc-
esses··· This is an investment in world freedom and world
peace (Truman, 1947).
Following this speech, a formal aid strategy applying the
Truman Doctrine began to be developed under the Secretary of
State’s newly formed Policy Planning Staff; political, military,
and, above all, economic aid would be used to contain Com-
munism. By May 23, 1947, they had published a proposal for a
three-part strategy: first, the American people must be informed
of the poor economic conditions in Europe, second, a short-
term solution would be implemented to relieve bottlenecked
industries, particularly coal production in the Rhine Valley, and
third, a comprehensive long-term rehabilitation plan would be
created. If Eastern European countries or the Soviets wished to
partake, they would be forced to institute democratic and capi-
talist practices. Otherwise, aid would be limited to Western
Europe. This policy prescription marked the beginnings of the
European Recovery Program (ERP) (Mallalieu, 1958).
Utilizing his reputation as the architect of military victory in
WWII, Secretary of State George C. Marshall became the face
of, and lent his name to, this bold initiative. On June 5, 1947,
he delivered his now-famous speech at Harvard University
introducing unilateral aid to Europe:
The truth of the matter is that Europe's requirements for
the next three or four years of foreign food and other es-
sential products—principally from America—are so much
greater than her present ability to pay that she must have
substantial additional help or face economic, social, and
political deterioration of a very grave character··· The
remedy lies in restoring the confidence of the European
people in the economic future of their own countries and
of Europe as a whole··· It is logical that the United States
should assist in the return of normal economic health in
the world, without which there can be no political stability
and no assured peace (Marshall, 1947).
The Marshall Plan Takes Shape
The State Department insisted that Europeans themselves
shape the details of the program in order to avoid firm com-
mitments before Congress officially approved. As a result, a
Tripartite Conference was held in late June 1947 between
France, England and the Soviet Union with no direct American
representatives. The Soviet Union objected to any condition-
ality of the aid (the capitalist and democratic reforms men-
tioned in the Policy Planning Staff’s proposal) as an infringe-
ment on national sovereignty. There was initial anxiety that the
Soviet Union would accept the aid and, consequently, make the
costs to the US prohibitively expensive, both financially and
politically. The greater concern, however, was that the Soviet
2

J. MAGID
Union would agree to the plan and, much like with the UNRRA,
disrupt its workings from within. Instead, the Soviets simply
pulled out of the conference and refused to participate. To this
day, theories abound as to why the Soviets did not choose to
sabotage the Marshall Plan from within; general ineptness of
Soviet foreign pol icy, distrac tion cause d by other pr essing mat-
ters such as political centralization in Eastern European coun-
tries, or, most likely of all, a Soviet fear that any infiltration of
their bloc by Western influences would only further destabilize
their precarious political hold (Mallalieu, 1958).
After the Tripartite Conference, France and England ex-
tended invitations to twenty-two other European countries (ex-
cluding only Spain and the Soviet Union) to discuss Marshall’s
proposal. Under pressure from Moscow, all the Eastern Euro-
pean countries refused to attend. Ultimately, diplomats from
sixteen nations convened in Paris on July 12th to establish the
Committee for European Economic Cooperation (CEEC): Aus-
tria, Belgium, Denmark, France, Greece, Holland, Iceland,
Ireland, Italy, Luxemburg, Norway, Portugal, Sweden, Swit-
zerland, Turkey, and the UK. Despite French concerns, the
State Department was adamant about including Germany in the
aid plan because, as the major occupying power, West Ger-
many’s utter destruction at the end of WWII accounted for a
serious drain on US resources (Hogan, 1987).
The proposed plan was designed for four years and was an
amalgamation of estimates for resources and credits from each
of the participating nations, originally totaling $29.2 billion. By
mid-August 1947, the Conference members needed explicit
guidance from the US to make their plans more detailed and
increase the likelihood that Congress would approve. The State
department sent George Kennan (Chief of the Policy Planning
Staff and founder of the Theory of Containment) and Charles
Bonesteel (special assistant to the Secretary of State) to advise
the CEEC on the necessary conditions of the aid: financial sta-
bility, reduction in trade barriers, and a centralized organization
to administer the program. The goals of the aid package were
also outlined: increase European production, expand Europe’s
foreign trade, contain inflation, and develop regional economic
cooperation as well as rehabilitate the German economy.
Congress and Popul ar Su pp ort
The proposal was sent to the State Department on September
22 and, after some edits, including a reduction in the requested
amount to $17 billion, was passed on to Congress for approval
(Hogan, 1987). Congressional debate on the Marshall Plan
began in January of 1948. Proponents claimed the ERP would
be a bulwark against Communism, maintain domestic prosper-
ity and exports, and serve as a sign of American charity. Oppo-
nents claimed it was too costly, would be ineffective against
Communism, and was tantamount to American Imperialism
(Hitchens, 1968).
After such a grueling war, most Americans were apathetic of
foreign policy in general and the Marshall Plan in particular.
Though polls measuring public opinion were generally inaccu-
rate, congressmen relied heavily on them as measures of sup-
port for the ERP. The majority of people who had heard of the
plan, however, were in favor of it: farmers supported it by 60%
and businesses supported it by over 70% (Hitchens, 1968).3
The Committee for the Marshall Plan (CMP) had already
begun organizing in autumn of 1947 to drum up support in
preparation of the vote. The CMP operated by fostering positive
newspaper sentiment (such as with Walter Lippmann), running
advertisements, sponsoring speakers’ bureaus, and funding
radio broadcasts. They also targeted special interest groups
directly to garner their support. In fact, the CMP managed to
achieve a rare feat: Congressmen actually received petitions
from large numbers of people for a proposed law that would
effectively raise their taxes.
Congressmen who opposed the Marshall Plan and were up
for reelection in 1948 suffered huge losses. Though Republi-
cans tended to oppose the Foreign Assistance Act, the bill
which would enact the ERP, it was generally a bipartisan effort
due to the strong alliance between President Truman, a De-
mocrat, and an influential Republican Senator from Michigan,
Arthur Vandenberg: Republicans succeeded in removing com-
mitments for specific dollar amounts of aid and ensured that the
ERP would not be administered by the State Department. Lim-
iting the aid plan to Europe, which possessed the institutions
necessary for and experiences dealing with market economies,
as well as keeping the timeframe to a constrained four years
helped push the Foreign Assistance Act through Congress. The
real tipping point, however, was the coup in Czechoslovakia in
February 1948 which solidified political will against a rising
tide of Communism. In the end, the Marshall Plan was insti-
tuted because Europe’s recovery was considered essential to the
long-term interests of the United States (Hogan, 1987).
The bill was signed into law on April 3, 1948 and placed
under the control of the European Cooperation Agency (ECA),
the newly-formed bureau responsible for the Marshall Plan’s
execution. This agency would be politically independent and
staffed with businessmen and managers from the private sector
such as Paul Hoffman, the former president of Studebaker and
the newly appointed Administrator of the ECA. Hoffman had
cabinet status and would report directly to the President. This
would allow the ECA to steer a course between the public pri-
orities of relief and Communist containment and the private
means of achieving these goals, including monetary stabiliza-
tion, trade liberalization, economic integration, and industrial
productivity (Hogan, 1987). Subsequently, the CEEC formed
the Organization for European Economic Cooperation (OEEC,
now known as the OECD) to allocate the distribution of aid and
continue their efforts for regional economic integration (Malla-
lieu, 1958).
Implementation of the Marshall Plan
The OEEC would work with each Marshall Plan country as
well as an ECA officer to determine exactly what supplies
would be needed from the US; for West Germany, requests
were first sent through the US Army. The OEEC and ECA
officer would coordinate these needs between all the affected
nations and ensure that goods coming from the US could not be
accessed from alternative sources; in fact, only a third of the
goods transferred in the ERP actually came from the US, total-
ing approximately 1% of her gross national product (Crafts,
2011). Much of the remaining material was transferred either
through trade amongst the Marshall Plan countries themselves
or from South America. This list of goods was adjusted con-
tinually over the course of the Marshall Plan as the needs of
European recovery changed. The list included both materials in
short supply in the US, like scrap metals and fertilizer, as well
3Some estimates say up to 75% of the American public had no knowledge o
f
the Marshall Plan.

J. MAGID
as those in surplus, such as cotton, fruits, and tobacco. Few
consumer goods were sent. The ECA officer would then pass
along a list of the requested materials to Hoffman in Washing-
ton DC. Hoffman and his staff would then work with the Na-
tional Advisory Council on International Monetary and Finan-
cial Problems (comprised of the secretaries of the Treasury,
State and Commerce, the Federal Reserve Board chairman, and
the head of the Export-Import Bank) as well as the Commerce
and Agriculture Departments, Interior Department, and any
applicable industry advisory committees and trade organiza-
tions to determine how much could be sent (without creating an
undue disruption in American production) and if the aid should
be given as a grant or loan. The White House acted as the final
arbiter in cases of disputes amongst these various interests.
Hoffman would then send word to the ECA officer overseas
and the procurement process would begin.
In most cases, US businessmen would market their goods
directly to foreign firms, utilizing the ECA office in Washing-
ton, foreign businessmen, foreign governments, their applicable
trade associations, or the export-license office in the Depart-
ment of Commerce. Businesses, however, were still reluctant to
engage in foreign direct investment in Europe as they feared
that they would be unable to realize their returns in dollar de-
nominations. The ECA, therefore, also functioned as a guaran-
tor of convertibility from European currencies to dollars as long
as these investments were considered essential for European
recovery, conversion was not available by ordinary financial
channels, and the returns were withdrawn within 14 years of the
initial investment. The ECA, however, did not guarantee
against ordinary conversion or investment risks.
Hence, while government controls ensured the goods pro-
vided were essential for European recovery, checked transact-
tions through post-auditing, and maintained the export licenses
required to actually send the supplies overseas, private enter-
prise was allowed to function normally within those parameters.
There were, however, some important exceptions. Export li-
censes could be revoked if the terms of the business arrange-
ment were not approved by the ECA (e.g. in the case of price
gouging). Additionally, some industries, particularly in fertiliz-
ers which had no interest in expanding into Europe, were forced
to export a certain percentage of their output when the amount
agreed upon through private means was insufficient (Gubin,
1948).
Breakdown of Aid
US industries which had spare capacity to increase produc-
tion, such as agriculture, farm machinery, machine tools, and
truck manufacturing, did particularly well in the Marshall Plan.
Industries which did not usually export, like coal and other
mined materials, enjoyed a short-term jump in demand as
European alternatives were brought up to speed. Even exporters
of non-Marshall Plan goods benefitted because, as non-Plan
countries received dollars for their contributions, such as those
in South America, their demand for all US goods increased. Yet
other industries, such as fertilizer, steel, fuel oil, and freight car
manufacturing were already stretched thin. And then there were
other industries, such as textiles, electrical generation machin-
ery, and timber products which were not much effected at all.
US consumers enjoyed lower unemployment rates as well as an
increase in European goods like perfume and lace. On the other
side of the coin, domestic prices remained higher than they
otherwise would have been and certain shortages, such as steel,
were prolonged (Gubin, 1948).
Total aid amounted to $13.2 billion. The dollars, however,
were never actually transferred out of the United States; they
were instead used to pay for the real goods that were then ex-
ported to Europe. 60% went to food, feed, fertilizer, industrial
materials and semi-finished goods, 16% went to fuel, and an-
other 16% went to machinery and vehicles. The remaining 8%
were the costs associated with using the merchant marines in-
stead of lower cost alternatives, an earmarked concession which
helped ease the ERP through Congress (De Long & Eichen-
green, 1991).
The aid was split between grants (60% - 80%) and loans
(20% - 40%) depending on each country’s ability to repay
(Gubin, 1948). The actual amount allocated to each country
was based on the dollar value of their balance of payments
deficits as determined by the OEEC. Each country was then
required to deposit an equivalent amount of their domestic cur-
rency into a Counterpart Fund overseen by the ECA. This
Counterpart Fund could only be used for purposes fostering
reconstruction: for instance, in the UK, these internal funds
were used to reduce public debt and, therefore, inflation. Part of
the aid package, approximately $300 million, included a pro-
ductivity assistance program which allowed Europeans to tour
American firms and receive technical services and training
(Crafts, 2011).
The ECA was also very active in pressuring European gov-
ernments to institute free market policies; they leveraged their
authority to ensure structural reforms were implemented in
keeping with the American conditionality of economic integra-
tion and trade liberalization. The particular reforms for each
country varied drastically. For instance, in France, the EPA
refused to release Counterpart Funds until the government
committed to balancing the budget but, in Italy, they pressured
the government to underwrite programs for more public in-
vestment (Hogan, 1987). Aid money could also be reduced; the
UK lost their aid for timber imports after its government began
constructing public housing and continued to nationalize its
steel industry (De Long & Eichengreen, 1991). All partici-
pating countries were also required to sign bilateral agreements
with the US committing them to financial stability, balanced
budgets, realistic exchange rates, reduced quotas and tariffs,
and most-favored-nation treatment for West Germany.4 To
foster regional economic cooperation, the OEEC earmarked
$1.5 billion for the creation the European Payments Union
(EPU). Though the EPU was not officially implemented until
1950, it was a major step in smoothing international trade
(Crafts, 2011).5 These policies, however, did not simply recre-
ate America’s version of free markets; European governments
maintained much of their controls on business, especially in
utilities and heavy industry, and they also created the largest
safety nets and social insurance progr ams in hi story.
Effects of the Marshall Plan
The results of the Marshall Plan were astounding. It took
4Most-favored nation treatment meant that governments would not institute
punitive trade policies against West Germany.
5Since US tender was the only stable reserve currency at the time, all inter-
national trade was done using dollars. With a shortage of American money,
the EPU accounted for all trade but saved the actual transfer of currency
until the end of the month. This accounting practice im
p
roved liquidity and
made trade much easier.
4

J. MAGID
Europe only four years to reach pre-war levels of output and to
stabilize prices. In contrast, after WWI, France suffered from
hyperinflation for eight years and Germany’s struggles infa-
mously led to the fall of the Weimar Republic and the rise of
National Socialism. Western European output increased 32%,
agricultural output increased 11%, and industrial output in-
creased 40% (Hogan, 1987). Stories of Marshall Plan goods
and practices saving businesses abounded: at the Doboelman
soap works in Holland, American experts trained the Dutch in
new machinery that cut processing time from five days to two
hours. In Norway, fishermen used new nets made from yarn
spun in Italy. In Offenbach in West Germany, Marshall Plan
leather revived the handbag industry. In Lille, Marshall Plan
coal kept a steel factory in business. In Roubaix, Marshall Plan
wood maintained one of the world’s largest textile mills. In
1945, only twenty-five thousand tractors were in use on French
farms but, only four years later, another two hundred thousand
tractors were in the fields (Duignan & Gann, 1997). Further-
more, the Marshall Plan heralded in an era of unsurpassed
prosperity for Europe: a twenty year period between 1953 and
1973, paralleling America’s Golden Age, with no significant
economic downturns and 4.8% annual growth rates, more than
twice as high as any other point in history. Investment rates
were also twice as high as before WWII (De Long & Eichen-
green, 1991).
Direct Economic Effects
Yet the question remains: was this economic success due to
the Marshall Plan? In fact, many scholars and economists argue
that Europe’s outlook in the medium term was already bright;
they already had longstanding capitalist traditions and relatively
successful market economies. With their friendly relations to
the US, firms in Europe seemed set to catch up with their
American counterparts simply with transfers in technology and
innovation. Although not strictly measured, rule of law, control
of corruption, regulatory quality, and government effectiveness
were also deemed much higher in Europe than most other parts
of the world. Indeed, when one looks at the direct implications
of the Marshall Plan, the evidence suggests a particularly minor
role for the aid (Crafts, 2011).
The total amount of aid, $13.2 billion, only comprised 3% of
total Western European output (for a country-by-country break-
down, see Table 1).
Table 1.
Breakdown of aid by country.6
$ Million % GDP
United Kingdom $2826.0 1.8%
France $2444.8 2.2%
Italy $1315.7 2.3%
West Germany $1297.3 1.5%
Netherlands $877.2 4.0%
Austria $560.8 5.7%
Belgium & L ux em bo urg $546.6 2.2%
Denmark $257.4 2.2%
Norway $236.7 2.5%
Sweden $118.5 0.4%
Based on the standard Solow Growth Model and an average
direct effect of a 2% boost to GDP, aid would only have in-
creased the growth rate by about 0.3 percentage points. In fact,
the dollar amount was really no larger than the UNRRA aid that
had preceded it. Moreover, there is no correlation between the
amount of aid received and the speed of the recovery: both
France and the UK received more aid, but West Germany re-
covered significantly faster (De Long & Eichengreen, 1991).
In terms of direct changes to investment, only 16% of the to-
tal amount of aid was used to boost the current capital stock
like machinery and vehicles. Contemporary estimates suggest
that for every dollar of aid money 65 cents went to increase
current production and only 35 cents went to investment. Since
investment at that time was yielding 50% due to the low exist-
ing capital stock, every dollar spent towards investment added
50 cents towards output in the following year. Using basic
growth accounting, this means that the investment effect of
Marshall Plan aid only added half a percentage point to the
growth rate. Over the four-year span of the ERP, that means
that the investment effect increased total Western European
output by only about 2% (De Long & Eichengreen, 1991).
Other direct effects were similarly paltry. Infrastructure was
relatively easy to repair and, by 1946, had already mostly re-
turned to pre-war levels. Even bottlenecked production, most
famously with coal, is insufficient to explain the rapid eco-
nomic growth after the Marshall Plan. Since coal imports were
only 7% of the Marshall Plan and would have effected only
industrial production and transportation, together accounting
for about half of total output, this bottleneck could have, with
even the most generous assumptions, accounted for only 3 per-
centage points of the total increase in output. Even though the
ERP, unlike UNRRA, allowed businesses and governments to
plan more effectively thanks to its set time period and clear
conditions, the direct effects of the Marshall Plan, through
boosts to production, investment, infrastructure, and bottle-
necks, cannot explain the extraordinary economic growth from
1948-1973. Thus, if we were only to look at these direct effects,
we could conceivably conclude that European economic suc-
cess was almost completely unaffected by the ERP (De Long &
Eichengreen, 1991).
Indirect Economic Effects
Direct economic effects of the Marshall Plan, however,
comprise only one of three consequences of the aid in Europe’s
recovery: direct economic impact, indirect economic impact,
and political impact.
The indirect economic effects of the Marshall Plan, though
more difficult to quantify, profoundly impacted Western Eu-
rope by altering its underlying institutions. First and foremost,
the ERP changed the tone of economic policy. Fearing a return
to the Great Depression and seeing the supposed economic
success of the USSR, there were loud calls to continue wartime
controls of key resources by rationing foreign exchange and
imposing price controls. Most European countries at the time
were still nervous to trust markets and relied heavily on regula-
tion, government control, and other tariffs and trade barriers.
Argentina’s poor growth after WWII provides a compelling
example of how Europe may have gone had it continued to
follow these policies. Argentina had been considered a first-
world country with high growth rates prior to WWII. Her fall
from grace into stagnation and economic decline warrants a
6Crafts, 2011.

J. MAGID
research paper in and of itself, but, to summarize, was due to
economic policies which had the government first determine
the allocation of goods and then allow the market to distribute
income. According to Diaz Alejandro, a specialist on the sub-
ject, these damaging economic policies were implemented due
to a politically active and riled industrial working class, eco-
nomic nationalism, deep divisions between elites and the poor-
est workers, and a government habituated to controlling the
allocation of goods. All of these factors were also present in
Western Europe after WWII (De Long & Eichengreen, 1991).
It was the Marshall Plan administrators and the conditional-
ity of the aid which pushed liberal market reforms on Western
Europeans. The bilateral treaties signed with each Marshall
Plan country required strong macroeconomic policies and trade
liberalization policies such as reduced spending by govern-
ments, necessary for financial stability, as well as lower tariffs
to increase trade and a general emphasis on the market alloca-
tion of resources. Counterpart funds and ERP goods all had to
be approved by the ECA which gave them the leverage for
influencing domestic programs. At the same time, compared to
post-WWI reconstruction when deflationary policies were
strictly enforced to maintain gold standard parity, post-WWII
policies were much more flexible. The Europeans themselves
would not have chosen these developments; they were more
concerned with recreating the pre-war economic system and
balance of power than integration and liberal capitalism. It took
consistent pressure from the United States representatives to
enforce these changes (Hogan, 1987). In other words, the Mar-
shall Plan forced Western Europe away from centrally-planned
economies. Without the active involvement of the ECA and the
conditionality of the aid program, Western Europe would likely
have suffered from overregulation and stagnation, like in Ar-
gentina, or financial instability, like in post-WWI Europe.
Additionally, the Marshall Plan affected total factor produc-
tivity (TFP)—intangible or difficult to quantify productivity
improvements such as management practices or the incorpora-
tion of newer technologies—through the productivity assis-
tance program. Boosts to TFP have a multiplier effect on GDP;
a 1% increase in TFP leads to a greater than 1% increase in
GDP. Furthermore, the added stability of the ERP, in terms of
both European integration and formal eco-political support of
the US, boosted confidence, a necessary factor in lifting private
investment.
In Europe as well as the United States, the Marshall Plan in-
stituted a framework of government-business partnerships that
paved the way for both a more socially engaged private sector
as well as a constructive public policy fostering economic
growth and stability. Even before the ERP was announced, the
CMP was assembling labor, farm, academic, and business
leaders in support. The fact that the ECA was independently
staffed by managers and businessmen instead of bureaucrats or
career politicians further exemplifies this collaboration. Allow-
ing private businesses to undertake their own transactions was
another important step in combining the strategic oversight of
the government with the efficiency of the market. And the
strong involvement of trade organizations and industry advisory
committees in ECA decisions was another.
Finally, the Marshall Plan also helped create the EPU which
served to further reduce trade barriers and reintegrate West
Germany into European markets. Because of an overall dollar
shortage and the inconvertibility of European currencies due to
underlying economic devastation, international commerce faced
a liquidity crisis: the volume of trade between nations was lim-
ited to the balance of payments.7 Thus the EPU, backed by the
US, served a vital role in providing a line of credit for countries
in deficit. Without the EPU, balance of payment deficits would
have strangled import-export markets. The EPU, which was
replaced by the European Monetary Agreement in 1958, of-
fered trade liberalization that was perhaps the single most im-
portant reason for economic growth in postwar Europe (De
Long & Eichengreen, 1991).
Political Effects
The political effects of the Marshall Plan are even more dif-
ficult to quantify. In the aftermath of WWII, European recon-
struction relied on two pillars: lifting price controls and stabi-
lizing inflation. This would incentivize producers to bring their
goods to market and encourage saving, investment, and plan-
ning. To reduce inflation, budgets had to be balanced. Balanc-
ing budgets required political compromise; consumers must
accept higher prices for goods, workers have to accept lower
wages, firms have to reduce profit expectations, taxpayers have
to accept increased liabilities, and landowners have to accept
lower property values. Estimates for the net demands of these
interest groups exceeded national output by 5 - 7 percentage
points. Therefore the 2 - 3 percentage point boost provided by
the ERP aid played a significant role in minimizing the distri-
butional tug-of-war while simultaneously serving as a cushion
for wealth loss (De Long & Eichengreen, 1991).
This new “social contract” led to higher growth, making all
stakeholders better off in the long-run. Firms would restrain
wages for workers but increase investment. Governments
would implement welfare policies and utilize Keynesian de-
mand control to maintain high employment. Labor unions
would raise productivity and shun Communist ties. This shared
sacrifice and, later, shared abundance eased class tensions,
eliminating the root of domestic Communism. Yet the Marshall
Plan’s role in this social contract is not black and white: Swe-
den had institutions like this before the Marshall Plan while
wages in Italy were suppressed due to the large amount of
available labor, not an implicit agreement between firms,
workers, and the government. In other words, though the Mar-
shall Plan may have served as a cushion to alleviate some of the
pain of reform, we cannot entirely credit it for the rise of this
social contract (Crafts, 2011).
Beyond the purely economic and domestic policy implica-
tions, the Marshall Plan showcased the deep US commitment to
Europe at a time when isolationist ideology was threatening to
come back in force. We cannot ignore the additional benefit
Europeans enjoyed from American optimism, peaceful produc-
tion, consumerism, individual welfare, and profits. By pushing
Europeans towards political and economic cooperation, the
Marshall Plan also helped instigate a period of peace between
nations that had been enemies for millennia. All of the above
helped foster an intricate web of contacts among businessmen,
civil servants, and even trade unionists which, along with
NATO, forged an alliance that could fill the vacuum left after
WWII and withstand Communism (Duignan & Gann, 1997).
This alliance preserved America’s access to Europe’s markets,
sources of supply, manpower, and industrial capacity while
simultaneously denying them to the Soviets (Hogan, 1987). In
fact, the Marshall Plan’s emphasis on collaboration, coordina-
7A surplus in exports would not offset a d eficit in im po rts.
6

J. MAGID
tion, and collective action came to dominate the European
military philosophy as well; NATO would contribute to the
unification of Europe as well as boost confidence by increasing
security (Hogan, 1987).
Conclusion
Thus the Marshall Plan functioned as more than just an eco-
nomic stimulus package or even a structural adjustment pro-
gram ingraining free market principles and institutions into
Europe. Instead, this massive transfer of wealth, with no major
cases of fraud or racketeering, laid the foundations for a new
era: European nationalism would be limited by multinational
cooperation, economies would be integrated by market forces,
and both would stabilize growth and foster international soli-
darity. These liberal capitalist ideals tied economic freedoms to
political freedoms and cultivated an ethos of free enterprise
(Hogan, 1987).
The ERP was more than just the sum of its parts. Though it
cannot be credited with single-handedly saving Western Europe
from economic doom, it was also not a mere relief package.
Along with the economic implications of the aid came struc-
tural changes and a philosophical orientation away from pure
national self-interest. In combination with NATO and the Bret-
ton Woods agreements, the Marshall Plan helped Western
Europe and the US cooperate and collaborate with a multina-
tional and mutually beneficial mentality. This unified front,
tying together both economic and military integration, set the
stage for the ideological (and at times, literal) battles against
Communism throughout the Cold War. In their eventual tri-
umph, the internationalism and integration of government with
business, as personified in the Marshall Plan, proved to be a
guiding vision for our modern world.
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