The Fed offices occupied one of the gray Washington buildings erected during the Depression. Made of Georgia marble in the Beaux Arts style, they conformed to the monumental scale of the capital’s public architecture. Facing Constitution Avenue and the Mall, the Fed’s headquarters were a statement of restrained ornamentation and imperceptible rupture with convention, with every detail, from the lampshades to the bas reliefs, carefully planned by its makers. It was an appropriate home for a way of thinking about economic affairs governed by caution, which should have rung some warning bells for the more freewheeling Hirschman. The aura of the Fed, and of the whole entourage near and around Foggy Bottom, was saturated with a clubbish in-group style. The F Street Club was the who’s who for lunch crowds of the Georgetown Set of journalists, senior officials, and politicians engaged in world affairs. With no access to the old school networks, and uninterested in a political career, Hirschman was not part of this scene; he and his colleagues were happily left in the back rooms, away from the corridors of power.
For the most part, Knapp’s approach to his research staff was to give them free reign to work on problems they saw as pressing. For the first few months, Hirschman’s work was uneventful, and he stuck to the tasks of reporting to the board. But it took Hirschman little time to embellish his data with a more analytical and more prescriptive voice, especially as it became clearer that Europe was not rebounding after the war. By the end of 1946, he showed why the outgoing finance minister in France, Robert Schuman, could not devalue as a response to France’s yawning trade deficit. The difficulty revealed a paradox that lay at the heart of why it was becoming more and more difficult to turn European economies around. For countries dependent on imports, any devaluation would make imports more expensive and thus spark an inflationary cycle, which was bound to make problems worse.12 Hirschman offered an analysis that ran headlong into conventional economic orthodoxies about self-correcting markets, views that got more and more air time after the November 1946 elections that handed Congress back to the Republican Party for the first time since the 1920s and introduced a new crop of politicos to Washington, such as Representative Richard Nixon from California and Senator Joseph McCarthy from Wisconsin.13
At first, Hirschman paid little heed and enjoyed his autonomy; he had plenty to absorb him. Europe was stumbling. Inflation was running out of control. Shortages worsened everywhere. In December, a snow storm rolled across the continent, burying it. This was followed by a deep freeze; the Thames iced up. Around Europe, trains and barges stopped moving—cutting off the flow of coal and fuel. The ice killed off the winter wheat crop, threatening mass starvation. Albert and Sarah stepped up their remittances to Ursula, sending whatever winter wear they could find. Old friends dropped by—such as Carlo Levi, who would stay with the Hirschmans for extended periods while in the United States—who shared the grim news.
The growing crisis in Europe inducted Hirschman into Washington’s policy-making backrooms. France and Italy in particular approached the edge of a cliff, as Hirschman catalogued to his superiors.14 Burke Knapp wanted more than reporting; he asked Albert to write a comprehensive analysis of both countries for the Federal Reserve Bulletin in early 1947.15 For the next several months he labored at the task, excited to be back to publishing. To Ursula, whom he relied upon for a steady flow of newspaper clippings, he wrote that this was not just his first intellectually exciting task, but given its visibility to his superiors—“VIP’s (= very important persons)”—it was an opportunity to make an impression.16
The essay was Hirschman’s first breakout into economic intelligence and analysis in English. An inventory of desperation, rationing, price controls, the collapse of banking systems, mounting inflation, and rapidly deteriorating trade balances, Hirschman explained how, one by one, European countries were resorting to the same policies that got them into their prewar fix: quotas, tariffs, foreign exchange controls, and protective walls. Any idea of a regional trading system was swept away by autarky and bilateral deal making. The world Hirschman depicted was one in which Europeans were bereft of the capacity to produce necessities and the ability to import essentials. When feeble governments in Paris and Rome tried to help consumers, they simply ignited inflation—requiring, therefore, even more rationing. Faced with scarcities and declining wages, they were gripped by strikes and more economic paralysis. Western Europe was not poised for a self-generated recovery. The immediate aftermath of the war could, Hirschman wrote, be “aptly compared to the process that takes place in an anthill that has been disrupted.” There were roads to clear, mines to open, debris to remove with ameliorative foreign aid. But, almost two years into peace, this model of recovery was exhausted. Everything was out of balance—budgets, external payments, and the stress of trying to get things right were making things worse. Hirschman was unequivocal: this crisis was not a paralysis of production, but rather of trade, especially regional trade; the ants were at a standstill because they had nothing to do with the fruits of their work. It was a grim but incisive analysis but not a hopeless situation: aid could help rebuild infrastructures, but there had to be a drive to multilateral trading so that markets could reactivate the anthill.17
What the Fed brass made of the message is unknown. But they published Hirschman’s words on the front page of the Bulletin at a critical moment in Washington’s deliberations over Europe. Certainly, his career lurched forward. When Gerschenkron left for Harvard in the middle of 1948, Hirschman became the chief of the Western European–British Commonwealth Section of the Fed’s Division of Research and Statistics. This positioned him as a midlevel staffer at the nexus of a remarkable experiment in creating a new world out of the rubble of war—and initiated Hirschman’s lifelong fascination with the possibilities and constraints of policy making for reform. His name did not appear on the famous memoranda that figured so prominently in the way American rulers sought paradigms and models for thinking about the place of the United States in world affairs. Hirschman provided, rather, thinking behind the thinking. He was one of the invisible men behind the Marshall Plan; this chapter of his life evokes the promises and frustrations of a critical moment of American statesmanship from the inside of its inner sanctums, another kind of anthill.
How was the United States going to wield influence in world affairs after the war? Would it use its superpower status (a term coined in 1944 by the political scientist William T. R. Fox) to get deeply involved in affairs abroad during peacetime? American newspapers portrayed a continent sliding out of reach. In Czechoslovakia, Communists had swept 40 percent of postwar votes and led to a year of fierce internal jostling that culminated in a Communist putsch. In June 1946, 40 percent of Italians also voted for the PCI, and in November, almost 30 percent of French voters cast their ballot for Communists; across Europe, coalition governments faced the choice of jettisoning Communist partners, and thus becoming crippled, or lurching leftward. In France, the government evicted the Communists from the ruling coalition, only to face veiled threats of an insurrection; the PCF leader Maurice Thorez alluded to a Soviet invasion. France, warned Hirschman, was at a crossroads. But if one had a choice, it was better for France to have “one big crisis than two separate ones,” for it would compel the government to shake things up in a way that separate, smaller crises may not. Years later, as Hirschman reflected on the crises in Latin America, he invoked a similar notion of an “optimal” crisis—deep enough to provoke change but not so deep that it wiped out the means to make it. In the gloom that pervaded the hallways of foreign-policy makers, Hirschman sought ways to convert necessities into virtues.18
As it turns out, matters were about to break. While Hirschman had his eye on the sinking French economy, a major diplomatic effort was under way. A council of foreign ministers from the United States, France, Britain, the USSR, and elsewhere, convened in Moscow in early spring of 1947 to discuss how to handle the postwar situation. It quickly broke down into two blocs, East and West. Washington’s sphere appeared
much more vulnerable. The French foreign minister told the US secretary of state, George C. Marshall, that the West could count on France, but that France was on the ropes and desperately needed “time to avoid a civil war.” A deeply troubled Marshall returned to the United States to warn Americans that the war had been won but that “the patient is sinking while the doctors deliberate.”19 Marshall wanted to get beyond piecemeal “aid” solutions, and his undersecretary of state for economic Affairs, William Clayton, was in full agreement. Bromides about laissez faire orthodoxies or the clamor, especially coming from the ranks of leading Republicans, that America had done more than enough for Europeans, were counterproductive. Truman’s foreign policy team shared the general sense that the United States had to play an interventionist role in world affairs, on the premise that nationalisms of all kinds had to be held at bay—that democracies could only be rebuilt with a new cooperative spirit between states and even a willingness to forgo cherished principles of state sovereignty. This pitch was loud and clear in National Power and the Structure of Foreign Trade; it also rang through the prose of Eugenio Colorni’s Ventotene Manifesto. Hirschman relished the chance to be a part of daring new policies that moved beyond cherished principles of state sovereignty. In early June, Marshall addressed Harvard’s graduating class of 1947 and laid out a plan for and with Europe.
Deterioration in Europe tipped the scales in Washington and pulled Hirschman’s section of the Fed into the effort to prevent the crisis in postwar Europe from exploding. Averell Harriman led the president’s Committee on Foreign Aid and stacked it with important businessmen and pragmatic Republicans. Harriman enlisted an MIT economist and seasoned OSS insider, Richard Bissell, as his executive secretary to draft up a plan for Congress. Albert Hirschman came to Bissell’s attention. We cannot know for sure why or how, since the Bissell Papers are still not open to researchers; it may be that he was reading some of the Fed insights from Hirschman’s pen, which was working overtime. Hirschman delivered two big reports to Burke Knapp about the commercial structure of countries into which Americans were considering pouring over $10 billion. Again, he argued that trade was depressed because European countries had locked themselves into interconnecting bilateral arrangements. The desperation to hoard foreign exchange to redeem war debts made things even worse. If European trade could not revive, the region would continue to record big trade deficits with the United States. And if the net payments kept exceeding net receipts, the United States would be giving “aid” to the “dying patient.” Hirschman insisted that this was remediable; this was not a patient afflicted with a “chronic” ailment. The problems were temporary and conjunctural. It is important to note: this was a contentious argument. Many conservatives argued that what Europeans needed was a good stiff devaluation to make their products more competitive in the dollar area. Hirschman dissented. Devaluation would only worsen France’s problems because necessary imports would be more expensive, and it would ignite inflation, cause more mayhem at the workplace, and reduce production. This was the trap of the “dollar gap”—conventional remedies would not work; giving aid with one hand and urging market corrections like devaluations with the other hand was self-defeating. France—the neuralgic core of the problem—had to increase exports, and if the dollar area was impossible to penetrate, France had to find alternative markets closer to hand.20 Italy was an exhibit of why stock-in-trade recipes would only work at a self-defeating price. The country’s vice president and minister of the budget, Luigi Einaudi, an advocate of conventional wisdom, responded to the country’s runaway inflation with massive cuts in public expenditures and tightening of local credit—which plunged the country into “familiar symptoms of depression.” Writing in the American Economic Review, Hirschman could not resist pointing out the irony that Einaudi, a priest of “orthodoxy,” was forced to step in and rescue several heavy industries that began to close their doors, leading “to more State intervention in, and greater State control of, Italian economic life.” Ursula’s list for her care packages grew longer and included ever more basics.21
Within a month of Knapp circulating Hirschman’s reports on France and Italy, Bissell was on the phone to the Fed. He wanted Hirschman on his team. The US Senate had approved by a wide margin the European Recovery Program (ERP) and a “moral commitment” to spend $17 billion from 1948 to June 1952. There was no doubt that Hirschman was waiting for the opportunity. “I am working already for weeks,” he wrote in late November, “on the elaboration of the European Recovery Program, in a way I have never worked before: Saturday-Sunday, almost always until very late at night etc.—it’s the final spurt, since soon everything has to be put together for the Congress.”22
From this emerged the Economic Cooperation Administration (ECA), led by an initially reluctant Paul Hoffman, the president of the Studebaker Corporation. He turned to Bissell as the centerpiece of a brain trust that would do the thinking behind the “planners” and be responsible for deep analysis of the recovery program. Hirschman grew to admire Bissell’s style of encouraging his staff to think creatively and pragmatically, advocating a style of problem solving that did not rely on an ability to know and anticipate—and plan for—all problems all at once.23 In fact, there was no “plan” as such, just a mechanism to raise and inject working capital into a system that was paralyzed by a weak financial structure and chronic balance of payments problems. No capital transfusion, Hirschman and Bissell felt, could yield sustainable recovery without tackling the underlying obstacles to the Europe’s payments system. The plan was in fact a process of creative, pragmatic deliberation, motivated by a vision of Europe as an active commercial, interdependent region.
Out of the new Miatico Building on the corner of H and 17th Streets, a few blocks from the White House, Hirschman was “on loan” from the Fed to the headquarters of the ECA. The Marshall Plan shuffled him back and forth; he was still reporting to the board of governors of the American central bank and also servicing Bissell’s brain trust, which was designed as a “council of five” (with thinking representatives from State, Commerce, Treasury, the Export-Import Bank, and the Fed) in which Hirschman served as the “voice” of the FRB. Hirschman was thereby doubly free. He was spared the day to day work of the ECA—figuring out the sums that had to be transferred to European central banks, where they would be converted into local currencies and loaned out. Nor did he have to conform to the monetary orthodoxy for which the Fed was a citadel. Instead, he had the room, afforded by Bissell, to explore broader questions about whether and how Europeans would cooperate. “His” countries at the Fed—France and Italy—happened to be the front line of the crisis for the ECA. Few economists knew them as well as Hirschman did.24
Hirschman buried himself in work. Leaving home early in the morning, he joined a car pool of fellow economists bound for their offices downtown, leaving wives and children in the city’s outskirts, and often returning home in the middle of the night.25 The associates formed the Working Group on Questions and Answers because their notes helped Bissell and Harriman handle the grilling from Congress. It included Theodor Geiger, Robert Triffin, and Harold van B. Cleveland. When the ECA opened an office on the rue de Rivoli, across from the Tuilleries in Paris, the working group enlisted the crafty, energetic William “Tommy” Tomlinson.
With this breakthrough in Washington, the challenge was Europe’s. Money and ideas would only go so far. Hirschman warned Altiero Spinelli, an early voice of European federalism, that the early results of aid did not look promising. “Because the coordination of investments did not give results, it is based now more on liberal methods: remove controls on exchanges and on commerce. However there too it is doubtful how far one can go without ‘enforcement’ bodies and some at ECA realize this very well.”26 Europeans had to coordinate. A big step was the founding of the Organisation for European Economic Co-operation in 1948, which gave European leaders a mechanism to sort out their differences and to consult with each other. Still, it did not untangle one
important knot: the multilateral system of payments. As Hirschman noted in a “critical appraisal” of the organization’s early track record, there were still tensions over countries that refused to give up exchange controls, barter arrangements, and bilateral trade accords. “More and more I am concerned with the conciliation of Europe,” he confided to Ursula; the European states’ commitment to national sovereignty was a giant barrier to intra-European trade and permanent recovery.27
There had to be new ideas. To that end, Bissell gave Hirschman the nod to peer further into the future to consider what Europe might look like with a properly functioning system to resolve their regional balance of payments and untangle the mess of multiple exchange-rate systems. Bissell wanted a system that would penetrate more deeply into what was holding up the reconstruction—national state sovereignty in Europe—without appearing to endorse a new protectionist bloc. There was also an immediate alarm about France, which by 1948 neared a precipice. Paris spent the summer of 1948 without a government, and by the fall, spasms of violence gripped the city. Many in Washington worried that if France collapsed, the whole ECA would fail.28 As soon as it was clear that the ERP would get through the Senate, and with France’s alarming deterioration, the board elevated Hirschman to chief of the Western European-British Commonwealth Section of the Fed’s Division of Research and Statistics. Bissell rushed Hirschman to Paris and Rome to evaluate the scene.
Worldly Philosopher: The Odyssey of Albert O. Hirschman Page 31
