The Marshall Plan, officially announce on June 5, 1947 as the European Recovery Program, grew out of the Truman Doctrine, proclaimed three months earlier on March 12, 1947, stressing US moralistic duty to resist by force the establishment of communist governments worldwide. The Marshall Plan spent US$13 billion (out of a 1947 GDP of $244 billion or 5.4%, equivalent to $777 billion in 2008) to help Europe recover economically from World War II to keep it from communism. The amount is about one fifth of the Treasury’s 2008 plan of nationalizing the liability of $4.5 trillion of Fannie Mae and Freddie Mac.
The Marshall Plan money actually did not come out of US government budget, but out of US sovereign credit. The most significant aspect of the Marshall Plan was the US government guarantee to US investors in Europe to exchange their profits denominated in weak European currencies back into dollars at guaranteed fixed rates, backed by gold at $35 an ounce. The key component of the Plan’s success rested on its monetary prowess based on the dollar. At the same time, the Marshall Plan marked the monetary conquest of Europe by the US.
At a time when the monetary regimes of Europe laid in ruin, the Marshall Plan helped establish the US dollar as the world’s reserved currency that anchored a fixed exchange rate regime established by the IMF, which had been created by the Bretton Woods Conference in July 1944. The Marshall Plan enabled international trade denominated in dollars to resume after the war, and laid the foundation for dollar hegemony for three quarters of a century, even after the dollar was taken off gold by President Richard Nixon in 1971. While the Marshall Plan did help the German economy recover, it was not entirely a selfless gift from the victor to the vanquished. It was more a Trojan horse for monetary conquest. It condemned Germany’s economy to the status of a dependent satellite of the US economy from which it has yet to free itself fully. For that matter, all the world’s trading economies have unwittingly become monetary satellites of the US because of dollar hegemony.
The Marshall Plan lent Europe the equivalent of $777 billion in 2008 dollars. China’ foreign-exchange reserves were $1.8 trillion at the end of August 2008 and still rising despite a marked slowing of the US economy. Japan’s were $1.1 trillion. In other words, China was lending two and a half times more to the United States in 2008 than the Marshall Plan lent to war-torn Europe in 1947. And the US is anything but war-torn, albeit it is debt infested.
Both China and Japan fail to get full benefits from their trade surpluses, because the loans to the US are denominated in dollars that the US can print at will, and because dollars are useless in China or Japan unless reconverted to yuan or yen. Trapped by dollar hegemony, Both China and Japan have to buy the dollars they earn in trade with their domestic currencies. This causes a rise in the domestic money supply to create inflation and an overheated economy. Yet both China and Japan also cannot sell dollars for yuan or yen without reducing the yuan or yen money supply, causing the Chinese and Japanese economies to contract and the yuan and yen exchange rates to rise. Selling dollars will hurt China and Japan, both heavily trade dependent, and cause them to lose export competitiveness. So the dollars that China and Japan
earn from export must be invested in US Treasuries or other dollar-denominated asset.
Between 1946 and 1971, trading countries operated under the Bretton Woods regime under which countries settled their international payments balances in US dollars pegged to gold at $35 per ounce set since 1933 under a relatively fixed exchange rate system. It was a trade regime of goods and not financial instrument because cross-border flow of funds was not considered as necessary or desirable for international trade. However, persistent US balance-of-payments deficits steadily reduced US gold reserves, reducing confidence in the ability of the United States to redeem its currency in gold. It was becoming evident that capital movements across national borders, fixed exchange rates and independent national monetary policies simply could not coexist peacefully. A country can have only two of the three, as demonstrated by the Mundell-Fleming model which won the authors the 1999 Nobel Prize in Economic Sciences.
September 15, 2008