Whenever there is an international problem self-proclaimed experts show up and invoke the myth of the Marshall Plan. This has also recently been the case with the European crisis. Like many before him, such as Krugman, it was recently billionaire investor George Soros who showed his lack of historical knowledge by pronouncing that Europe needs a new Marshall Plan and that it was foremost American generosity that brought the old continent back on the road to prosperity. He pointed out that the West Germany economic miracle was the result of the Marshall Plan and that now it was Germany’s turn to do the same for Southern Europe. Facts, however, tell a different story than those who want us to believe that what makes economies grow is that governments spend ever more money to “stimulate” economies in depression.
By any standards the Marshall Plan was not a very big financial program given the fact that large parts of Europe were destroyed and the program was spread across 16 European countries. Overall, US$ 12.7 billion were spent under the Marshall Plan which in today’s dollars would amount to little more than US$ 122 billion.
Of that amount, the largest part went to the United Kingdom (26 %) and France (18 %). The share of West Germany was much less (11 %) and was probably just enough to compensate for the ongoing dismantling of industries as part of reparations payments and the confiscation of German patents, copyrights and trademarks. In other words: while the Allied forces continued to destroy German industrial base, vouchers were sent to Germany to buy goods from the United States.
Role of the Soviet Union
The Soviet Union was invited to join the Marshall Plan program but refused to participate. Instead the Soviet Union installed its own kind of a “reverse Marshall plan” and appropriated for itself approximately a value of the same amount as the original Marshall Plan in the form of physical reparations from those countries that came under Soviet rule after Churchill and Roosevelt had handed over to Stalin all of Eastern Europe. Poland was pushed westward and what came under the new rule was ethnically cleansed. Modern research estimates that between 1945 and 1950, Europe witnessed the largest episode of forced migration, and perhaps the single greatest movement of population in human history when between 12 and 14 million German-speaking civilians (mostly women, old people, and children) were forcibly ejected from their places of birth in Czechoslovakia, Hungary, Romania, Yugoslavia, and what are today the western districts of Poland. Sadly enough, those who were left behind fell under Soviet dictatorship and experienced their own kind of suffering and veritable slavery for the next five decades.
Change of US Plans
Up unto 1947 the United States followed the occupation directive JCS 1067 which was inspired by the Morgenthau plan elaborated in the US Treasury that foresaw an almost complete deindustrialization of Germany with the acceptance of its consequence of the annihilation of around 25 million individuals. In July 1947 with the advent of the initial planning for the Marshall Plan designed to foster a European economy recovery, the restrictions were lessened and U.S. occupation directive JCS 1067, whose economic section had prohibited "steps looking toward the economic rehabilitation of Germany [or] designed to maintain or strengthen the German economy", was replaced by the new U.S. occupation directive JCS 1779 which instead stated that "an orderly, prosperous Europe requires the economic contributions of a stable and productive Germany."
The United States finally identified the Soviet Union as its new enemy and learnt reluctantly and only step by step that without a German recovery there would be no economic recovery at all for the rest of Europe and thus it would be only a matter of time until all of Europe would fall under the dominance of the Soviet Union.
Economics of the Marshall plan
Tyler Cowen has demystified a series of pertinent fairy tales about the economics of the Marshall Plan. According to Cowen, the Marshall plan was not a significant factor in West European recovery. What mattered much more than the financial aid was economic liberalization, relative monetary and fiscal stability (what nowadays is falsely called austerity), and a surge for economic integration. It was not the financial flows per se but the conditions attached to the Marshall Plan that were decisive for the European recovery: economic integration and free trade, the first steps to construct what later became the Common Market and thereafter the European Union. Tyler Cowen states that those countries that received most aid grew less than those countries which received less, such as West Germany. Ludwig Erhard of Germany who implemented his free market policy in 1948 against the plans and advice of his own and the allied forces staff was more important for the German recovery than the aid which the Marshall plan provided. US aid was problematic in some cases indeed, when, for example, instead of farm equipment, the US delivered tobacco and US aid helped Britain and France to acquire military equipment in order to continue their colonial wars against independence in Africa and Asia.
Why the Marshall Plan MatteredNevertheless
One must recognize that the Marshall was crucial for the recovery of Europe quite different from what the pushers of stimulus policies suggest. What the Marshall plan accomplished was to do away with the earlier genocidal plans. It established the option of European integration. The Marshall plan ushered the way for West Germany to become a respected member of the Western European Community. Using the terminology of Robert Higgs, the most important contribution of the Marshall Plan was to do away with regime uncertainty. More important than financial aid was the restoration of business confidence that really mattered, the belief that investment would pay, that in the face of absolute destitution and destruction, marginal investment would carry huge profits. For the German people, the Marshall plan cast away the fear of punishment, the fear of being pushed into poverty forever and instead lit the light of hope for prosperity. In other words: the Marshall plan in combination with the internal reforms of Ludwig Erhard liberated the entrepreneurial spirit, and the recovery of Germany would soon pull out the rest of Europe of misery and set it on the path towards prosperity.
Contrary to what is often told in the press, Southern Europe has received its financial “Marshall plan” already in a massive way over the past couple of decades. Contrary to what “loudspeakers” such as Krugman and Soros pronounce, a European transfer union has been in place for a long time. Thus, calling for a new “Marshall Plan” is just outright nonsense and such a claim is based on ignorance. While complete ignorance would be less harmful than half-knowledge and is actually as worse as believing in something that is not true, modern media actively promote half-knowledge. The simple fact is that as much as there has been a massive “Marshall plan” in Italy from North to South, the European “Marshall Plan” as a transfer from the North to the South also did not produce beneficial results. What is needed is something quite different from money. It is good institutions, it is free markets; it is corruption-free politics. It is, most of all, doing away with “regime uncertainty” as Higgs has explained for the curse that prolonged the Great Depression. That is the phase that Europe is in. The great challenge consists in solving the problem whether the European Union will be capable to spread the principles of good governance to Southern Europe. Financial transfers can only serve as teaser and as a threat. They serve as an instrument to make these countries do what they need to do – in their own interest. Those who call for a “New Marshall Plan” and only have the flow of funds in mind, not only expose their historical economic illiteracy they also have not learnt the basic lesson of the Marshall plan that it was the conditions more than the funds that made the project a success.
The beneficial effect of the Marshall Plan came not primarily from the transfer of funds, but from the conditions attached to receiving them. These conditions pushed the European towards open borders and free trade and did away with regime uncertainty. It was precisely because the Marshall program promoted the necessary structural reforms of the European countries that made the Plan effective. The proponents of a “New Marshall Plan” promote the exact opposite: they demand funds without condition in order to avoid structural reforms, to avoid the consolidation of government finances, and in order to cut welfare spending and regulation. They want to push European governments into an endless cycle of monetary and fiscal expansion and an unsustainable debt burden that will cripple these economies for decades to come. The true heirs of the Marshall Plan and promoters of prosperity are not those who call for an unconditional flow of resources from the North to the South, but those who condition such flows to structural reforms.