The Second World War

The Second World War shifted the global economic balance even more decisively than the First. Both physical destruction and loss of life in central and eastern Europe, in Russia, and in East Asia were far higher than in 1914-18; even though many economists have tried to show how the apparent physical destruction went hand in hand with increases in productive capacity. Germany’s basic capacity was as high in 1945 as in 1940, despite the massive damage done to cities by bombing. But the infrastructure was in ruins, transportation had broken down, the financial system was effectively destroyed by the combination of wartime inflation and price controls. Britain had been obliged to sell her overseas assets to pay for the combat, and was a net debtor at the end of the war. The undisputed victor of the economic side of the war was the United States. American supplies under Lend-Lease had allowed Britain and the Soviet Union to continue fighting. The growth in American production finally ended the Great Depression. At the end of the 1940s, half of the world’s manufactured goods were made in America. The merchant navy had constituted 17 per cent of world tonnage in 1939; at the end of the war it was 52 per cent. As Life magazine announced, the Second World War had produced the ‘American century’.

Americans hoped to use their position as the world’s preeminent creditor to shape the nature of the post-war settlement. After the Second World War, the United States played a much more direct and immediate role in the recasting of the world and the European economy than after the First. Although the details of the post-war economic settlement were worked out in a series of fundamentally bilateral negotiations between the United States and Britain, financial leverage always gave an advantage to the American view.

Underlying American proposals was the belief that the collapse of the international economy in the 1930s had been a major cause of war. Preserving peace in the future would require an open international system, in which currencies should be convertible and trade non-discriminatory. Time after time, American leaders, notably President Roosevelt’s Secretary of State Cordell Hull, argued that only a liberal trading order could serve as an adequate foundation for the post-war order. In the course of wartime diplomacy, the United States began implementing this vision. The most difficult parts of the lengthy Anglo-American Lend-Lease negotiations concerned the commitment that the United States wished to impose on Britain to avoid ‘discrimination in either the United States of America or the United Kingdom against the importation of any product originating in the other’.

Bretton Woods

At the Bretton Woods conference of July 1944, the outcome of the Anglo-American negotiations, accepted in principle by forty-four nations, was presented to the world. The vision of a liberal economic order remained; but membership in the International Monetary Fund and the World Bank imposed on surplus countries an obligation to assist development elsewhere. Currencies would be fixed in relation to each other (a system of ‘fixed par values’) in order to prevent the competitive devaluation which had been a feature of the breakdown of the international order in the 1930s. One clause in the IMF Articles of Agreement was viewed by the British negotiators as their greatest triumph: it gave permission to member countries to discriminate against the products of countries with ‘scarce currencies’ (i. e. against the products of the United States). The conference ended with a ringing endorsement of the principle of multilateralism from the US Treasury Secretary.

European Recovery

The actual course of European recovery bore only a slight relation to the mechanisms created at Bretton Woods, the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). The United States made it clear that it would never permit the dollar to be declared a ‘scarce currency’. At the same time, it insisted on the fulfilment of the pledges given at Bretton Woods to currency convertibility. But this looked impossible to most participants. In fact, the experiment of enforced convertibility of sterling in 1947 came to an end after only a few months.

Instead the United States began working on a plan for the economic revival of Europe. The European Recovery Program, or Marshall Plan, was launched by Secretary of State George Marshall in his Harvard commencement address of 5 June 1947. The United States intended to create a quite new political world in the western part of the European continent. The traditional and destructive Franco-German relationship should be replaced by a federal structure, a United States of Europe patterned after the American example. Only a combination of political strength and material satisfaction could create a society that might resist Soviet expansionism. The Organization for European Economic Co-operation (OEEC) created as part of the Marshall Plan was envisioned as a ‘focal point around which closer Western European economic cohesion should be built’. It might even be seen as an embryonic form of a future European government, in which the United States would have a role as an ‘associate member’.

The European strategy also required a revision of US policy towards Germany. The policy proposals of reagrarianizing Germany associated with the wartime US Treasury Secretary, Henry Morgenthau, or at least of greatly reducing German production (laid out as US policy in the Joint Chiefs-of-Staff directive JCS 1067), were abandoned. The German economy had been so structurally linked with her neighbours — even after the autarkic experience of the 1930s —that their recovery was impossible without a German revival. A more punitive stance was ruled out, not on moral grounds, but because of an awareness of the interconnectedness of the European economy. When France and Belgium initially insisted on high coal deliveries from Germany, the United States quickly came to the conclusion that these would reduce German performance to such an extent that the occupation authorities would need to intervene to stop widespread starvation. Already in 1945-6, when the Allied policy still aimed at punishment, the western Allies had paid some $700 million to support their zones of occupation in Germany. Making Germany pay more would in effect only force the United States to pay more for Germany. As a result, American policy towards Germany was completely different from that followed after the First World War.

In order to bring about a European recovery, Europe needed to be treated as a unit. Instead of establishing currency convertibility with the dollar, Europeans worked through a multilateral clearing system (European Payments Union) which allowed them to discriminate against imports from dollar countries. It was a version of Bretton Woods scaled down to European requirements: members committed themselves to the elimination of trade discrimination, and there was also a (rather limited) amount of credit available through the clearing union. The process of trade liberalization within Europe played a significant part in the European recovery; and in a long-term perspective this constituted the most important contribution of the EPU mechanism. Only after a sustained recovery phase did the Europeans allow a partial move to currency convertibility outside the European area (in 1958).

How much the push to European integration in the 1950s followed from an American initiative and how much it followed the self-interest of the European nation-states has sometimes been discussed by historians. In fact the debate is largely redundant: American and European interests over this issue largely coincided at this period. In particular, the key to solving both the European political and economic problem was seen as the establishment and then the institutionalization of Franco-German co-operation. One interpretation presented the wars of the European past—in 1870-1, 1914-18, and 1940—as struggles for the control and integration of Europe’s coal and iron ore resources, or attempts to bring together the iron ore of Lorraine with the giant coalfields of the Ruhr. (Needless to say, this is a grotesquely oversimple analysis. Each of these European conflicts was about a great deal more.) A solution to the political problem could be accomplished by finding a way of securing economic co-operation. In addition, the process of establishing a post-war economic recovery plan in France required a reliable coal supply. The plan proposed in 1950 by the French foreign minister, Robert Schuman, for the integration of the French and German heavy industrial sectors was originally intended as a substitute for France’s failure to win the battles over reparations coal. It was eventually realized in 1952, with the creation of the six-member European Coal and Steel Community (ECSC).

During the 1950s, Europe experienced an economic miracle. Rates of growth were faster than in any previous or subsequent period. German real growth of GNP amounted to 7.8 per cent in the 1950s, that of Italy 6.4 per cent, France and The Netherlands 4.5 per cent, and that of Britain 2.6 per cent. In part, the European miracle can be explained in terms of pent-up consumer demand after the depression and wartime deprivation.

But there were other uniquely favourable circumstances. The post-war recovery benefited from a ready supply both of labour and of capital. Before the Second World War, most countries in continental Europe had had large populations in rural areas, engaged in low-productivity agriculture. Any mobility would bring large gains. In Italy and France, industrial workers were recruited from the countryside. The traditional immobilism of the French countryside, a product of the system of partible inheritance written into the Code Napoleon, had been ended by a legal reform making single-heir inheritance possible. The West German economy benefited from inflows of Germans from the eastern areas allocated to the USSR and Poland at Potsdam and from the Sudetenland: by i960 these ‘expellees’ (Vertriebene) represented 18 per cent of the West German population. Then in the 1950s another 3 million came to the west from the (eastern) German Democratic Republic.