Marshall Plan & K flight

Brad De Long delong at econ.Berkeley.EDU
Sun Oct 4 20:53:17 PDT 1998

>Here's an excerpt from that interesting book [Eric Helleiner's
>_States and the Reemergence of Global Finance_ (Cornell UP,
>1994), pp. 58-62, to be exact.
>Only with the extension of Marshall Plan aid beginning in 1948 was the
>contradiction between these short-term and long-term goals overcome. The
>Marshall Plan has traditionally been viewed as having promoted Western
>Europe's economic recovery. Milward has effectively demonstrated that the
>principal economic significance of the aid was not that it promoted
>economic recovery-for recovery was already under way-but that it provided
>offsetting financing to resolve the European balance-of-payments crisis.

Strike one (against Milward, not Helleiner): There is no difference between "promoting economic recovery" and "resolving the European balance-of-payments crisis." Had the balance-of-payments crisis been "unresolved" as East Asia's balance-of-payments crisis over the past year and a half has been "unresolved," there would have been no post-1947 economic recovery in Europe.

Milward knows perfectly well that balance-of-payments crises destroy economic growth. However, he prefers to split hairs, argue that people like Kindleberger are wrong to claim that "the Marshall Plan caused recovery" because recovery was already underway, and then casually admit when pressed in seminars that "the Marshall Plan allowed the *fundamental* resolution of Europe's balance-of-payments crisis to be postponed for three years"--which as I understand it is Charlie Kindleberger's maximal claim.

Thus as I read the debate, Milward has shown *nothing* and will admit to this when pressed. As you can guess, Milward really annoys me...

>Milward has in mind the offsetting of deficits caused by European imports;
>however, Marshall Plan aid was also crucial in offsetting capital flight
>from Europe to the United States. Indeed, according to the "able and
>authoritative" New York Times correspondent Michael Hoffman, the total
>volume of U.S. aid to Western Europe in the early postwar years was
>exceeded by the total volume of European capital moving in the other

Strike two (against Helleiner this time): We can't directly track international capital flows. The best we can do is talk to people who are undertaking international capital flows to figure out why they are doing what they are doing, and then to look at the balance-of-trade figures to infer net capital flows. If a country is earning a lot of foreign currency via exports (tracked fairly well by recipient countries' customs services) and not spending much of that hard currency on imports (tracked fairly well by the home country's customs service), then we infer that capital must be flowing out. Balance-of-trade-based estimates of capital flows are poor because capital flows are the difference between two numbers, imports and exports, that are themselves not measured that well. But balance-of-trade-based estimates are by far the most reliable.

Thus when one finds the "able and authoritative" New York Times correspondent saying x about international capital flows, one should first ask: (a) Is what he is saying consistent with the import, export, and official settlement totals of the country in question? If not, then ask: (b) Does he have magic sources of information that make his observations much more reliable than those gotten from the balance-of-trade statistics? The answer to (b) is "no." There are times and places where balance-of-trade statistics are really badly messed up, but post-World War II western Europe is not one of them.

Since the answer to (a) is "no" as well, the right thing to conclude is that Mr. Hoffman (able and authoritative as he may be) is simply one more example of the fact that in a world this big you can find five people willing to say anything. And Mr. Helleiner suffers from one of the big vices of political historians: taking what some observer says about economics as evidence without inquiring whether said observer could have known what he was talking about.

>American policymakers were in fact keenly aware of the link between
>Marshall Plan aid and European capital flight. In late 1947, particularly
>vocal demands from the French government for help in locating the concealed
>assets of its citizens in the United States increased the visibility of
>this issue in Congress. Many members wondered if the cost of the Marshall
>Plan to the American taxpayer could be reduced by forcing wealthy Europeans
>to keep their money at home. They deplored the "small, bloated, selfish
>class of people [in Europe] whose assets have been spread all over the
>place" and questioned "whether or not [the United States] should become a
>sanctuary for refugee money."[20] The view of the American Veterans
>Committee, for example, was that "the American taxpayer should not be
>obliged to provide the necessary funds for the program while well-to-do
>Europeans continue to hold on to their private hidden investments in the
>United States."[21]

Strike three: We are now talking not about capital flight made possible by the Marshall Plan, but about wealth owned by French citizens who had moved their assets to the U.S. before the June 1940 fall of France to the Nazis. We have now drifted far from the initial claim that Marshall Plan dollars coming in was immediately grabbed by rich Europeans and deposited in their bank accounts in New York...

Did U.S. policymakers worry that Marshall Plan aid might generate capital flight, and thus fail to do its job of aiding western Europe's recovery? Yes, they worried about it a lot. Does the fact that they worried about it mean that it happened? No, it doesn't: and the best evidence we have on capital movements suggests strongly that it didn't. Did U.S. policymakers think that it would be good to allow the French government to tap assets of French nationals who had moved their money out of France before June 1940? Some did, some didn't, and in the end little was done. (Although note that we are only talking about *French* assets here: Britain had grabbed the American assets of British nationals to finance World War II, and the U.S. had grabbed many of the American assets of German nationals.) Did a lot of European capital flee to the U.S. between the end of the war in Europe and the start of the Marshall Plan? Almost surely not: capital flight requires that you export *something*, take the proceeds, and invest them in the country that you are fleeing to. Western Europe was exporting very little in 1945, 1946, and 1947.

Do I think that more should have been done to nationalize American assets of western Europeans and use them to fund European recovery? Yes. Was Marshall Plan aid immediately turned around and used dollar-for-dollar to boost the New York assets of European plutocrats? No. Can Noam Chomsky count? No.

Brad DeLong

"Now 'in the long run' this [way of summarizing the quantity theory of | <delong at> money] is probably true.... But this | Brad De Long **long run** is a misleading guide to | Dept. of Economics current affairs. **In the long run** | U.C. Berkeley we are all dead. Economists set | Berkeley, CA 94720 themselves too easy, too useless a | (510) 643-4027 2-6615 fax task if in tempestuous seasons they | (925) 283-2709 3-3897 fax can only tell us that when the storm | is long past the ocean is flat again."

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