“When we get to 1947 and the Marshall plan, the Truman Administration is already in a major corrective mode. The State Department is already talking openly about a two-world vision for the post-war order.”
Benn Steil is senior fellow and director of international economics, as well as the official historian in residence, at the Council on Foreign Relations. His most recent book, The Marshall Plan: Dawn of the Cold War, was named the winner of the New-York Historical Society's Barbara and David Zalaznick Book Prize, awarded each year to the best work in the field of American history or biography.
Before his death, FDR developed four pillars of a post-WWII foreign policy: peaceably dismantle the British Empire; build permanent peace between the United States and the Soviet Union; profitably dismember and deindustrialize Germany; and integrate the global economy with short-term IMF loans. This represented the hope for a one-world architecture where the US and Soviet Union got along. Circumstances quickly forced then President Harry Truman to pivot and begin dividing the world between Marshall states- countries that asserted liberal democracy and free markets- and Soviet states under communist rule. This marked the dawn of the Cold War. “When we get to 1947 and the Marshall plan, the Truman Administration is already in a major corrective mode. The State Department is already talking openly about a two-world vision for the post-war order.”
The multilateral alliances that came out of WWII, like NATO, represent some the period’s most important and enduring legacies. The world depends on these institutions even more today as the need to build alliances only grows. A rising China presents a global threat that can only be managed with new partnerships that meet these challenges collectively.
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SPEAKER
Benn Steil
Senior Fellow, Director of International Economics & Historian-in-Residence, Council on Foreign Relations
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone and welcome back to Salt Talks. My name is John Darsie. I'm the managing director of Salt, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. Salt Talks are a digital interview series that we started in 2020 with leading investors, creators, and thinkers.
John Darsie: (00:29)
While we started Salt Talks as a response to the pandemic, due to the fact that we had to cancel our global Salt conferences, which we host twice a year, one in the United States and one internationally, we're going to continue to do these Salt Talks because they've been so fun, so engaging with our community. We've been able to expose our community to so many interesting speakers and ideas and the interaction as well with members of the Salt community has been so much fun.
John Darsie: (00:54)
So we're going to continue these even around our conference circuit that we do. So we're very excited to continue these Salt Talks into 2021 with several talks per week on a variety of topics. What we're trying to do with Salt Talks is replicate the experience that we provide at our global conferences, which is to provide a window into the mind of subject matter experts as well as provide a platform for what we think are big ideas that are shaping the future.
John Darsie: (01:21)
We're very excited today to welcome Benn Steil to Salt Talks. Benn Steil is the senior fellow and director of international economics, as well as the official historian in residence at the Council on Foreign Relations in New York City. He's also the founding editor of International Finance, a scholarly economics journal. He's the lead writer of the Council on Foreign Relations Geographics Economics blog and the creator of five web based interactive tracking global growth, global monetary policy, global imbalances, sovereign risk, central bank currency swaps, and China's Belt and Road initiative.
John Darsie: (02:01)
Prior to joining the Council on Foreign Relations in 1999, Benn was the director of the International Economics program at the Royal Institute of International Affairs in London. He came to the institute in 1992 from a Lloyd's of London Tercentenary Research Fellowship at Nuffield College at Oxford, where he received his MPhil and DPhil in economics. He also holds a bachelor's degree of science in economics, summa cum laude from the Wharton School of the University of Pennsylvania.
John Darsie: (02:34)
Dr. Steil has written and spoken widely on international finance, monetary policy, financial markets, and economic and diplomatic history. He's testified before the US House of Representatives as well as the Senate and the CFTC. He's a regular op ed writer and commentator on CNBC. His most recent book, The Marshall Plan, Dawn of the Cold War, won the New York Historical Society's 2019 Barbara and David Zalaznick prize for best work on American history. It won the American Academy of diplomacy 2018 Douglas Dillon prize. It won the honorable mention runner up of the 2019 ASEEES Marshall D. Shulman prize and was shortlisted for the Duff Cooper prize and is ranked number three among book authorities best diplomacy books of all time.
John Darsie: (03:27)
Hosting today's talk is Anthony Scaramucci, who actually is a member of the Council on Foreign Relations. Anthony is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of Salt. With that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (03:44)
Well, Dr. Steil I have to tell you, I read your book, it feels like 100 years ago now sir. I read it back in July of 2019. I was thinking to myself, what a splendid book and what a splendid moment to write a book like this because it was a time when America was thinking very big on the world stage in terms of how to be inclusive and engaged and how to make the world more peaceful through global shared prosperity.
Anthony Scaramucci: (04:12)
Congratulations on the book, it's written very well to bestseller, The Marshall Plan, Dawn of The Cold War. Benn, if you know anything about me, I'm not really that promotional. If you probably... So that's why I'm waiving the book like it's a windshield wiper in front of me. But I want people to go out and read this book because it's very timely for what's going on in the world today. You talk about in the book, monetary nationalism and globalization as being a dangerous combination. I would hope that you could explain to people who haven't yet read the book what that means Dr. Steil.
Benn Steil: (04:50)
I think I actually made that particular comment in my previous book, which was called The Battle of Bretton Woods. That was an historical narrative on the Bretton Woods international monetary conference of 1944. That's where the IMF and the World Bank were created and the dollar based international monetary system, and actually got the idea of doing the Marshall Plan book while I was writing Bretton Woods. I was working on an aftermath chapter and it really hit me how very different the view of the post war world was under President Truman in 1947 when the Marshall Plan was launched, and what it had been under FDR in 1944 when the Bretton Woods Conference had been held.
Anthony Scaramucci: (05:44)
Explain that to people because a lot of people don't realize this but in the mid 40s, 43, 44, FDR was building the post World War Two architecture, as you point out in the book. But Truman had a totally different vision for where he wanted to go relative to FDR. I was wondering if you could contrast those two visions.
Benn Steil: (06:05)
Right. In 1944, the US is very near the zenith of its power historically. We account for more than half the world's manufacturing output. One year later, we would have sole possession of atomic weapons. This is a period in which we had enormous leeway to improvise with the architecture of both the global economy and the global political system.
Benn Steil: (06:38)
Now, in 1944, FDR was still proceeding under the expectation, or one might say the hope that we could have what he called a one world architecture. This is a world in which the United States and the Soviet Union would somehow find a means of cooperating with each other to promote peace and stability and economic prosperity throughout the world. Now, that sounds naive now but in April of 1945, when FDR died and Truman took over, he had no intention of overthrowing this foreign policy architecture that had been handed down to him by FDR. It was really circumstances that dictated that we needed to go in a very different direction.
Benn Steil: (07:34)
Now there were four pillars of foreign policy thought that underlay FDR's one World Vision. Those were the following [inaudible 00:07:45], first of all, that the British Empire could somehow be peaceably dismantled. That didn't work out. The British Empire collapsed very violently and chaotically in early 1947. Second, that the Soviets could be co-opted into a peacetime, a permanent peacetime alliance with the United States to promote political and economic stability through institutions like the United Nations, the IMF and the World Bank.
Benn Steil: (08:18)
That didn't work out obviously. The third was that Germany could somehow be profitably dismembered and de-industrialized. This was the so called Morgenthau plan for Germany developed by FDR's treasury secretary, Henry Morgenthau. Truman administration was forced to reverse this because Germany was sinking into chaos and disorder and it was redounding to the benefit of the Soviet Union.
Benn Steil: (08:48)
Finally, and this goes back to Bretton Woods, there was a fourth pillar and that was the idea that somehow a globally integrated economy could be rebuilt on the basis of just short term loans from an international institution, the IMF, that would help countries who were in temporary balance of payments difficulty get back on the right track. That didn't work at all. When I referred to this idea of monetary nationalism. That was the idea of Bretton Woods that the United States could have it all. That we could have the US dollar as the foundation of an international monetary system, but it would be indelibly backed by gold. We could meet this promise without in any sense tying ourselves down.
Benn Steil: (09:42)
As I pointed out in that book, it didn't turn out to be anything of the sort. When we get to 1947 and the Marshall Plan, the Truman administration is already in a major corrective mode. Now the State Department is talking openly about a two World Vision for the post war order. Very different from the one that FDR had developed. In this world, there would be martial states that would effectively be led by the United States. These would value above all things democracy, a liberal political order and free markets.
Benn Steil: (10:28)
There would be what the State Department called the slay world or the communist world, which would be led by necessity of the Soviet Union. And obviously, the Truman administration wanted to keep that as small as possible concentrated in Eastern Europe, the immediate periphery of the Soviet Union.
Anthony Scaramucci: (10:46)
It's a fascinating time because you also pointed out in the book, that improvisation that we're really trying... It's not... Sometimes people look back on the past and say, okay, they had this grand blueprint and they masterfully created this architecture, but it was a work in progress. Of course, we had the situation in Turkey in Greece which led to the introduction of the Truman Doctrine and the rejection of communism around the world.
Anthony Scaramucci: (11:15)
But before I go deeper into the book, I want to touch on Bretton Woods, if you don't mind, because I found that book also fascinating which is perhaps why I conflated the two. Tell us about the idea behind Bretton Woods, how well it worked and why it failed and obviously with the August of 1971 pulling of the pin of gold tied to the US dollar by Richard Nixon. Give us some of your sense for that.
Benn Steil: (11:43)
Well, Bretton Woods was a rather eclectic amalgamation of views about what the post world would be. On the one hand, it was an extremely nationalist view led by treasury secretary Henry Morgenthau's assistant, Harry Dexter white. He was going to build this architecture around the US dollar which he said would be tied to gold but in no way did he want the United States to be constrained in how it operated its economy by gold.
Benn Steil: (12:22)
So we wouldn't obey any sort of rules dictated by the movement of gold ownership across borders. We would just have so much gold that people would be obliged to use the US dollar simply because after World War Two, it was the only credible voucher for gold. It's hard to put ourselves back in that mindset now. But back in 1944, people really viewed gold as being the foundation of money and national currency is just being either more credible or less credible vouchers for gold.
Benn Steil: (13:02)
By the time we get to 1944, Britain being almost bankrupt, the pound sterling is no longer a credible voucher for gold so you're left with the United States. But on top of that view, Harry Dexter white remarkably, as I explained in the Battle of Bretton Woods, was a progressive romantic who had very positive views about the role of the Russian Revolution and the history of mankind. He viewed it as a great liberating event. He was quite convinced that the world was going to be moving more towards a Soviet state managed economy style of operation after the war.
Benn Steil: (14:02)
He viewed Republicans in Congress as being against US interest by trying to counter or contain the Soviet Union. He himself was, in fact, an agent of the Soviet Union. He passed classified documents to them. He pursued major foreign policy initiatives that redounded to their interest. It's hard to imagine those things being spliced together. But it was really central to the American vision at Bretton Woods that the Soviets would somehow be willing to sign on to an American architecture for the post war world.
Benn Steil: (14:55)
By the time we get to 1947, it's clear that's not going to happen. None of the assumptions that Harry Dexter White took into Bretton Woods turned out to be true. For example, the monetary system at Bretton Woods assumed that all the major European currencies would be completely convertible into US dollars. It wasn't in fact until 1961, that that took place. So what we call the Bretton Woods system that supposedly lasted from 1945 until Nixon closed the gold window in 1971, really didn't even start operating until 1961.
Benn Steil: (15:42)
By the time we get to that period, the system is already coming under enormous strain as the US is losing gold reserves, the French and others are losing confidence in the system and are no longer willing to accumulate dollars. The Marshall Plan was in many senses a major corrective both from an economic perspective. That is, the United States now realized that we needed much more than short term loans from a new international institution to revive a global economy. We were going to have to reconstruct the economies of Western Europe on the fly and it was going to be enormously expensive.
Benn Steil: (16:28)
Second, that we were not going to be able to do this in conjunction with the Soviet Union. In fact, we had to expect that the Soviet Union was going to resist this initiative as they did. As you know, I explained in the book, that the Marshall Plan is really at the center of the Cold War. That is the Soviet Union, Stalin in particular, think of the Marshall Plan as a major threat to their control of their satellite states in Eastern Europe. Even more importantly, he saw it as a threat to the ability of the Soviet Union to constrain Germany, whom they consider to be obviously the mortal enemy.
Anthony Scaramucci: (17:19)
I've heard you say this stuff before, Dr. Steil, but I'd like you to repeat it to all our Salt viewers and guests about the size and scale of the Marshall Plan. Yes, the 14 or so billion dollars at that time but what did it mean in today's dollars and as a percentage of GDP today. Because I think those numbers are actually monumental.
Benn Steil: (17:42)
Over a four year period, it amounted to $13.2 billion which may not sound like terribly much but in current dollars, that's about 140 billion. This was 2.6% of the recipient country output. There were 16 European countries that ultimately participated in the Marshall Plan. We can also talk about how those countries came to be selected or self select, which is itself a really interesting story. It was 1.1% of US GDP.
Benn Steil: (18:20)
Now to put that in context, if we were to launch a Marshall Plan today, of equivalent size in terms of the percentage of our economy, we would be talking about a plan greater in size than $800 billion. When you add in the military aid that started pouring into Europe, particularly after the creation of NATO, in 1949, which was really... Which became the military escort for the Marshall Plan. And then in particular, the aid we provided during the Korean War began in 1950. Now we're talking about sums that would be equivalent today to over a trillion dollars. So extremely significant.
Benn Steil: (19:11)
To put this in the context of the economic performance of the US economy at the time, in 1946, this is the year after the war ends, we had a GDP growth rate of negative 11.6%. This was a massive economic contraction brought about by the collapse in government spending with the end of the war and the withdrawal of our troops. So it was a very, very difficult period of economic adjustment in the United States. As you can imagine, few in Congress, particularly on the Republican side, were in any mood for a major new foreign aid program. They wanted their peace dividend, they wanted tax cuts. Selling this idea to the American public was itself a very major initiative. There was, as Marshall like to put it, a Marshall Plan to sell the Marshall Plan.
Anthony Scaramucci: (20:21)
That's another fascinating part of the book, because it's not Marshall's idea. Sort of Germany [inaudible 00:20:27] him and Truman says, well, there's no way it can be the Truman plan because I'm not that popular up on the hill. Atkinson isn't popular either for that matter. And so they turn to the five star general, the Chief of Staff of the Army. He unveils this plan at Harvard University, he gives it the very famous commencement address, talking about the rebuilding of our allies, but also our adversaries.
Anthony Scaramucci: (20:53)
It's a fascinating part of human history because this could be the only time where a vanquishing power is replenishing and rebuilding the vanquished, which is in very stark contrast to what happened after Versailles and the Treaty of Versailles, which call for war time reparations and loans. So my question, Dr. Steil, is did it work?
Benn Steil: (21:20)
The short answer is yes. But as you pointed out earlier, this was very much a grand improvisation. Mind you, there was a lot of planning that went into it, a lot of serious planning. But there were major adjustments that were made on the fly. If you look at the original vision of the Marshall Plan, where did it come from? Now you and I both know, Anthony, that the best policy ideas almost always come from economists. But in this particular case, in this rare particular case, it didn't come from economists.
Anthony Scaramucci: (21:58)
Let's not go into that story then. Let me go to another question. It didn't come from an economist, Dr. Steil, I don't want to hear about it.
Benn Steil: (22:10)
Where did the ideas come from? Very surprisingly, they came from the military establishment. Why is that? Consider the situation that we were in May of 1945 when the fighting stops in Europe. We have over 3 million troops in Europe. The American public wants them home immediately. President Roosevelt had promised at Tehran in 1943 openly to withdraw all American troops from Europe within two years of the end of the fight. As I pointed out earlier, Truman at this point, is not looking to reinvent the world. He's actually searching for FDRs blueprint so that he can execute it.
Benn Steil: (22:54)
He starts withdrawing the troops. By the time we get to 1946, the American military and diplomatic establishment knows that they have a huge problem on their hands because FDR had believed or wanted to believe that the Soviets would effectively contain themselves after the war. That is that they would be satisfied with their newly expanded borders and security zone. A buffer that they had created in Eastern Europe.
Benn Steil: (23:23)
But by 1946, it's clear, they're not satisfied. They're threatening Iran, they're threatening Turkey to take over territory. They refuse to withdraw troops from Iran. They only back down when Truman sends a large military flotilla into the region. The American military establishment knows that's not going to do. That's not going to be sufficient for Europe. So how are we going to protect our most vital interests in the world, which we consider at the time to be in Western Europe, without relying on the military?
Benn Steil: (23:57)
And so they looked to instigate a new form of asymmetric warfare that we would wage against the Soviets to counter their conventional force dominance in Europe. We would rely around our economic power. We would leverage our economic dominance in the world to rebuild and reconstruct the West European economies as quickly as possible so that they would be able to defend themselves, both their external borders and the internal integrity of their political systems.
Benn Steil: (24:39)
What we didn't wager, however at the time, was that the Europeans wanted no part of an integrated Western European economic and political structure. The French and the British in particular said this is a mortal threat to our security. If we're no longer going to be self sustaining, if we're going to be dependent on one another, how do we defend our borders? The French, for example, said you're withdrawing your troops from Europe. In five years time, what do we do if the Germans cut off our coal supply or more likely, since you're going home, the Soviets will have taken over Germany and they will cut off our coal supply.
Benn Steil: (25:23)
If we're going to go forward with your economic and political integration vision. That is the vision behind the EU, which actually came from the United States. Contra Donald Trump, who has said that the EU was created to screw the US on trade. It was in many ways created by the State Department. If we go forward, we Europeans with your vision, we won't be able to protect ourselves. So we need security guarantees from the United States.
Benn Steil: (25:53)
So in 1949, a year and a day after passage of the martial aid legislation, we passed the NATO Founding Act legislation. If you go back to the first part of my explanation here, the American military establishment was looking for a way to protect Western Europe without using the military. Yet the Europeans made it clear to us that that was a dream that could never be fulfilled. That the US would have to make firm security commitments to Western Europe in order to get them to go along with the American integration idea.
Anthony Scaramucci: (26:33)
This is a brilliant exposition of what's in the book. It begs the question, did this work for the United States and has worked for the West in terms of setting up the architecture? Although it wasn't a one world architecture, set up the architecture for the free world to have a semblance of long term peace and long term prosperity. If so, what are the lessons that can be learned from that?
Benn Steil: (27:00)
When we ask the question did it work? If you look at the early studies that had been done on the Marshall Plan going back to the late 1940s and 1950s, they really just simply looked at the amazing recovery of the West European economies and said, yeah, well all this aid must have worked. Look at the performance of these economies between 1948 and 1942. Output in the Marshall country is increased by over 60%.
Benn Steil: (27:39)
To put that in context, if we take the four and a half year period running up to 2008 and the great financial crisis, the EU's total growth rate over that period was 15%. This is a really remarkable regeneration of the European economies. But only later did economist start questioning how much of this came from the Marshall aid? As economists were wanting to do, they ran regressions looking for the secret sauce. What was it that revive the economies?
Benn Steil: (28:19)
They asked, was it for example, that this aid money allowed them to import vital commodities, industrial machinery, et cetera that they wouldn't otherwise have been able to bring in? Did that revive the European economies? The answer is yes, but it would only explain about half a percent of growth whereas you're seeing many multiples of that. Up to seven percentage points of additional growth coming from the Marshall Plan. Was it the fact that government spending was increased?
Benn Steil: (28:56)
No, government spending as a percentage of GDP over those four Marshall years actually fell in Europe so it wasn't that. What was the answer? What was it in the Marshall Plan that really regenerated the European economies? I go back to George Kennan's point, the famous American diplomat, George Kennan is one of the architects of the plan, he's no economist but he recognizes that the primary benefit of the Marshall Plan is going to be psychological in Europe. To convince the Europeans that unlike after World War One, we are not going home.
Benn Steil: (29:33)
That's why the Marshall Plan is a four year scheme rather than a one day scheme in which we write them a giant check and wish them well. We wanted to convince the Europeans that we were going to be with them year after year. Did that work? Yes, but only with the security guarantees. I can't emphasize how important those security guarantees were. Without the security guarantees, you wouldn't have gotten the private investment necessary to regenerate these economy.
Benn Steil: (30:00)
To put that in context, look at the money we've spent on reconstruction in Iraq and Afghanistan. Well over $200 billion. Just reconstruction aid alone, that is more than 50% greater than the totality of Marshall aid in current dollars. So it's not as if we haven't tried a Marshall approach to economic reconstruction in Iraq and Afghanistan but we were not able to provide those countries with the internal security and external security necessary to produce economic growth. Whereas in the case of the Marshall Plan, because of NATO and the security commitments of the United States, we were able to provide those guarantees.
Benn Steil: (30:52)
The second thing I would just emphasize briefly is the 180 degree change we made in occupation policy in Germany. That is shifting from the Morgenthau plan, which was to de-industrialized Germany, essentially to impoverish it. The Marshall Plan, which would aim to make Western Germany, the part we controlled, into the industrial engine of a new integrated Europe. A totally different vision that was enormously successful.
Anthony Scaramucci: (31:23)
Well, I mean, it's an unbelievably powerful story in the book. It is a story about improvisation but it's also a story about really good long term strategic planning, with the intention of collaboration. Ultimately, the lessons from this book that I took away, is that we needed America engaged. Certainly, we needed an America to help its own and to rebuild our infrastructure and to rebuild our lives here. But we do needed America engage with the rest of the world to give that peace, to give that confidence and to give that ultimate prosperity that we want. Back here in our homeland.
Benn Steil: (32:00)
Alliances, I can't emphasize this enough, are at the centerpiece of the Marshall Plan.
Anthony Scaramucci: (32:06)
No question.
Benn Steil: (32:07)
Building alliances around the world. That is we weren't going to rely on our own muscle. We were going to rely on others who shared a common vision, a common attachment to liberal democracy and open democracy.
Anthony Scaramucci: (32:26)
[inaudible 00:32:26].
Benn Steil: (32:28)
We eventually extended that strategy to Asia as well, and rehabilitating Japan and providing security for South Korea. It was the same sort of thinking that underlie the Marshall Plan.
Anthony Scaramucci: (32:44)
Well, this is a brilliant book Dr and I enjoyed it a great deal. I got to turn it over to the homegrown millennial now. He's going to ask you some questions. He'll try to steal the show from me. So if you have to cut him at the knees, please go ahead and do that. You have my license and proxy to do that. But go ahead, John Dorsie.
John Darsie: (33:06)
Thank you very much Anthony for that warm introduction. As a millennial, obviously, I'm a student of history but I'm also very concerned about the future as well. I'm going to ask you a few questions that we got from our audience that pertain to topics that you're an expert on and relate to your books as well. We're talking about the Marshall Plan and all the benefits that it had for the United States and for the world.
John Darsie: (33:31)
The idea of a new Marshall Plan is sort of a buzz word or a buzz phrase these days. If we were to engage in a new Marshall Plan, where would that be best targeted, regionally or country specific? What type of aid and what type of funding would we provide to those regions or to those countries that would not only serve America's interests abroad but also aggregate to the global economy as well?
Benn Steil: (33:59)
In recent years, there have been all sorts of proposals for new Marshall plans all over the world. In Ukraine, in Greece, in southern Europe and North Africa. The Arab Middle East, Syria, et cetera. If you take the blueprint of the Marshall Plan and try to transplant it to these particular circumstances, you're not going to get success. Why do I say that?
Benn Steil: (34:27)
Take Syria, for example. Without creating an environment of internal and external security in Syria, you will never get the sort of economic growth and stability that the Marshall Plan was able to bring in Western Europe. Remember, in the case of the Marshall country, we weren't trying to reinvent the world, right? We were taking countries that had been democracies with market based economic systems before the war, and rehabilitate and reconstruct them. Bring them back to what they were before the war and reintegrate them on a Western European level.
Benn Steil: (35:19)
So you already had functioning, relatively impartial bureaucracies that were capable of implementing these plans. You had public support for democratic cooperative political structures. These are not situations that exist, for example, in Ukraine or Syria today. So it's very difficult to transplant that Marshall idea. That's not to say that using significant amounts of financial aid cannot help in many circumstances. The Marshall Plan analogy has been used, for example, to discuss how we should approach climate change.
Benn Steil: (36:06)
There's no doubt that it's going to take significant investment in order to address the issues of climate change but I don't believe that spending enormous sums of money as a cure for problems around the world is the message that we should take away from the Marshall Plan. The primary message that we should take is that it is vitally important for the United States to build and support alliances around the world, even more important than it was in 1945.
Benn Steil: (36:40)
In 1945, again, we were at the apex of our power. We account for more than half the world's manufacturing output. We have sold possession of atomic weapons, we were never in a stronger position to pursue a policy of America first. Yet we didn't. Why? Because we had a long term view of what the Marshall Plan was about. Let me quote from a remarkable letter. I didn't get to emphasize this before, but it's very important, this was a bipartisan initiative. It's hard to imagine something like this happening today.
Benn Steil: (37:18)
But this was a bipartisan initiative, Harry Truman, a Democrat, faced with a republican congress still managed to push through this remarkable agenda. Senator Henry Cabot Lodge Jr. In October of 1947 writes to Senator Arthur Vandenberg, a republican senator from Michigan, head of the senate foreign relations committee. Let me read you what he said. I think it's just so remarkable and spot on. He says, and I'm quoting, "The recovery of Western Europe it's a 25 to 50 year proposition. The aid which we extend now and in the next three years will in the long future result in our having strong friends abroad."
Benn Steil: (38:01)
So fast forward from the Marshall Plan to 1989. This is 42 years after the Marshall Plan. The Berlin Wall collapses. What do we notice immediately? That the alliances that America built as offshoots of the Marshall Plan, NATO and the embryo of the European Union are now more popular than ever. The newly liberated countries of Central and Eastern Europe are clamoring to get in.
Benn Steil: (38:33)
Whereas the Alliance's such as they were that the Soviets created like the Warsaw Pact, collapse overnight. Now, these alliances are far more valuable to us today, now that we only represent a quarter of the global economy than they were in 1945, when we were half the global economy. We are reaping the dividends today of the investments we made then. To give you other examples of what I consider successful examples of Marshall thinking, think of the creation of NAFTA.
Benn Steil: (39:09)
NAFTA was not just about integrating the economies of North America. It was about putting the political relationship between the United States and Mexico on a very different path. Demonstrating to the Mexicans that we respected their sovereignty and that we were treating them as equal partners in an important initiative and security cooperation between the United States and Mexico improved dramatically after the implementation of NAFTA. My bottom line is if you're looking for areas in which to apply martial thinking, remember that the creation of alliances for the United States was the central innovation behind it.
John Darsie: (40:01)
I want to switch gears a little bit. Again, talking a little bit more about things that are happening in the modern day because you wrote a fantastic op ed in Business Insider that cites our good friend, Jeff Sonnenfeld. Anthony is a member of the Yale CEO Summit community as I know you are. I've had the privilege of accompanying him to a couple of events. It's a unique privilege to be able to see all those great leaders in one room talking about the issues of the day.
John Darsie: (40:28)
He did a study recently where he surveyed his community. Found that 84% of executives said that the failed pandemic response by the Trump administration hurt their business and that generally, the view coming out of those meetings is that a vacuum of leadership has harmed corporate interests in business and the economy in the United States. Trump always viewed the stock market as a barometer of his success. The stock market performed very well during his tenure as it did under President Obama.
John Darsie: (40:54)
He often said that the market would crash if Vice President Biden, now President Elect Biden, were to win the election and take office. But instead markets rallied after the presidential election and the results became clear and they've rallied in the aftermath of the Georgia senate run offs where the democrats want to give them a majority in the Senate. Why, in your view, are markets rallying on the back of a presidency that... The markets did well under Trump but why today are they rallying on news of Biden winning and democrats getting control of Congress?
Benn Steil: (41:28)
There's no doubt in my mind that there were elements of the Trump economic architecture that the markets liked very much. For example, my co-author, Ben Della Rocca and I, we looked at the rise in what's called implied earnings growth in stock prices after the successful implementation of President Trump's tax cuts, particularly the corporate tax cuts in 2017. We found a significant Trump bump there. We also just examined in our Business Insider piece, what happened to implied earnings growth after the election.
Benn Steil: (42:18)
That is after you strip out extraneous factors like interest rates and so on. We found a very significant Biden bump. It was in fact, interestingly enough, almost identical in size to what was called the Trump bump back after the election in 2016 and what underlay it. You refer to Professor Sonnenfeldt. Well we think, first and foremost, if you look at his survey work and the survey work that others have done, business wants to see the pandemic addressed effectively and with far more vigor than it's been addressed by the Trump administration.
Benn Steil: (43:10)
Professor Sonnenfeld surveys really made clear the degree to which executives were not only deeply concerned about the pandemic but believe that President Trump's response to the pandemic was holding them back. Wasn't just gosh, this pandemic is awful, but our response to the pandemic is grossly insufficient. This is one reason. Another reason is that the markets are very positive about the prospects for more fiscal stimulus.
Benn Steil: (43:53)
I think that's primarily what you're seeing now in terms of the reaction to the Georgia vote. That if the democrats come to control the Senate, the prospects for another very significant stimulus package are very good. Perhaps even more, perhaps we'll finally get a significant infrastructure initiative which the markets would also applaud.
Benn Steil: (44:22)
Finally, what you see in this survey data is great concern among executives about the enormous economic and political instability that we've seen over the past four years with trade wars which have gone nowhere, in terms of changing China's behavior, for example, in a positive direction. Beating up our allies in North America, and Europe and Asia. South Korea and Japan. The markets don't like that at all and they view the prospect of our finally re-engaging positively with our allies and having a coherent approach to the China challenge, the market seemed to view that very positively.
John Darsie: (45:17)
So speaking of China, I want to close with a couple questions on China that I'll weave into one. You're a great student of China. You study the Belton Road initiative, the Asian infrastructure bank. While Trump has been pulling America out of these multilateral agreements and stepping back from the rest of the world, China has been stepping into that void, even coming into areas of South America. What was the strategic thinking behind China with the Belton Road initiatives? How have they been successful or not been successful and what direction do you expect US China relations to take over the next four years, at least of the Biden administration?
Benn Steil: (46:00)
That's a lot to bite off in [inaudible 00:46:02]. Where do we start? Belton Road. Belton Road, you will never find on a Chinese government website here is what Belton Road is all about. This is what we wanted to accomplish and this is how we're doing it. Here, by the way, are all the details of our lending contracts under Belton Road. You will never find anything like that.
Benn Steil: (46:26)
When I built my Belton Road tracker at the Council with Benjamin Della Rocca, how did we find out what China was actually doing and these countries that it was lending to for major infrastructure project? How did we find out about it? It was extremely difficult to get details of these contracts. We had to use... In some cases, estimates based on indirect sources or some things that were published by the recipient governments but never anything that we could get out of China.
Benn Steil: (47:03)
So China's been very opaque. It wants a few things are out of Belton Road. First of all, it wants to start getting better returns on its reserves. It's not investing it's central bank reserves directly in Belton Road. But if you think of the funds as being fungible, China is looking for a way to diversify away from US investments, in particular, US Treasuries. Get a better return infrastructure seems to be one way of doing it.
Benn Steil: (47:40)
Of course, you have massive overbuilding in China, massive overcapacity. They're looking for some way to create the demand for this. They're lending to these developing countries, these countries will then hire Chinese firms to build the infrastructure. Although China itself is a major borrower from the World Bank, which is quite perverse because China is now one of... Is the major competitor to the World Bank as a development lender.
Benn Steil: (48:24)
China is making these loans at a very significantly higher interest rate. Now, when these loans fail, in many cases, if you do get details of the contract, like for example, the port facility that China built in Sri Lanka which failed. Sri Lanka couldn't pay back. China takes over these facilities. So even if China did not set out with Belton Road to become a colonial power, they will in effect, become a colonial power and perhaps a hated one by taking over these facilities which they supported with this massive expansion of debt in the developing world.
Benn Steil: (49:07)
Now, how should we react to it? In my view, it's pretty much a no brainer. Let's go back to what the US did after World War Two. Take the World Bank and the IMF. Consider what we managed to create in terms of the architecture there. There is only one country that has veto power within the IMF and the World Bank and that is the United States. Can you imagine us building an institution like the World Bank today and telling the world we want veto power within this organization, sole veto power, no one else will have it. The world would laugh at us.
Benn Steil: (49:47)
But this is our inheritance from our victory in World War Two. We should be exploiting it. Nothing can happen within the World Bank without our agreement to it. We should be putting more capital behind the World Bank. Again why? We can use it to promote our values, our way of doing things, our dedication to non corruption, our dedication to environmental protection, our dedication to not creating debt traps.
Benn Steil: (50:23)
Guess what? We get to leverage it with other people's money because most of the money actually comes from the other countries who participate in the World Bank. It's an absolute no brainer for the United States in its own interest to be pursuing these initiatives through the multilateral institutions that it itself created. Again, coming back to the point, alliances, we built institutions and alliances after World War Two. We should be today, reaping the benefits of those institutions because our allies have been so significantly enriched by this architecture that we created.
Benn Steil: (51:10)
The fact that they're still willing to work with us and indeed are enthusiastic about working with us is the greatest advantage that we bring in terms of countering China's rise to dominance in the global economy. We should be showing a united face to China. We should be showing the world our positive values. Our dedication to liberal democracy and open markets. If we do this together with our allies and within the multilateral institutions that we created after World War Two, we will have far more moral capital than we would by going it alone.
John Darsie: (51:56)
The direction of US China relations. What path do you expect us to take? I think most people expect US China relations to improve. But who's going to give more? Is China going to relax some of its economic conditions open up their economy a little bit, allow more private enterprise and less human rights types of restrictions in the country and expect the United States to be, to acquiesce more to demands that China's making on our side?
Benn Steil: (52:26)
Unfortunately, I think the road that China's is headed down right now, it's pretty clear. It's a road towards more state economic control, more authoritarian political control, more regional belligerence toward other nations in the area. We have to be concerned about it. But the question is, how do we address it? Again, I can't harp on this more strongly enough. We need to do it together with our allies.
Benn Steil: (53:00)
I wrote a chapter to a size volume recently in which I advocated a return to the two world thinking that we implemented in the Marshall Plan with respect to China. That is, we need to build a massive coalition around the world of like minded countries with which we will develop things like 5G and 6G infrastructure. Things of that nature, so that we will not be reliant on China.
Benn Steil: (53:39)
I do think we should always hold out an olive branch to China and make it clear that if China pursues political and economic reforms that will bring them back towards the vision that we had when China entered the WTO nearly two decades ago, that we would welcome China, but we are not afraid, together with our allies to stand up for our values and our interests. If we need to construct a new liberal, democratic, open market, international infrastructure from which China is excluded, we should be willing to take those bold steps.
John Darsie: (54:32)
Thanks so much for joining us. It's a pleasure to have you on and you're rich expertise. Two great books you wrote on the battle at Bretton Woods as well as the Marshall Plan. We would recommend that all of our viewers go out and read those books. They provide a rich history as well as lessons that can be applied today as we enter a new era in Washington. Thank you so much, Benn, for joining us. Anthony, You have any final words?
Anthony Scaramucci: (54:55)
Benn anything you're writing currently that you could talk about?
Benn Steil: (54:59)
Yeah. I am writing a political biography of Henry Wallace, who was FDRs vice president from 1940 to 1944.
Anthony Scaramucci: (55:11)
Another progressive romantic by the way.
Benn Steil: (55:13)
There you are, exactly. Wallace is perhaps the most interesting, almost president whoever was. He lost out to Harry Truman in a very strange open convention for vice president in 1944. Had he won that nomination, he would have become president on FDRs death instead of Harry Truman and he would have tried to take the nation in a very different direction. I'm writing this book on the basis of fascinating new Russian and FBI archival material that's never been brought to bear, just sort of to tell the story of the vision that he had. And to really tell a counterfactual history of what might have happened had Henry Wallace rather than Harry Truman, become president in 1945.
Anthony Scaramucci: (56:11)
Well, we really appreciate you being on. Thank you. I hope to get you back on for that book once it's published Benn.
Benn Steil: (56:18)
My pleasure, thank you Anthony.
Anthony Scaramucci: (56:20)
We really appreciate it Dr. Steil. Thank you for joining Salt Talks.
Benn Steil: (56:24)
My pleasure.
John Darsie: (56:25)
Thank you everybody who tuned in to today's Salt Talk with Dr. Benn Steil from the Council on Foreign Relations out with a new book about the Marshall Plan. Just a reminder, if you missed any of today's talk or any of our previous talks, you can access the entire archive of Salt Talks on our website salt.org/talks/archive. You can sign up for all of our future talks at salt.org/talks. We have several talks a week throughout 2021. We'll take a couple breaks for some conferences that we're doing. But for the most part, we're going to continue this salt talk series indefinitely throughout the year.
John Darsie: (57:01)
Please follow us on social media. We're on Twitter, Facebook, Instagram, LinkedIn, and please tell your friends about Salt Talks. We love growing our community and exposing more people to the educational expertise that our speakers provide. On behalf of the entire Salt team. This is John Dorsie signing off for today. We'll see you tomorrow again on Salt Talks.