The research on the Marshall Plan performed by the Alexis de Tocqueville Institution, and the exposition of it here by Gregory Fossedal and Ambassadors Richard Holbrooke and Paul Nitze, adds importantly to our understanding of what has been called America's "finest hour."

In the highly polarized and ideologized discussion of the plan, debate is dominated by two camps -- both of which miss important truths about the Marshall Plan and, I would argue, fail to see its real essence and genius.

On the one hand, we have an uncritical gush of enthusiasm, which treats the Marshall Plan as a kind of giant American soup kitchen. This demeans the fact, as General Marshall insisted, that it was in fact a European policy initiative for free trade, stable money, and liberal investment policies, that made the American aid possible. It asso threatens to weaken our current foreign and economic policies -- whether towards Central Europe or our own inner cities -- by focusing attention on dollars, rather than policies of empowerment that were the real genius of the plan.

On the other hand, we have a clever, but somewhat mechanistic critique of the Marshall Plan that puts all its emphasis on policy reforms themselves which were vital - but ignores the fact that the Marshall Plan made those reforms possible. Ludwig Erhard, author of the German monetary and tax reforms of 1948, gives testimony to that "inextricable" linkage here.

In short, the authors give us something rare - a balanced, but also highly original and powerful, analysis of an important event. The Alexis de Tocqueville Institution is grateflul for their contribution.
 

Understanding America's Finest Hour

Keeping large events in perspective is difficult, a case in point being the recent hoopla over the Marshall Plan. Admirers invoke the plan for a variety of worthy causes, but often with little understanding of what it was. Critics and revisionists, on the other hand, question whether the plan made any difference at all. Some even argue it was counter-productive, delaying recovery by making some allies dependent on subsidies, and forestalling needed adjustments.

A close examination of the economic and historical facts, however, refutes the efforts to downplay the Marshall Plan - and at the same time, enables us to apply its real lessons to today, placing acumen ahead of sentimentality.

By one common view, manifest in yesterday's pleas for a package of $100 billlon or more for Eastern Europe, the Marshall Plan was simply a matter of generosity. America could have dropped dollars from an airplane and had nearly as much impact.

Money alone, though, surely did not make the difference. In fact, many of the countries that received the most Marshall Plan aid per capita - such as Sweden, Britain, and Greece - enjoyed weak economic recovery: GNP rose 39 percent in Sweden, 31 percent in Britain, and 21 percent in Greece from 1947 through 1955. By contrast, others - Germany and Italy for example - got relatively less aid. Yet over the same period, their output grew by 148 percent and 57 percent respectively. (Germany also grew by 96 percent against its 1938 output, weakening any suggestion that it just made a rapid recovery from artificially reduced levels).

Countries that received Marshall Plan aid and joined the General Agreement on Tariffs and Trade significantly out-performed those that only got foreign aid dollars. A group of five countries that received Marshall Plan aid (or significant foreign aid in the case of Japan) and that joined GATT enjoyed annual average GNP growth of 8.3 percent from 1947 through 1955, and unemployment of 2.6 percent. (Germany, France, Japan, Britain, Sweden.) Four countries that received significant Marshall aid, but were not part of GATT for much of the period, had GNP growth of 3.7 percent, and 7.6 percent unemployment. (Italy, Denmark, Austria, Greece).

This has led to a further case that the Marshall Plan, in fact, didn't matter at all. It was the eventual reform of domestic economic policies by the Europeans that did the trick.

There is a large element of truth to this. An index of European trade liberalization by Robert Triffin, extended to cover the years 1946 and 1948 by the Alexis de Tocqueville Institution, show that European trade liberalization moved to a rate of more than 80 percent by 1956, from a level of less than 40 percent in 1946.

After significant devaluations in the early postwar years, Germany (1948), France (1949), Italy (1950), Austria (1953), and even Britain (late 1950) finally succeeded in stabilizing their currencies and adhering to the discipline of the Bretton Woods monetary system. It was at precisely this point that each of their equity markets -- an excellent daily monitor of how market actors judge the likely output of a nation's capital -- began to soar. And it was some 6 months after, in each case, that production began to surge as well.

Here is how each of those equity markets performed before and after currency stabilization, expressed as an annual average rate of change.
 
 

COUNTRY  (& date of  Monetary reform)	CHANGE IN
	STOCK PRICES BEFORE MONETARY STABILIZATION  (annual average)	STOCK PRICES AFTER MONETARY STABILIZATION  (annual average)
Germany (8-48)	-2.6%	+47.9%
France (6-49)	-1.1%	+35.7%
Italy (4-50)	+9.6%	+28.5%
Britain (6-50)	-8.9%	+12.9%
Austria (5-53)	-0.4%	+71%

The problem with using this evidence to conclude that the Marshall Plan didn't matter is that the plan was aimed precisely at encouraging such reforms, and enabling fragile governments in war-shattered Europe to enact them. When Will Clayton, the plan's architect, was asked which was more important the European recovery - the Marshall Plan, GATI', or Bretton Woods he answered, "I find it impossible to talk about them separately." The European Recovery Plan and the Clayton GATT, in fact, were both adopted in October, 1947. The Bretton Woods framework had been in place since 1945, but only began to be seriously implemented by Europe with the German monetary reform of 1948. This came, not by coincidence, just as the Marshall Aid began to flow.

Ludwig Erhard, the father of the German reforms, later called the Marshall Plan "absolutely essential" to the monetary stabilization that followed. "Currency reform and the Marshall Plan," he told an audience in April, 1948, "are both contributory factors of economic recovery... and must operate simultaneously, if they are to be fully effective." He continued: "Thanks to the aid we received, we could take the safe road of systematic reconstruction and recovery." The links between the two, he said, "are inextricable." The plan not only provided a flow of money and imports, "but also confidence... preparing the ground for new capital to be raised."

This capital helped lead to an average annual rate of growth in German stocks of 47.9% from the summer of 1948 through December, 1955. It would not have happened without the Erhard reforms; but the Erhard reforms, according to Ediard, depended on the Plan.

What is the Marshall Plan's relevance? By some standards, Russia, Poland, Ukraine, and the rest of Central Europe are worse than Germany, France, and Britain were in 1947. All, in fact, have some industrial base, and a work force that performs better on standard math and science tests than the average student in the U.S., Britain, or Germany. There is even some funding, though it pales in comparison to the Marshall Plan's ultimate $15 billion as a share of current U.S. output.

What we do not have is a vigorous U.S. or Western European policy of promoting economic growth among our former enemies. Trade integration by Western Europe has been sluggish and stubborn. Western aid has been mostly contingent on IMF fiscal conditions that have often continued burdensome income tax rates, crushed industrial production, and accelerated a surging black market and mafia-based economy from Moscow to Kiev to Budapest.

If there is any lesson in the Marshall Plan, it is that our help is most effective when it is leveraged. Dollars work best when they are used as an inducement - an incentive to implement intelligent reforms, and a facilitator of them. Of these, the most important is the International Monetary Fund, the principal institution charged with reviewing economic policy with the developing countries.

The IMF should serve the role Clayton and the Marshall Plan announcement did in Europe in the summer of 1947, promoting policy reforms that lead to growth. On the evidence, though -- from Africa to Europe -- IMF policies have only a spotty record of promoting growth.

The U.S. sometimes lacks a single, coherent voice on international economic policy. The State Department and the Agency for International Development often defer to the Treasury Department, which in turn defers on many matters of policy conditionality to the IMF, World Bank, and other institutions. The appointment of Stuart Eizenstat, with his experience on development issues, to Clayton's old position at State should give the U.S. the single, lucid voice it needs.

FIFTY YEARS ago, under conditions less auspicious than today, Americans launched a daring initiative that helped preserve democracy and economic freedom for hundreds of millions. Today, the danger is different; but the challenge is real. In the deluge of reminiscences, we should not lose sight of why the Marshall Plan was so successful.
 

Richard Holbrooke is Vice Chairman of Credit Suisse First Boston. He was US. Ambassador to Germany and Assistant Secretary of State for European Affairs

Paul Nitze was a senior foreign policy official in the Truman, Eisenhower, Kennedy, Nixon, and Reagan administrations