The few years over which the Marshall Plan was implemented preceded what has come to be called the “Golden Age” of economic growth in Western Europe, occurring roughly between 1950 and 1973. The annual real GDP growth rate of this period averaged 4.6% compared to the 1.4% annual growth in the nearly four decades before 1950 and the 2% annual growth in the two decades after 1973. While it is tempting to think that the financial aid administered through the Marshall Plan provided the primary driving stimulus for this unprecedented growth, one should not ignore the ways in which the Marshall Plan helped to facilitate greater economic integration and cooperation between the disparate economies throughout Western Europe.
Conditions in Postwar Europe
World War II claimed the lives of close to 60 million people and was the first war in which more civilians than soldiers were killed. On top of this, whole cities, towns, and villages across the European continent were destroyed. Ports, bridges, railways, factories and workshops, as well as crops and forests throughout Europe, had been decimated by the war.
The war itself was bad enough based on the casualties and destruction just mentioned, but there are indirect effects that can be felt long after a war ends. These effects can be just as devastating. All of the damage caused by the war served to undermine the productive capacity of European nations leading to numerous shortages of essential productive inputs including coal, cotton, and petroleum, not to mention food shortages. Indeed, many Europeans were forced to survive on 1,000 calories per day or less.
Another shortage that became increasingly relevant was that of U.S. dollars. The productive incapacity following the war forced European nations to import more than they exported leading to a situation in which their net external trade position with the U.S. was negative and worsening. Europe had used up $3 billion in reserves by the middle of 1947 and used $2.5 billion in 1947 alone. Without a new supply of dollars, it is unclear how Europe would continue to be able to finance this trade imbalance. (To read more, see: How did World War II impact European GDP?)
Implementation of the Marshall Plan
In a commencement speech given at Harvard University in June 1947, U.S. Secretary of State George C. Marshall recognized that Europe’s immediate needs were above and beyond its current ability to pay for them. Without additional aid, Europe was at risk of a dire economic situation quickly turning into both social and political instability akin to the situation that transpired after World War I.
It should be recognized that the $12.5 billion of Marshall Plan aid provided to Western Europe between 1948 and 1951 was not the first of its kind following the war. Between the middle of 1945 to the end of 1947 the U.S. had already transferred up to $13 billion in aid to Europe. What made the Marshall Plan aid different was the strict “conditionality” with which it was administered making it not just a financial aid package, but a structural adjustment program as well.
With the specter of communism haunting postwar Europe, the U.S. had very real intentions of fashioning as much of the region as possible after its own image. The conditionality of the aid meant that the U.S. steered European governments in the direction of pursuing more market-oriented economies as opposed to ones governed by central planning. The Marshall Plan reforms were aimed not just at helping Europe to regain financial and economic stability, but to do so in a way that gave priority to the market to allocate goods and resources, as well as facilitate greater trade not just within Europe but also with the rest of the world, especially the U.S. (To read more, see: What’s the Difference Between a Market Economy and a Command Economy?)
To this end, the Marshall Plan enforced the relaxation of controls that had previously prevented proper market allocation of resources. Foreign trade liberalization was accomplished through the signing of bilateral trade treaties between aid recipient countries and the U.S., and also through the establishment of the Organization for European Economic Cooperation (OEEC) in April 1948 and by membership in the European Payments Union (EPU) in 1950. Both of these institutions fostered greater economic cooperation within Western Europe by establishing multilateral trade agreements and a multilateral payments settlement system.
The Bottom Line
While Western Europe experienced an unprecedented level of growth between 1950 and 1973 as previously mentioned, it is difficult to precisely quantify how much of that growth is a direct result of the Marshall Plan aid. Some would argue that the amount of aid was far too little to stimulate European economies to any significant degree, and in regards to whether the aid was helpful in reconstructing Europe’s damaged infrastructure, it has been recognized that most of the reconstruction was completed by the time the aid was administered.
No doubt there were severe resource shortages, and the significant trade imbalances that were draining Europe’s gold and dollar reserves are an indication that further aid was likely a necessary condition for full recovery, albeit not sufficient to explain the high levels of growth experienced for the next two decades. The aid was a crucial linchpin, but more significant for the long run growth were the Marshall Plan reforms that established a more economically integrated and cooperative Western Europe.