·        The Marshall Plan (a.k.a. European Recovery Program) was a coordinated aid program funded by the USA. It transferred over $12.5 billion to Western European countries between 1948 and 1951.

·        Came into law on April 3 1948 signed in by President Truman.

·        It was needed because of a fall in output in countries that were affected by the war. A fall in output meant that there was a disruption of channels for obtaining inputs and distributing production.

·        Motivations behind the Marshall Plan:

1.      American Capitalism (Kolko and Kolko).

2.      Pure altruism (Galbraith)

3.      Political and social stability of non-communist Europe

4.      Continuity of export markets for US products

·        Final aid recipients formed the Organization for European Economic Cooperation (OEEC) to coordinate the proposal based on national needs and consistency with American objectives.

·        Impact of the Marshall Plan on European recovery:

1.      Early triumphalist accounts – (Jones, Mayne and Arkes) – believe the plan was vital for the reconstruction of productive capacity, the development of the necessary institutions for cooperation among former adversaries and the restoration of the European confidence in market capitalism.

2.      Milward believed that the primary role of the ERP was limited to sustain the flow of capital imports necessary to prolong recovery. He believed that the outstanding performance of Western European economies would have not been very different in the absence of the Plan, and that recovery was well under way before 1948. He also believed the leverage afforded by the ERP was insufficient for the USA to force through its vision of the United States of Europe.

3.      The Plan induced British and French support for a strong Germany.

4.      The Plan helped promote collaboration among former adversaries.

5.      De Long and Eichengreen believe the Plan helped the recipient economies more in terms of political economy than macroeconomics. The ERP bought European governments the political space needed allowing an institutional environment conducive to growth.

·        The early views were exaggerated in believing the vital importance of the ERP funds for Western European growth.  They believed the Aid allowed for the reconstruction of the capital stock, the elimination of bottlenecks that obstructed production and the public provision of infrastructures and the surge in intra-European trade.

·        Eichengreen argues that if the effects of the Plan worked mainly through private and public capital accumulation then there should be a significant correlation between output growth and ERP allotments. His statistical analysis did not turn up that positive correlation.

·        Alvarez-Cuadrado and Pintea’s numerical analysis shows that transfers led to the increase in the growth rate of output by only 0.5%. Concludes the effects of the Plan through capital accumulation are rather limited.

·        De Long and Eichengreen argue that political economy considerations lie behind the true impact of the Plan. Aid provided the currency needed to relax the foreign exchange constraint, giving European policy makers extra room to maneuuver. This political space, together with aid conditionality induced European governments to balance their budgets, restore internal financial stability, and maintain their commitment to free markets.  This argument is a little difficult to evaluate however.

·        Aid was offered to the USSR and its allies, but it was not accepted.