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The Clayton Theorem

(or: Did George Marshall Save the US from Economic Collapse?)

Daniel Ford (long essay, fall 2006)

Even if they don’t quote him directly, our textbook authors generally agree with a theorem advanced nearly sixty years ago by Undersecretary of State William Clayton: Europe was about to run out of dollars, a situation that posed a calamitous threat to the US economy. Clayton envisioned ‘markets for our surplus production gone, unemployment, depression, a heavily unbalanced budget on the background of a mountainous war debt. These things must not happen’[1].

His words appear in Foreign Relations of the United States 1947. Seen in context, they actually constitute an anomalous part of his three-page memo, written as Clayton returned from Europe in May 1947—and that memo, in turn, is an anomalous part of a 284-page collection of State Department papers on the Marshall Plan.[2] In one of those papers, Charles Kindleberger tells us that ‘Mr. Clayton was deeply exercised by what he had seen in Europe. He had the impression that Europe was collapsing.... He was depressed by what he had seen and heard ... and felt strongly that something should be done’.[3] In short, the man was upset, and he was bent on a mission. Do a few sentences, written in heat, deserve the immortality they have been given?

Of our core texts, Crockatt quotes Clayton at length, and indeed admits of no other motivation for the Marshall Plan than the US was staving off a renewal of the Great Depression.  Young & Kent grant the aid program a double purpose: to combat communism in Europe, and ‘to ensure that the post-war American economy was not sent into recession’. Best and his co-authors take a similar view: economic aid ‘was not an unselfish act born out of some sense of guilt [sic!]’ but an effort ‘to counter the … rise of European left-wing political parties’ and ‘help stimulate the American domestic economy’.[4] Altruism, the student must conclude, had nothing whatever to do with it.

Gaddis is something of an exception, attributing the Marshall Plan to ‘the desperate economic plight of the West Europeans generally’. Indeed, I venture to say that if he were asked about the Clayton Theorem, he’d find little to commend it, to judge by a reference to the ‘stranger illusions’ of Communist ideology. Early in 1945, Gaddis tells us, Stalin authorized Molotov to accept a reconstruction loan ‘in order to help the United States stave off the economic crisis that Marxist analysis showed must be approaching’.[5]  If Stalin was under a strange illusion, what are we to say about Crockatt, Young, Kent, and Best and his colleagues?

Deconstructing Allen Dulles

Turning to books specifically about the European Recovery Program (ERP), Michael Hogan employs a more defensible formulation, explaining that American policy-makers ‘were convinced that a “dynamic economy” required American trade and investment abroad’. However, he provides no documentation beyond the ritual reference to FRUS 1947, and he has virtually nothing else to say about the program’s origins.[6] 

Then there’s Allen Dulles, who in 1947 wrote a book to proselytize for the Marshall Plan (it was overtaken by events and wasn’t published until 1993).  In his introduction, Michael Wala provides the most egregious example of how the Clayton Theorem has come to dominate academic thinking. American officials, Wala explains, ‘feared that the dwindling dollar reserves of the European nations ... could easily spell unemployment and even a new depression for the United States’. The public-relations campaign in favor of the ERP would therefore stress ‘the humanitarian aspects of the program and the benefits ... for the United States’ domestic economy’, while downplaying its utility for countering Soviet expansion in Europe.[7]

Yet Dulles makes no such argument in the book Wala is introducing—a book written precisely as propaganda for the Marshall Plan. Indeed, Dulles mentions the US economy only once, when he quotes the presidential advisory committee upon which he’d served. The effect is explicitly to contradict his editor: ‘The Committee regards as nonsense the idea ... that we need to export our goods and services as free gifts, to insure our own prosperity. On the contrary, we are convinced that the immediate economic danger to the United States is inflation’.

Instead, Dulles appeals to the better nature of his countrymen: ‘If Western Europe does not receive substantial aid,’ he warns, ‘there will be widespread starvation ... [and] a breakdown in its economy and industrial life. Under these conditions, there is little hope of preserving these countries for what we call western civilization’.[8]

Will Clayton and his theorem

Clayton was a self-made millionaire who turned to public service during the Depression and World War 2. As undersecretary of state for economic affairs, he was ‘regarded both at home and abroad as America’s foremost economic statesman’.[9] Indeed, he was Truman’s first choice to replace James Byrnes as secretary of state. Family obligations obliged him to refuse, or otherwise we’d be discussing the Clayton Plan rather than the Clayton Theorem.[10]

That May 1947 memo wasn’t Clayton’s first mention of the US economy in connection with aid to Europe. Drafting a speech for the president three months earlier, Clayton writes: ‘Last year exports from the United States amounted to ten billion dollars; and imports into the Untied States amounted to only five billion dollars.... It is up to us, if we are going to avoid economic disaster in the years to come, to see to it that the world does have through normal processes plenty of dollars to buy American goods’. However, the notion was dropped from the final draft, and Truman’s speech (at Baylor University on March 2) makes no reference to European aid.[11]

Clayton meanwhile retreated to an Arizona ranch, where he formalized his ideas in a series of one-sentence paragraphs calling for a $5 billion aid program for 1948. ‘The United States must take world leadership and quickly, to avert world disaster’, he writes. But the US will not undertake that leadership unless the voters ‘are shocked into doing so’. The effort must be total, ‘or we’d better stay at home and devote our brains and energies to preparation for the third world war’.  His only mention of the US economy is to scoff at the notion that the country could not afford aid, given that it is spending $10 billion a year on defense, its people are enjoying ‘the highest standard of living in their history’, and there’s talk of reducing taxes.[12]      

In May, Clayton made his seminal tour of Europe, seeing for himself the breakdown of civil order: looting, hoarding, and ‘[m]illions of people ... slowly starving’. His colleague Paul Nitze recalls of this tour: ‘Will was genuinely alarmed that Europe was on the brink of disaster’. Back in Washington, Clayton writes his now-famous memo, which almost point by point anticipates Marshall’s June 2 speech at Harvard. The principal difference is the secretary’s reference to the US economy. Where Clayton fears ‘markets ... gone, unemployment, depression’, Marshall contents himself with remarking that ‘the consequences to the economy of the United States should be apparent to all’.[13]

As it happens, Clayton’s influence appeared to be diminishing in the summer of 1947. When State Department officials (including Kennan, Bohlen, and Kindleberger, but not Clayton) met to discuss the Marshall Plan on August 22, ‘It was the consensus that Mr. Clayton, while generally aware of departmental thinking with regard to the “Plan”, holds fundamental divergent views on some aspects.... It seems essential ... that every effort be made to bring Mr. Clayton’s thoughts in line with the clarified position’.[14]

It would of course be too much to expect that the Clayton Theorem was unique to its author. His colleague Ernest Gross writes of this time: ‘It was clear that so long as Europe remained as it was, the U.S. economy would suffer’.[15] Truman himself—announcing the formation of that advisory committee on foreign aid—declares on June 22 that European recovery ‘is essential also to a world trade in which our businessmen, farmers and workers may benefit from substantial exports’.[16] The left-wing Nation writes its issue of June 28: ‘Our own economy will slump, our prosperity will disappear overnight, if the huge output of American factories ... cannot find overflow markets outside the United States’.[17]

And of course the Clayton Theorem got considerable traction in Europe, helped along by Soviet propaganda. The TASS news agency explains that the US has merely seized an opportunity ‘for expanding its markets, especially in view of the approaching [domestic] crisis’.[18] The same argument is advanced by the Communist Information Bureau in an apparently successful effort to discredit the ERP. ‘Europeans’, reports the newsweekly Time in October, ‘... seemed to believe that the Marshall Plan, with its program of exports, was something devised to save the U.S. from economic collapse’.[19]

But thoughtful opinion in the US has already turned against the Clayton Theorem. Also in October, in Foreign Affairs, Harvard economist John Williams discusses at length the theory that only foreign aid will enable the US to maintain full employment. ‘Mr. [Ernest] Bevin has been reported to this effect’, Williams notes, ‘and the Russians from the start have pictured the Marshall Plan as a capitalistic dodge to keep our own economy off the rocks.... [T]his emphasis on our need to export to support employment is mistaken’. Rather, he argues, the US is exporting too much, not too little. ‘[O]ur present danger is one of over-utilization rather than under-utilization of American resources’.[20]

The US Senate hearings

The White House submitted draft legislation for the ERP in December, and congressional deliberations began in January. What’s most remarkable about the testimony is how completely the Clayton Theorem has dropped from view—this, in a congress held by Republicans, the party of big business, hence presumably more amenable to the self-interest argument. Congressional hearings are often as much to educate the public as to inform the congressmen, but in this case it appears that the public was out in front of Congress: by January, ‘advocates of the Marshall Plan far outnumbered and outshone its opponents’.[21]

The Senate Foreign Relations Committee hears 95 witnesses over the course of 24 days, questions most of them, and accepts 74 statements into the record. Throughout, the emphasis is on the sacrifices that the ERP would require, not on the benefits it might bring. ‘This program will cost our country billions of dollars’, George Marshall warns in his opening remarks. ‘It will impose a burden on the American taxpayer. It will require sacrifices today in order that we may enjoy peace and security tomorrow.... I do not even assume that there will be much gratitude [in Europe].... You always get into trouble when you give. I think that is a well-known fact of life.... We are not buying an advantage here for ourselves.’[22]

Again and again, the fear expressed is not depression but its opposite, an overheated economy. ‘I am greatly concerned ... as to what this program ... will do to the American economy’, frets one senator; ‘whether it will contribute materially to inflation by withdrawing necessary goods from this country’. Indeed, some invoke inflation as an argument for foreign aid: an isolated America will face a gigantic defense budget. John Foster Dulles, elder brother of Allen, warns that if the ERP fails to pass, there’s ‘a considerable chance’ of a Soviet dictatorship ‘from Normandy to Dakar’. In that event, ‘the Congress is going to be pressed with demands for increased military establishment which will make this plan look like a bag of peanuts’.[23]

To be sure, the senators hear their share of special pleading. Turpentine farmers worry about ‘the progressively declining market for gum naval stores’; orchardists urge that fresh fruits be sent to Europe; and tobacco growers testify that the weed is ‘in surplus supply in the United States and its shipment ... will therefore have no inflationary effect’.[24] More successfully, the seamen’s union wants to keep Europe-bound freighters under US registry, to protect the jobs of American merchant mariners.[25] (The sailors will get half their wish: in floor amendments, the bill will be amended to require that half the US goods going to Europe travel in American vessels.[26])

Altogether, in 1,466 pages of testimony, the Clayton Theorem comes up just twice. One is a reference by William Harriman, secretary of commerce and chairman of the committee on which Allen Dulles served: ‘We clearly have ... an interest in the restoration of Europe as a paying market for United States goods’. The impending dollar shortage, Harriman says, foreshadows ‘an inevitable steep decline in our exports.... It is to our interest, therefore, that this world network of trade be restored and sustained on a paying basis’.[27] Harriman is the exception; indeed, as we have seen, the committee that bore his name repudiated his Senate testimony.

(I will save the second Clayton reference for last, since the witness seems to address directly our textbook authors.)

More typical than Harriman is the Wall Street financier who warns that European recovery will oblige the US to impose rent, price, and wage controls; postpone tax cuts; and delay public works projects. As one senator concludes: ‘We are going to have to defer, if we carry on this program, some of the pent-up demands which our people have’.[28] 

Indeed, inflation was a major worry in the opening months of 1948. The US economy was experiencing shortages of many of the same products that Europeans needed most, including wheat, fertilizer, coal, steel, and farm machinery. In the fall of 1947, Truman himself launched a food conservation campaign because ‘the United States had to increase its grain exports dramatically in order to avert starvation in parts of Europe’, and he appealed to Americans to reduce their consumption of grain, so as to prevent inflation at home due to shipments overseas.[29] Overall, consumer prices in 1947 increased 14.65%—a rate last seen in 1920 and never since.[30]

Inflation's most strident prophet is Yale professor George Murock, who warns the senators that the ERP will cause ‘an upsurge of catastrophic proportions in the cost of living’ leading to ‘an uncontrollable inflation such as the country has never seen’—and that, in turn, will lead to the dread ‘economic crash and depression’, though by a theorem 180 divergent from Clayton’s.[31] 

Conclusions

How much truth is there to the conventional wisdom about the ERP as a tool to save the American economy? Obviously there’s a germ. Time, for example, reports in January 1948 that the Marshall Plan ‘meant that the export boom was not going to collapse; foreign nations were going to get the cash to keep the boom going.[32] But what’s remarkable is how seldom such sentiments are voiced. The prevalent view at the time, outside the Belgrade offices of the Comintern, is closer to the judgment of British Foreign Secretary Ernest Bevin, who likens the ERP to ‘a lifeline to sinking men. It seemed to bring hope where there was none. The generosity of it was beyond belief’.[33]

As Allen Dulles recalls of his own observations in Europe: ‘It was not only dollars and food and supplies which were running out—hope and faith in a future were dwindling too. Something had started which was in the nature of a run on the European bank of resources, and slender resources they were in that year 1947’.[34] Whether in the recollections of the participants, the testimony before Congress, or the media coverage of the day, the concern in the United States seems to be for the people of Europe—from whom, of course, most Americans sprang, most of them only a few generations earlier. Even the biographer of Will Clayton—the man most often cited as proof that the motives were cynical—chose to title his book, in an echo of Winston Churchill, as Our Finest Hour.[35]

I am inclined to agree with John Gimbel: ‘Historians in search of the cold war have, in fact, discovered a Marshall Plan that never existed’.[36] The analysis, he argues, has stemmed from the historians’ knowledge of the outcome, arguing backwards ‘to explain and describe what must have been the reasons’ for its origins. ‘In short, the origins of the Marshall Plan have been explained by extrapolation, rather than by interpretation of documents, sources, and contemporary evidence’. His conclusion is that the ERP developed in an ad hoc fashion and not according to some reasoned plan.[37]

And now I return to the Senate Foreign Relations Committee, which among its witnesses hears ‘a distinguished American academic economist’, Calvin Hoover.[38] The United States, Hoover assures the senators, ‘could easily consume much more in the form of goods and services than we are currently able to produce. There can be no question, therefore, but that the goods we furnish Europe must come out of our own potential standard of living and not out of some mythical surplus. This answers both the argument about ERP providing a market for our surplus goods and the ERP as a means of preventing a depression in the United States. These are both spurious arguments, [which] have been used with some effect by the Russians as propaganda against us.’[39]

And to even greater effect, I conclude, in shaping the way academic historians now present the genesis of the Marshall Plan.