What is the Marshall Plan?

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Definition:

The Marshall Plan was a US economic assistance program that gave billions of dollars in aid, helping European nations recover after the devastation of World War II.

🤔 Understanding the Marshall Plan

The European Recovery Plan, aka the Marshall Plan, was a US assistance program that supported 16 European countries. World War II devastated much of Europe, leaving countries without the resources needed to spur economic growth. The US government gave $13.3B in aid (equal to roughly $152B in 2020) to support economic development, believing the effort would help combat the spread of communism in Europe. The plan’s administrators carried out the plan from April 3, 1948 to June 30, 1952, providing less funding as each year passed. Among other programs under the Marshall Plan, the United States gave grants to European countries to buy food, raw materials, and machinery. European governments decided how to distribute and spend the funds.

Example

The Marshall Plan (aka European Recovery Program, or ERP) wasn’t just a monetary aid program to passively assist war-torn Europe. It required Europeans to fully participate. Goods were sent to Europe from the United States and sold to the highest bidders. The payments went into a Counterpart Fund for each country to be used for reconstruction efforts.

By 1949, total output of goods and services for ERP countries had risen by 25%. Each nation made different use of the funds provided by the plan depending on its needs. For example:

  • Sweden secured raw materials and energy supplies
  • Italy and Greece rebuilt railways, roads and power facilities
  • France invested in industrial development
  • The United Kingdom repaid wartime debts

Historians believe that the ERP set the foundation for the 1957 Treaty in Rome, which launched the European Economic Community to foster trade between nations — And eventually became, in 1993, the European Union we know today.

Takeaway

The Marshall Plan was like America pinch hitting for Europe...

A pinch hitter is a batter that steps in and substitutes for a hitter in a baseball game — Usually at a critical point in the game. A pinch hitter usually gives his or her teammates on base better odds of making it home and scoring. Europe was in critical financial condition after the war. America's $13.3B funding package provided by the Marshall Plan was designed to stimulate and stabilize the struggling post-war economies of some European nations — Giving those countries a better chance of recovering from the war.

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What is the Marshall Plan?

The European Recovery Plan (ERP), commonly known as the Marshall Plan, was an assistance program the United States provided to 16 European nations, including the United Kingdom, France, Austria, Belgium, Denmark, Greece, Iceland, Italy, Ireland, Luxembourg, Norway, the Netherlands, Portugal, Switzerland, Sweden, and Turkey. American leaders feared that, without economic stability, European nations would fall under the influence of communism and the Union of Soviet Socialist Republics (USSR).

After World War II, much of Europe’s infrastructure was in ruins, and many countries were in poor financial health. US leaders believed that a joint economic solution could help European nations stimulate and stabilize their economies. US Secretary of State Greg Marshall proposed a massive financial aid package to encourage growth.

Following talks in Europe and encouraged by President Harry Truman, Congress passed a $13.3B funding package. Under the Marshall Plan, the US provided loans, technical assistance, and cash grants — The latter accounting for 90% of spending. European countries provided matching counterpart funds in their national currency to pay for infrastructure projects.

The US Congress set up the Economic Cooperation Administration (ECA) to oversee the Marshall Plan. President Truman appointed the President of Studebaker and businessman, Paul Hoffman, to administer the ECA. The European countries receiving aid formed the Organization for European Economic Cooperation (OEEC) to coordinate and distribute aid.

What is the history of the Marshall plan?

The Soviet Union gained control of much of Eastern Europe following World War II, and many feared that its influence would expand into Western Europe. While Germany surrendered on May 7, 1945, much of Europe laid in ruins. Extensive bombings and fighting had destroyed much of Europe’s industrial base and infrastructure. Further, the war killed millions of men and women.

While speaking at Harvard University on June 5, 1947, then-Secretary of State George Marshall proposed that the United States give aid to support Europe’s economic recovery. While Europeans would draw up specific development plans, the US would help foot the bill.

On December 19, 1947, President Harry S. Truman sent a message to Congress urging it to put together and approve an economic aid package for Europe. Truman argued that economic prosperity and the flow of goods between countries were essential “conditions for peace.” Truman also believed that the world economy would deteriorate if Europe didn’t recover and that the continent's recovery would benefit the United States economy.

The USSR was also top among Truman’s concerns. He argued that the European recovery was “essential to the maintenance of the civilization in which the American way of life is rooted.” Truman believed that European nations could help form a strong defense against the spread of communism that would support “freedom, justice, and the dignity of the individual.”

In July 1947, representatives from 16 European countries met and formed a Committee of European Economic Cooperation (CEEC) to discuss the proposal of the program. The Committee also considered the needs of Western Germany and drew up plans to support its economic recovery.

Congress passed the Economic Cooperation Act and President Truman signed it into law on April 3, 1948. The act also established the Economic Cooperation Administration to oversee aid programs.

On April 16th, European nations established the Organisation for European Economic Co-operation (OEEC) to implement the key components of the program, collaborate on grant allocation decisions, and discuss lowering trade barriers.

Over the next four years, the United States gave out $13.3B to European nations to support economic development. European nations also contributed billions more in matching counterpart funds.

As originally legislated, the Marshall Plan was slated to end officially on June 30, 1952 — after four years and one quarter from it’s start date of April 1, 1948. However, the US shutdown the ECA six months prior, transferring its aid programs to the Mutual Security Agency — Which was overseen by the US and sought to strengthen its European allies. For this reason, the official duration of the Marshall Plan is still a gray area.

How did the Marshall Plan contribute to the Cold War?

Some argue that the Marshall Plan kicked off the Cold War — The period in which the United States and the USSR competed for influence across the globe. The Marshall Plan was meant to curb the USSR’s influence in Europe and Soviet expansion.

The USSR and the US did not fight directly during the Cold War, instead waging proxy battles against each other in other countries and regions. For example, the Soviets gave aid and weapons to the communist Viet Cong, whom the US fought during the Vietnam War. Likewise, the US provided weapons to mujahideen fighters fighting against the Soviets in Afghanistan.

Some historians argue that the Marshall Plan was an offensive measure taken by the US government to weaken the Soviet’s influence over Eastern Europe. While the US supported market economies (economies that are largely regulated by market forces, such as competition), the Soviet Union established command economies (in which the government controls resources, sets prices, and directs production). The two rivals competed for influence and promoted their different economic systems across the world. The Marshall Plan provided aid to US-allied European countries, but not to those nations that had fallen under the control of the USSR.

Ultimately, the Marshall Plan helped many European countries rebuild and encouraged them to integrate their economies. This cohesion and prosperity helped curb the influence of communism in Western Europe. But the plan strained relations between the US and USSR, and between Western Europe and Eastern Europe.

What were the goals of the Marshall plan?

The overall aim of the Marshall Plan was to spur economic growth in Europe and to counter the spread of communism. US leaders believed that Europeans would be more likely to support communism if they were unemployed and couldn’t access basic necessities like food. The Marshall Plan also laid out other goals, including:

  • Increasing industrial production to 30% above pre-war levels (1938).
  • Increasing agricultural output to 15% above pre-war levels.
  • Reducing the trade gap between Europe and the United States and other countries.
  • Increasing trade liberalization (meaning less trade barriers) and reducing protectionist measures, such as tariffs (taxes on imported goods).
  • Helping to support the integration of European economies.
  • Improving morale and stability in European societies.
  • Encouraging Europeans to buy American goods.
  • Increasing US influence in Europe.

The US government was also interested in studying the economic effects of such programs. The Marshall Plan influenced subsequent aid programs and agencies. For example, the US Agency for International Development (USAID) still uses the private-public partnership model used in the Marshall Plan.

What were the effects of the Marshall plan?

According to the Congressional Research Service, the Marshall Plan set off a chain of events that led to many accomplishments, including increased agricultural and industrial output. By the end of 1951, industrial production had increased by 55% from four years prior, and agricultural output grew by 37% between 1947 and 1948. Overall, the total aggregate Gross National Product (GNP) across all European countries receiving aid increased by roughly 33% while the Marshall Plan was in place.

The United States encouraged European unification through intra-European trade and easier currency conversion. European countries removed trade barriers, eliminating 90% of quantitative import restrictions (limits on the quantity of goods that can be imported or exported) by 1955. The volume of trade within Europe doubled between 1947 and 1951. In 1950, the US provided help and funds to establish the European Payments Union (EPU) to facilitate payment transactions between European countries. The EPU led to the European Coal and Steel Community in 1952 and laid the groundwork for the European Union.

As European nations recovered, people consumed more goods, resulting in more imports from the United States and other countries. The US exported machinery, food, raw materials (such as aluminum), and other goods. The US also benefited economically from the Marshall Plan. Roughly 70% of European purchases using Marshall Plan dollars were spent on commodities, such as foodstuffs and raw materials, produced in the United States.

The United States also saw expanded influence in Europe. The US support for Europe enhanced a diplomatic relationship centered on both economic and security issues. ECA Administrator Hoffman believed that the Marshall Plan laid the groundwork for the eventual creation of the North Atlantic Treaty Organization (NATO) — An alliance between 28 countries that border the North Atlantic Ocean for the purpose of protecting its members.

Was the Marshall Plan successful?

The Marshall Plan is often upheld as a successful model of government planning and foreign aid in strengthening the economies of the participating countries. Europe’s economic recovery helped thwart the expansion of the Soviet Union, which controlled much of Eastern Europe by 1948. In 1952, George C. Marshall was awarded the Nobel Peace Prize.

However, revisionist critics have questioned whether the Marshall Plan was necessary. They note that the plan only accounted for roughly 5% of the Gross National Product (GNP) of the assisted countries. These critics base their claim on statistical analysis which allegedly supports weak positive correlation between the aid given and the actual growth of GNP.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC (member SIPC), is a registered broker dealer. Robinhood Securities, LLC (member SIPC), provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

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