The first tranche of Marshall Plan funds helped West Germany reform its currency and jump-start a surprisingly rapid economic and political revival. Integral to the Marshall Plan was the Truman administration’s elimination of German debt and reparations. As a result, real output increased by 18.5 percent in 1948 and leveled off at an average increase of 8 percent a year during the first half of the 1950s.
The above is a quote from David L. Roll, “The 11-Minute Harvard Speech that Rebuilt Postwar Europe,” Wall Street Journal, Saturday/Sunday, June 4-5, 2022. It’s based on Roll’s book titled George Marshall: Defender of the Republic.
Roll missed most of the cause of the German recovery and economic expansion. It wasn’t the Marshall Plan, as Tyler Cowen laid out cogently in his 1985 book chapter titled “The Marshall Plan: Myths and Realities” and in a 1986 article based on that chapter in Reason. The latter is titled “The Great Twentieth-Century Foreign-Aid Hoax,” Reason, April 1986.
So what did cause what has come to be known as the German economic miracle? I tell the story in some detail in “German Economic Miracle,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, Liberty Fund, 2008.
The short version: currency reform, ending price controls, and substantially cutting marginal income tax rates.
The picture above is of the person who, more than anyone else, deserves credit for the German economic miracle: Ludwig Erhard.
READER COMMENTS
Fazal Majid
Jul 27 2022 at 9:19am
It’s worth mentioning the UK was the primary recipient and yet managed to fritter it away on maintaining appearances of Empire:
https://www.bbc.co.uk/history/british/modern/marshall_01.shtml
Mark Z
Jul 27 2022 at 12:12pm
Indeed, the Marshall plan was a drop in the bucket. There’s an excellent summary of the the critique of the Marshall Plan myth in the ‘criticism’ section of the wikipedia page for it:
“The Marshall Plan grants were provided at a rate that was not much higher in terms of flow than the previous UNRRA aid and represented less than 3% of the combined national income of the recipient countries between 1948 and 1951,[107]which would mean an increase in GDP growth of only 0.3%.[7] In addition, there is no correlation between the amount of aid received and the speed of recovery: both France and the United Kingdom received more aid, but West Germany recovered significantly faster.[7]”
Given those numbers it’s rather astonishing how it’s become conventional wisdom that the Marshall Plan ‘rebuilt Europe.’ Probably one of the most successful instances of propaganda in history.
Thomas Lee Hutcheson
Jul 27 2022 at 12:44pm
True, but would Erhard have been willing and able to make the structural reforms without aid and with 1918 style reparations?
David Henderson
Jul 28 2022 at 5:20pm
You write:
Maybe not, although one could make a strong case, given Erhard’s strong commitment to free markets, that he would have been even more motivated to decontrol.
Also, remember what the post is about: not Marshall, the man, but the Marshall Plan. Marshall the man did something good by arguing against FDR’s Treasury Secretary Henry Morgenthau’s plan to prevent German economic development. For this, Marshall and others deserve kudos. But that wasn’t the Marshall Plan.
Henry
Jul 27 2022 at 2:26pm
Of course the 18.5% increase in output in 1948 came from a baseline of being bombed regularly. Germany had a very efficient economic base and an excellent work force that responded well to being freed to go to work. A good example of this was the 1952 one-two finish by Mercedes in the 24 hr of Le Mans. You can buy a W194 Mercedes for $15 million if interested. The Marshall Plan indicated that the western allies were not going to impose punitive sanctions on Germany. The Soviet Union was still looking to suppress Germany. In 1954, the west Germans won the world cup in soccer; this was a great confidence builder.
Monte
Jul 27 2022 at 4:42pm
Although the Marshall Plan didn’t contribute significantly to the Wirtschaftwunder, it did have a positive psychological impact on the German people.  And in addition to those factors mentioned above, demand for material support from Germany during the Korean War and the drastic reduction in reparations (The Germans had to pay $121 billion (in 2016 US dollars) in reparations to the UK, France, and Russia, mainly in the form of dismantled factories, forced labor, and coal.*) helped tremendously.
* The West German Economic Miracle
Â
Craig
Jul 28 2022 at 1:36pm
And let’s not forget, and this applies to any country that was ravaged by the horrors of war, that at the end of the day the Germans, famously the Trümmerfrauen, and of course this also included the men of course, schlepped their butts to work and made their lives better. The Germans refer to VE day as Stunde Null, zero hour, starkly defining the boundary between what came before and what would come after.
The relative prosperity enjoyed by Germans even as early as the 1950s (I believe Germany hit pre-war GDP by 1953) during the Wirtschaftswunder, is still mostly due to them and their efforts.
Rich Wilcke
Jul 28 2022 at 1:54pm
To some, the greatest benefit of the Marshall Plan was that it served very efficiently to fund the initial intelligence agency, the CIA, WITHOUT the knowledge or oversight of Congress, seen as a necessity for covert action. A major portion of the so-called ‘Marshall funds’ were siphoned off in Europe as soon as received in France and before they were used to ‘rebuild’ devastated nations and regions. Of course, U.S. interests that determined the recipients of the funds and the amounts they received, gained a great deal of influence across Europe, a goal of the CIA that meshed nicely with the ample funds and vague policies of the Plan.
Andrew_FL
Jul 28 2022 at 6:32pm
I would love to see this same level of analysis applied to Japan, as well.
David Henderson
Jul 29 2022 at 2:13pm
Good point. As I recall, from some research on industrial policy I did while in the Reagan administration in the early 1980s, it was only after the Dodge reforms were scuttled in the early 1950s that the Japanese economy started growing like gangbusters. (Dodge got out of town? Pun intended.) But my memory is imperfect.
Vivian Darkbloom
Jul 30 2022 at 12:06pm
But, the Marshall Plan wasn’t just about doling out aid. Â For a contrary view of the overall effects of the Marshall Plan see Eichengreen and DeLong who argue that the Plan enabled structural reforms that were far more important than the effect of the aid itself (which they agree didn’t have that much effect, in and of itself):
https://www.nber.org/papers/w3899
David Henderson
Jul 30 2022 at 6:43pm
Eichengreen and DeLong simply assert, on page 37, that without the Marshall Plan we wouldn’t have had price decontrol. They give no basis for that claim.
It’s shocking that in a 50 plus page NBER study, they don’t mention the details of price decontrol or of dramatic cuts in marginal tax rates. They put Wallich in the references but, from I could find in the study, they don’t draw on his work at all.
Comments are closed.