The European Recovery Program

From Harvard to Paris to Washington: Making Marshall’s Plan A Reality

by Anne M. Dixon

When Secretary of State George Marshall presented his idea for a plan that would “help the Europeans help themselves” at Harvard on 5 June 1947, there was already a broad base of support in both the Truman Administration and in Congress. Thus, despite opposition from some who favored a harsh peace for Germany and others who feared that a large foreign aid program would harm the U.S. economy by provoking an inflationary spiral and depleting stocks of essential commodities, the machinery for the Marshall plan was in place by early April 1948.

European Responses to the Marshall Proposals

The European countries reacted quickly and enthusiastically to the Harvard speech. Britain and France were the first to begin bilateral discussions, but were careful not to offend the Soviet Union. The British were less sensitive on this point than were the French; on 19 June 1947, the British Foreign Minister announced that Europe would go ahead with work on the American proposal with or without the Soviets, since speedy action was essential. To smooth possible discord, France subsequently sent a note to the Soviets expressing interest in discussing the proposal with them.

Soon after they met, Britain and France called a Conference of European Economic Cooperation, which convened in Paris on 12 July, 1947. Out of this conference was born the Committee of European Economic Cooperation (CEEC). The Soviet Union was invited to the conference, but declined. The Soviets pressured Czechoslovakia, Poland, and Hungary, also invited, to stay away from the meeting. The 16 countries which attended were Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, and the UK.

The task of the representatives at the Paris meeting was to estimate their national foreign exchange needs and come up with an estimate for the cost of a comprehensive aid program to submit to the U.S. The draft CEEC report completed in August estimated that together these countries would have a $29 billion deficit over four years. This estimate was, however, highly suspect on two counts: statistics on annual production and exports were very poor, even for a single year; and the figures were the result of compromise among countries with different ways of measuring their needs, and which may in some cases have settled higher amounts in order to reach final agreement.

CEEC Country Differences

1. Restriction and controls vs. expansion and freedom: The British excluded nonessential imports from their calculation in accordance with their austerity program. This policy had the effect of restricting the development of European trade. Belgium, on the other hand, advocated freedom from internal and import controls, which encouraged individual enterprise and tended to expand the European economy. The latter, of course, was more in line with what the U.S. leaders wanted to promote.

2. The future of Germany: France was deeply concerned with the consequences of German recovery, fearing a resurgent and recidivist power on its border. This put the French at odds with the Dutch, who were directly dependent on German growth for their own expansion.

Criticism of the CEEC Draft & State Department Conditions

The CEEC report raised concerns in the U.S. that the Europeans were interpreting the American offer as a traditional “charity” program; previous concessional programs were broadly judged to be failures. The State Department thus set out six conditions for CEEC members:

1. specific commitments regarding the fulfillment of major production programs
2. immediate steps to ensure internal monetary and financial stability
3. reduction of trade barriers
4. consideration of other sources of dollar credits, such as the International Bank
5. formal recognition of common objectives
6. establishment of an international organization to coordinate the program

The Europeans responded to many of the American concerns in the final CEEC report of 22 September 1947. The estimated European foreign exchange requirement was reduced to $22 billion, $3 billion of which would be drawn from the International Bank. The report also called for the foundation of an Organization for European Economic Cooperation (OEEC), a permanent agency charged with the coordination of the program in Europe.

American Preparation for the Marshall Plan

While the Europeans were working on their programs and objectives, the U.S. government was evaluating the shape, size and feasibility of the plan that it could provide for European recovery. The State Department directed interdepartmental research on commodity availability in the U.S. and balance of payments problems of foreign exchange-poor European countries. The result was four reports in late 1947 and early 1948:

1. Department of the Interior (Krug Report): This report evaluated the adequacy of physical resources that the plan might offer. Special attention was given to commodities in short supply in the U.S. The report concluded that the U.S. economy could withstand the proposed program.

2. Council of Economic Advisers: This report studied the effect of the unforeseen export burden on domestic production, consumption, and prices. It concluded that the U.S. had both the industrial and the financial capacity to support a program that amounted to 2-3% of GNP. “The economy had already proved its capacity to support an export surplus in excess of that likely to arise under the aid program, and any general threat to stability in the expanding American system was to be looked for in domestic financial and economic policy rather than in foreign assistance policy.” However, inclusion of commodities in short supply could bring inflationary pressure. Rather than suggesting the exclusion of these commodities, the Council called for assiduous coordination of domestic policy and foreign assistance.

3. Presidentially Appointed Committee (Harriman Committee): This committee, led by Averell Harriman, included consultants from labor groups and private industry and economists. The report estimated the cost of European recovery at $5.75 billion the first year and $12-$17 billion over four years, but cautioned that such a long-term forecast was likely to be inaccurate. It recommended that general policies and limits for assistance be established at the outset of the program, but that actual allocations of loans and grants should be performed by a new separate government agency, which would work closely with the State Department.

4. House of Representatives (Herter Committee): This was the broadest of the four studies. Committee members visited participating countries to study relief needs. Studies were also made of availability of resources for European needs both in the U.S. and elsewhere. The committee recommended measures to protect the American economy as well, and examined the qualifications of different agencies for running the program. It recommended the creation of an Emergency Foreign Reconstruction Authority.

The findings of the various reports were to be presented in full to Congress in January 1948, but conditions in Europe led President Truman to call an emergency session in November. Italy and France were about to run out of dollar reserves, and were beset with strikes and labor unrest. Because both of these countries had relatively strong Communist parties, the Americans feared that their governments could fall to “totalitarian powers.” President Truman asked Congress for over $500 million for European needs up 31 March 1948. He signed an interim aid authorization on 17 December 1947.

A draft bill for the full plan was sent to Congress one day earlier; Truman’s deadline for its passage was 1 April 1948. Congress labored to pass the Economic Cooperation Act on 2 April 1948, and Truman signed it the following day. The European Recovery Program (ERP), as the Marshall Plan was formally named, was legislated as Title I under the Economic Cooperation Act. The three ERP goals specified by Congress were:

1. “the promoting of industrial, agricultural, and cultural production in participating countries;

2. furthering the restoration and maintenance of the soundness of European currencies, budgets, and finances; and

3. facilitating and stimulating the growth of international trade of the participating countries with one another and with other countries by appropriate measures, including the reduction of barriers which hamper trade.”

A total of $27 billion was authorized for the four-year ERP, which was to be terminated on 30 June 1952. The aid provided by the program could be grant or loan. The limit on the loan component was set at $1 billion of the $5.3 billion authorized for the first year of the Marshall Plan; Congress would annually appropriate the rest of the funds. The Export-Import Bank was the official lending agency; it administered the approximately 10% of the assistance that was in the form of loans. The ECA, which eventually became USAID, administered the bulk of the assistance.

The American Administrative Structures

The ECA: Dependent and “Debureaucratized”

The Economic Cooperation Act called for the creation of an Economic Cooperation Administration (ECA) to administer the ERP. The ECA was established as a separate agency with equal status to other executive departments . In accordance with the goal of setting up a debureaucratized agency, its charter was temporary, and it was to be small and controllable. It was, as Hadley Arkes has described in his book Bureaucracy, the Marshall Plan, and the National Interest, to “progressively divest itself of its functions.” The ECA was headquartered in Washington and headed by an appointed Administrator who oversaw evaluations of the needs of participating countries and the progress of their recoveries. Paul Hoffman of Studebaker Corporation was appointed as Administrator on 9 April 1948—the architects of the Plan wanted a business leader to run the ECA.

In defining the authority of the ECA, Congress closely followed the recommendations of a report prepared by the Brookings Institution. But rather than making the Administrator bow to the Secretary of State on all questions of foreign policy, Congress gave both equal rights to object to a proposed action, and equal access to the President as the arbiter of disputes. This did provoke some tension between the two agencies, but weekly lunches meetings for Hoffman and the Undersecretary were useful in smoothing relations. Most disputes were not important enough to require the President’s attention; Frederick Lawton of the Budget Bureau was appointed to a position in the White House to arbitrate between State and the ECA, but left after six months having had nothing to do. To further ensure coordination, the ECA Administrator sat on the Cabinet-level National Advisory Council on International Financial and Monetary Problems.

The ECA was first structured to emphasize delivery of essential supplies to Europe. Deputy Administrator Richard Bissell headed divisions specialized in food, industry, trade, procurement, and transportation—not dissimilar form how the European Bank for Reconstruction and Development (EBRD) and World Bank programs for the CIS were conceived. Later the ECA tried to tie U.S. assistance more closely to country recovery policies. A division for program coordination was established. A Special Representative was stationed in Paris to coordinate with the OEEC and with the American country missions, but the Washington office had final authority. The staff in the office assisted the Administrator in policy development and operating regulations, including final review and decision on programs proposed by the participating countries and the OEEC. The Assistant Deputy Director for Programs was responsible for making recommendations on OEEC proposals to the Administrator. The Director of Operations oversaw the work of the strategic materials, procurement transactions, and transportation divisions.

The ECA financed only dollar trade, when dollars were not available from the International Bank. During its first year of operations, the ECA expected to finance about half of the participating countries’ dollar imports, about 5% of total imports. The other 95% would be produced or imported though the nation’s own resources (see the counterpart fund, below).

A Dependent Agency

The fact that the ECA was rapidly created, and that it was mandated to self-destruct over four years, almost inevitably made it quite dependent on other established agencies. Even more so because it was to commit large dollar amounts, which made it subject to close supervision. It was overseen by the Comptroller General. The Economic Cooperation Act also provided for the formation of a Joint Committee on Foreign Economic Cooperation—a watchdog committee reporting to Congress, composed of bipartisan members for both Houses.

Although its niche of authority in approving ERP allotments went essentially unchallenged (save for some disputes with Paris or the country missions), ECA operations remained dependent on other agencies. First, the ECA architects had other agencies—the Departments of State, Commerce, and the Treasury, as well as the Export-Import Bank and a group of New York bank officials—establish the procedures for handling letters of commitment. Their system confirmed the status of the ECA as their creature. Furthermore, at the end of the first quarter of ECA operations, these other agencies had distributed about one-third of the program expenditures charged to it. This fell somewhat after the ECA got on its feet in 1948.

But the ECA continued to rely on other agencies for special services. The Army was responsible for procurement in occupied areas; the Department of Labor compiled a handbook of labor statistics and manpower analyses; the Department of the Interior studied the availability of U.S. mineral resources; and the Department of Commerce compiled export statistics. Because the Congress had set a ceiling on ECA administrative expenses, the Budget Bureau played an important monitoring role in seeing that these other agencies did not overcharge the ECA account.

One area in which the ECA operated fairly independently was procurement. At the close of the first year of operation, about 84% had gone through private channels, with the other 16% done via the Commodity Credit Corporation, which held surplus agricultural stocks designated for the ERP.

Many have been critical of the ECA’s operations beyond the simple authorization of funding, particularly once its Washington staff ballooned to 938 in January 1950. While less than 10% of these people were under the Assistant Administrator for Operations, 522 were billed as administrative staff. The ECA’s efforts to perform detailed commodity screening failed, largely because even if an order was not approved under the ERP, the buying country could use its own foreign exchange to purchase the goods. The Washington headquarters thus abandoned this goal and began authorizing procurement in broad commodity categories. According to some, the only “real” operations carried out by the ECA were technical assistance (now a major component of multilateral development bank assistance) and strategic materials monitoring. The latter operation was actually quite poorly staffed.

Office of the Special Representative

The Office of Special Representative (OSR) was established in Paris to communicate with the OEEC. The individual U.S. country missions reported to the ECA through the OSR. Averell Harriman, Secretary of Commerce at the birth of the ERP, was selected to be the first Special Representative (Pamela Harriman, his wife, is now the U.S. Ambassador to France).

The OSR saw itself more as a theater command with a good amount of leeway for its operations rather than a delegation dependent on Washington for its authority. It successfully insisted on close supervision of the missions, although Washington’s preference was to allow them to operate more independently. However, State Department officials made the case that the independence and authority of the OSR attracted competent and motivated people and that the organization was able to establish good relations with the OEEC.

Though it was originally conceived as a 30-40 person staff, by 31 March 1953, the OSR staff had burgeoned to 630 Americans and 825 locals; the Paris office accounted for almost 50% of the administrative costs of the entire European operation. Many of these personnel worked closely with OEEC country representatives in evaluating national statistics, projections of trade and production, and the countries’ recovery programs (evident precursors of the OECD), but the OEEC eventually dropped its programming functions because European officials became frustrated with the least common denominator solutions coming out of the OEEC.

Bilateral Agreements and Country Missions

To set up the country missions, 16 bilateral agreements had to be negotiated by the State Department. Draft agreements were submitted to all OEEC countries in late May 1948. They included general political and economic provisions required by the Economic Cooperation Act and specific undertakings to establish counterpart funds and to receive special ECA missions.

Two particular European objections were raised in response to the draft agreements. All European officials objected to the requirement to consult the IMF regarding exchange rates whenever the U.S. thought it necessary, because this would give the U.S. power to push devaluations. Britain and France objected to MFN status for Germany, Japan and other U.S.-occupied areas. Though the underlying reason was probably a prescient fear of competition from Japan and Germany, the objection against granting MFN to Japan was raised on the basis that Japan is not European.

In the end, European countries committed to maintaining and stabilizing confidence in their currencies and to balancing their national budgets. The MFN clause was also dropped and replaced with a separate protocol. The British withheld MFN from Japan and South Korea; the French only granted it to western zones in Germany, and retained the power to retract it with six month’s notice.

By the end of the allotted three-month period for ratification, agreements were signed with all but Turkey, the U.K., and Switzerland (an unlikely candidate for assistance, which eventually dropped its request, but remained an active OEEC participant). The signed agreements provided for:

1. The Purpose of the ERP;
2. Assistance and Cooperation;
3. General Undertakings;
4. Guarantees;
5. Local Currencies;
6. Access to Materials;
7. Consultation and Transmittal of Information;
8. Publicity;
9. Missions;
10. Definitions;
11. Entry in Force, Amendment, Duration.

For Germany, the Bizonal Economic Council was the operating unit. The OEEC originally proposed that all funds provided for Germany would be on a loan basis, with no grant portion; the counterpart fund proposal for Germany was much smaller than for other countries at first, but once French resistance was overcome, a better compromise was reached. Representation of Germany was initially a problem because the ECA wanted a representative from each zone, but General Lucius Clay, the U.S. military governor, refused that idea. Finally it was decided that a sole representative would be based in Frankfurt. When the Federal Republic of Germany (FRG) was established in 1949, a Deputy Chancellor handled Marshall Plan funds.

The Mission Chiefs in each country were second only to the ambassador. The size of the Mission staffs varied, ranging from under ten to about 100. The average was about 30.

The European Administrative Structures

The OEEC

At the second meeting of the CEEC in March 1948, France called for the establishment of a permanent regional organization to coordinate the European recovery. The organization would also have the longer term working objective of working toward a united Europe. The French wanted a formal organization with an executive board that would be active between larger conference meetings, and an International Secretariat with a Secretary General to coordinate country activities.

The British largely agreed, but wanted a looser consultative organization. They did not want to give the ECA and the new European entity joint executive authority in the distribution of aid and the stimulation of the European economy, but rather wanted the U.S. to work with the European countries on a bilateral basis. As in the long history of debate over the EU, they did not want to compromise national sovereignty.

The result was an April 1948 compromise: the new OEEC was to draw up and implement a joint recovery program to end reliance on outside assistance. The organization would work toward establishing a European Payments Union (EPU) to stabilize the impact of financial fluctuations on intra-European trade and lower reliance on dollar foreign exchange. It was also to move toward reducing trade barriers. The OEEC would review action taken by individual countries and report its findings.

The OEEC had a three-part machinery:

1. A Council representing all participating countries;
2. An Executive Committee of seven members elected by the Council to conduct business when it was not in session; and
3. An International Secretariat with a Secretary General.

Decisions in the OEEC required unanimity of all countries.

The 16 ERP member nations first met under the OEEC mantle in Paris on 15 April 1948 to come to the final determination of their national needs, just before the U.S. Congress passed the appropriations bill. The OEEC concluded that Europe needed Germany as much as Germany needed Europe The American and British Occupation Zones (the Bizone) were first added to the OEEC; the French zone was included soon thereafter. The new FRG entered the OEEC in the second quarter of the second year of the Plan, on 30 June 1949. Canada and the U.S. later joined as associate members.

The sectoral priorities set by the OEEC were mining, transport, manufacturing, food, housing, clothing and human necessities; these were closely mirrored in the division structure of the ECA. Each country set up a National Office to liaise with the Paris OEEC headquarters and with the American ECA officer for that country.

Initially, in preparing the first allocations, the members seemed truly dedicated to working toward the best European solution, rather than meeting their own national priorities. In the end, however, the OEEC proved to be a rather ineffectual organization, though it did provide needed coordination at the outset. But in the end Washington became cynical about the fairness and accuracy of OEEC allotments, and particularly to the reluctance of the French and others to dedicate a greater share to the German recovery. Even then, British reservations emerged as the major obstacle to efforts toward European integration. The EPU, also resisted by the British, but strongly advocated by the U.S., was one of the OEEC’s better accomplishments.

Operation of the Recovery Program: the Counterpart Fund

The U.S. contributed $13.3 billion (over $65 billion today) to the 16 Marshall Plan countries over four years. Most of the program funds were spent on commodities: $3.5 billion on raw materials; $3.2 billion on food, feed, and fertilizer; $1.9 billion on machinery and vehicles; and $1.6 billion on fuel. A small portion of funds was used for technical assistance visits to the U.S. for European farmers and industrialists. The ECA arranged for transfer of goods in accordance with the allotments established by the OEEC.

To benefit from the program, a European purchaser, with his national unit’s approval, requested ECA funds under the Grant Aid Plan. To do this, the purchaser’s country submitted a procurement request to the ECA, which evaluated it to see that it was within the country’s allotment. Then the ECA issued a letter of commitment to a cooperating bank within the country. The foreign government or a private firm in the recipient country, not the ECA, handled procurement, and the details of goods transfer were handled by those involved in the transaction. This saved the ECA a good deal of administrative expense.

The American supplier was paid for his goods in dollars credited against the appropriated ERP funds. The European recipient paid for the goods in local currency which was then deposited by the government in a counterpart fund. Ninety-five percent of each country’s total allotment was designated for the country’s use; five percent went toward ECA administrative expenses. The government could spend its share of the funds only after assuring the ECA with a written request that they would be properly used for recovery. Sanctioned uses of ECA funds by governments were debt retirement; promotion of production; reconstruction and rehabilitation; and development of resources for wealth-producing materials.

Originally posted on the Marshall Plan 50th Anniversary Website (http:/www.marshfdn.com/page2.html)