The Marshall Plan

Two posts ago I mentioned the Marshall Plan and despite the UK borrowing from the plan it still became the 'Sick Man' of Western Europe.

Blog reader Mike left a comment suggesting a major factor in the decline of the UK and the rapid resurgence of West Germany was that whilst both countries were devastated, the West Germans received more funding for reconstruction that the UK.

I will confess that up until several years ago I also believed this to be the case.  Now I know it's not true.  The UK actually received the greatest share at 26% of total funds allocated to the Marshall Plan.  France received 18% and West Germany only received 11%. 

So what happened?

I'm going to paste below a BBC article from 2011.

Hard luck story

We all know the easy British explanation for our cumulative export defeat in world markets from the 1950s onwards, especially at the hands of the Germans. This story tells us that lucky West Germany had all her industries and infrastructure bombed flat or removed as reparations, and then was able to re-equip herself from scratch with Marshall Aid dollars. Meanwhile, so this hard-luck story goes on, poor old Britain had to struggle on with worn-out and old-fashioned kit.

This is utter myth. Britain actually received more than a third more Marshall Aid than West Germany - $2.7 billion as against $1.7 billion. She in fact pocketed the largest share of any European nation. The truth is that the post-war Labour Government, advised by its resident economic pundits, freely chose not to make industrial modernization the central theme in her use of Marshall Aid.

'Financial Dunkirk'

The root cause of this self-destructive British choice lies back in 1945, when Great Britain, as one of the 'Big Three' along with the United States and the Soviet Union, emerged from World War Two with the psychology of a victor but with her economic circumstances more resembling those of a defeated country. Despite the victory over Hitler, Britain was literally bankrupt, and faced the prospect of unbridgeable balance-of-payments deficits for years to come.

It was this victor's psychology that deluded both Labour and Conservative politicians into believing that Britain - at the centre of the Commonwealth and the Sterling area - could have a future that was similar to her past. British politicians saw the United Kingdom as a first-class power in the same league as the United States. And certainly Britain looked in many ways like a global power, with more than two million men in fleets, garrisons and air squadrons sprawled across the world, from their bases at home to those in Japan.

Nonetheless, John Maynard Keynes, the chief economic advisor to the new Labour Government, warned ministers in August 1945 that Britain's world role was a burden which '... there is no reasonable expectation of our being able to carry ...'

As he pointed out, the entire British war effort, including all her overseas military commitments, had only been made possible by American subsidies under the Lend-Lease program. If the Americans stopped Lend-Lease, Britain would face a 'financial Dunkirk' - his words - unless Washington could be touched for a loan of $5 billion. Keynes wrote that such a 'Dunkirk' would have to be met by:

'... a sudden and humiliating withdrawal from our onerous responsibilities with great loss of prestige and the acceptance for the time being of the position of second-class Power, rather like the present position of France.'

Dream of world power

Secretary of State George Marshall (right) faces the Senate Foreign Relations Committee, 8 January 1945, to argue for aid to Europe  ©Well, a week after VJ-Day (Victory over Japan Day), the US Congress duly did stop Lend-Lease. What now? For the new Labour Cabinet, Keynes's 'Dunkirk' solution of packing up all our 'onerous responsibilities' and becoming a second-class power was unthinkable, certainly unthought.

So instead, the Labour Government successfully cadged a loan of nearly $4 billion from the Americans. Thanks solely to this American tick, Britain could continue to entertain the dream of being a world power at the centre of the Commonwealth. Even so, the war-bankrupted country was still desperately hard up. The Labour Cabinet therefore sought in the first place to reconcile the dream with economic reality by means of salami-slicing the armed forces. The result was worrying - as Herbert Morrison shrewdly judged in November 1949:

'We are in danger of paying more than we can afford for defences that are nevertheless inadequate, or even illusory'

Just as true today, of course.

In the second place, the Labour Cabinet attempted to accommodate the costs of the world role and the expensive new welfare state by severely restricting capital investment at home. This of course served to handicap the much-needed modernisation of Britain's obsolete industrial system, and the country's clapped-out roads, railways and telecommunications.

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Marshall Aid

The dream of Britain as a global power also included the 'invisible empire' of the Sterling Area, to which Britain chose to play the banker. This was despite the fact that her reserves of gold and dollars were well known in Whitehall to be far too scanty for this role. By the end of 1947, the American dollar loan had already been largely spent, but the gulf still remained between the cost of Britain's self-inflicted global commitments and her inadequate earnings from exports. Without another huge dollar handout, Britain would have to give up all her global strategic commitments, as well as her role as the banker to the Sterling Area, and accept that she was now only a second-class power.

In that same year, the American Secretary of State, George Marshall, proposed his European Recovery Program to rebuild a war-shattered Europe. For Britain herself, the offer of the Marshall Aid dollars presented a last chance to modernize herself as an industrial power before her old trade rivals could recover from defeat and occupation. Instead, all the illusions and follies of post-war British policy now reached their climax in the wasting of Britain's Marshall Aid.

The French and German tenders for Marshall Aid resemble today's four-year business plans, being detailed technocratic strategies which give clear priority to investment in reconstructing industry and infrastructure. However, the British tender, originally drafted by a senior Treasury civil servant, resembled an Oxbridge economist's prolix prize-essay - with a tour of the world's economic horizon and Britain's place within it.

In the words of Sir Stafford Cripps, Labour Chancellor of the Exchequer, it was a 'general statement' rather than a set of 'detailed proposals'. Certainly it amounted to nothing like an action-plan with a clearly stated strategic objective.

Overriding needs

According to Whitehall documentation of the time, Britain's 'overriding need' in regard to the Marshall Aid was to keep up the Bank of England's reserves of gold and dollars, so that Britain could go on acting as banker to the Sterling Area. But then again, it was also stated in the documentation that the 'primary purpose' must be to keep up imports, especially of food and tobacco, to say nothing of timber for the Labour Government's ambitious program of council-house building. As for capital investment in industrial modernization, that was relegated in the British tender to the mere category of 'clearly of great importance'.

The plain truth is that the Labour Government in the late 1940s sought to use Marshall Aid much as the Conservatives used the rake-off from North Sea oil in the 1980s - as a general subsidy for whatever they wished to do, like clinging on to the dream of a world power role.

And so we find - surprise, surprise - that during the four-year period of Marshall Aid, Britain planned to devote to net fixed investment in industry and infrastructure a proportion of GNP that was a third less than West Germany's proportion.

Waste

In fact, far from Marshall Aid boosting British investment, planned programs were heavily cut after the debacle of a Sterling devaluation in 1949, caused by a balance-of-payments crisis. In what had been intended as the 'decisive' Marshall Aid years of 1949 and 1950, investment was only a little higher than in 1948 - barely ahead of inflation.

In 1950, Britain's investment in industry and infrastructure came to only 9 per cent of GNP, as opposed to Germany's 19 per cent. Thus the actual total of the investment was a fifth less than the German total.

It followed that during the 1950s German industry would enter export markets with new plant and new machines. For instance, the Volkswagen factory at Wolfsburg was no longer the bombed-out wreck of 1945-6, but was poised to achieve sensational global success in coming decades. Then again, more autobahns had been constructed in Germany, whilst the German rail network - and the French and Italian - had been totally re-engineered, with all the main lines electrified.

In Britain, steam haulage, semaphore signaling and clapped-out track still prevailed, and were to do so until the 1960s. Moreover, the road and telecommunications network in Britain remained equally inadequate, ill-maintained and out-of-date.

The sad irony is that it had been in vain that the Labour Government had sacrificed the modernization of Britain as an industrial country for the sake of using Marshall Aid to support a world power role - strategic and financial.

Britain's estimated defence expenditure for 1950-1 - the final year of Marshall Aid - amounted to 7.7 per cent of GNP - at a time when Germany and Japan were not spending a pfennig or a yen on defence. And in spring 1950, Hugh Gaitskell, Chancellor of the Exchequer, reported that the Sterling Area's dollar reserves were 'still at a lower level than when Marshall Aid began'.

What a monumental waste of a great and unrepeatable opportunity.

http://www.bbc.co.uk/history/british/modern/marshall_01.shtml