Here was an opportunity to imagine and outline the economic architecture of a postnational Europe. It was also an opportunity to return. In fact, Hirschman had been angling for such an adventure for months, eliciting an invitation to deliver a lecture at the Institut d’économie appliquée in Paris and asking Ursula if she could broker something similar with friends like Paolo Baffi at the Bank of Italy or at the Istituto per gli Studi di Economia in Rome.29
The first stop was France. Robert Rosa, an economist working out of the Federal Reserve Bank of New York, accompanied Hirschman on his return to Paris. They made a good pair—and Hirschman appreciated the company. He also quickly settled back into the rhythm of his longstanding relationship with Robert Marjolin, who was quickly emerging as a key figure among Fourth Republic policy makers under Premier Henri Queuille. He no doubt took the opportunity to bend Hirschman’s ear to get Washington to support his government’s policies. Hirschman and Rosa returned more hopeful than when they left. They found plenty of evidence that there was a “physical recovery.” Steel production was up. France could look forward, finally, to a good harvest. The political and financial instability displayed signs of calming down, thanks in part to the first infusions of Marshall funds and the confidence they brought. Inflation was on its heels. Despite the apocalyptic headlines, France was on the right track. This was no time to give up hope in the ability of the new government to manage reforms.30
Having watched the Queuille ministry settle into power in Paris, Hirschman then traveled to Rome, where he spent a month. Installing himself in the Research Department of the Bank of Italy, he marveled once more at the ingenuity of Italian officials and the artful responses of citizens. As if to pick up where he left off in 1938, he poured over balance sheets of the Bank of Italy and budget transcripts of the Institute of Statistics. He also plowed through business reports and data of the largest electricity distributor in the country in an effort to get beyond official figures to gauge the pulse of industry. If regulators contrived brilliant, if obscuring, ways to manage exchange rates and to stabilize the lira, Italians citizens were no less creative in their resort to a thriving black market. The result was more economic dynamism than one would expect from the widespread poverty, illiteracy, and maldistribution of resources. If France underperformed, Italy overperformed. Italy, unlike France, had not begun the process of reforming its banking and credit sector and thus ran the risk of releasing the demons of inflation. Italy may not have appeared as crisis prone as France; but, in fact, it was precarious. The planners had to stay vigilant—and urge investment in Italy’s bottlenecks.31
What the European trip did was affirm Hirschman’s basic optimism and help him draw attention to the ways in which authorities were not prostrate, passively waiting for American assistance to bail them out (as some of the press was inclined to report). It also reminded him of the importance of paying attention to details and nuances, the little things: “Europe” was not of a piece, and so the Washington crowd needed to be attentive to the complexities and particularities if audacious reforms were going to maximize their returns.
If Hirschman returned cautiously optimistic about Europe, he was dismayed to find the apostles of orthodoxy gaining the upper hand in United States. Europe’s stubborn inflation and economic lethargy led some to warn that the planners were throwing good money after bad: the proof was in the persistence of balance of payments deficits. They urged a sharp devaluation and spending cuts to bring inflation to its knees. Hirschman was appalled; there was no sense at all of the historic moment. Under normal circumstances, there would have been a connection between inflation and balance of payments problems; “it is easily understood,” he noted. But these were not normal times, and Europe’s needs for imports to sustain the recovery made their demand particularly inelastic. The allure of a “shortcut solution” to exchange shortages—it being easier to decide to “disinflate” an economy than “to bring about basic readjustments of industrial structure and trade patterns”—did not make it right. In a warning that must have rubbed against the grain of some Fed authorities, he dismissed orthodox solutions to complex problems, especially ones so likely to foster “growing public demand for indiscriminate ‘reflation’ which would reproduce the situation prior to ‘disinflation.’ ” In August, he stepped up his defense of the ECA’s diagnosis and remedies in a confidential memorandum to the board that insisted that the ties between inflation and balance of payments involves a “causal relationship [that] runs both ways.” Inflation was the effect of a deeper transformation that had to be tolerated so that underlying change could run its course. It was not the basic cause. Do not let the “cures … be worse than the disease.”32
Some might see Hirschman as repudiating market solutions to economic problems. Certainly, his “unorthodoxy” has often been seen as a signature contribution to the history of economic thought. But ascribing his affection for heresy as an aversion to market thinking should not be pushed too far. Though he cautioned against the simplicity of monetary explanations and solutions, he did see the marketplace as the basic motor of Europe’s recovery. It can be seen in a small way in his criticisms of those—such as the The Economist magazine, which crusaded for controls on the glut of US goods as a necessary stopgap to the trade imbalance—who urged Europeans to “discriminate” against American goods temporarily while regional industries recovered. This was a bad idea and worse economics. Discrimination was like devaluation or austerity, a blunt, oversimplified tool for a complex problem. What was needed was “far greater flexibility and readiness to make adjustments than has been displayed hitherto by most European economies.” And this meant opening, not closing, markets. It can also be seen in a big way in his response to Bissell’s request for a panoramic perspective on the future. Hirschman assembled his thoughts, got feedback from two of his closest associates in the brain trust, Charlie Kindleberger and Raymond Bertrand, and culminated his defense for economic union in one line: the integration of European economies would “remove many of the obstacles which have been blocking progress in this direction.” Europe had “hidden wealth,” much of which thrived in the black market. It needed, instead, an open market. Only with freer flowing markets that could be corrected did orthodox policies make any sense.33
Like those above him in the ECA, Hirschman was positioned between two poles. To one side were the advocates of worldwide open trade, who argued against regional blocs as barriers and argued for orthodox measures to curb internal disequilibria; stiff monetary medicine and throwing open the markets would remedy the dollar gap. On the other side were nationalists, who emphasized the need for production and jobs by protecting domestic markets; insulating national demand and pumping it with government spending would lead the recovery. So long as the debate was dominated by universalists on one side and nationalists on the other, nothing would get done, and the United States would have to bail out its allies with no end in sight. How long would American public opinion stay committed to the operation? The fall elections of 1948 were brutal and anti-Communist hysteria reached new highs. A tired, weakened Marshall stepped down. His successor, Dean Acheson, was less immune to the escalating charges that Communists had formed a fifth column at the core of Foggy Bottom. Then the American economy slumped, shrinking Europe’s markets and heightening its balance of payments problems. Hirschman worried that it would throw governments back on their nationalist heels.34
By early 1949, Hirschman was growing anxious that the larger vision that he and Bissell shared was going to get lost in the malaise; short-term reactions were going to spoil the long-term deep adjustments. In April of the previous year, Europeans had taken the first step with the Organisation for European Economic Co-operation to coordinate the recovery; Robert Marjolin became its first secretary-general. Internal feuding among the countries plagued him. They could not agree upon a common format for working out the complex latticework of debts and payments. Hirschman argued for his higher-ups to support Marjolin in Paris. W
ith Tommy Tomlinson working from the offices on the rue de Rivoli to cycle ideas into the OEEC Council, many of the ideas incubated in Washington wound up on Marjolin’s desk—and vice versa. Did Marjolin recognize the prose of his former protégé? It is possible. What we do know is that he skillfully maneuvered the council members to elaborate a plan to make European currencies transferrable among each other, and thus move from bilateralism to multilateralism.35 American policy makers could put their thumbs on the scales. The ECA, Hirschman argued, was bargaining with each of the Marshall borrowers individually and not compelling them to overcome their internal differences. It is worth quoting the final lines of one of his reports at length: “From a narrowly Machiavellian point of view it has sometimes been argued that the United States has no interest in the emergence of a unified European area. Actually, the current experience demonstrates that, as long as we are dealing with the European area as a whole, our interests can only be served by a consolidation of that area which would assure us equality in negotiations in place of our present position as a minority participant.”36 Washington should deal with Europe as a region.
Ideas for greater union, “federalizing” sovereignty in Europe, as Hirschman had been advocating for some time, had been circulating through the agency’s working group. Now, the ECA was willing to force Europeans to come up with a sustainable payments plan based on freer regional trade. In October 1949, Harold van B. Cleveland and Theodore Geiger submitted two papers that condensed the thinking within Bissell’s working group. Western European economies had to find a way to “integrate.” A European union gave “the best hope for a regeneration of Western European civilization and for a new period of stability and growth.” The time had come to turn necessity into an opportunity. Several weeks later, Cleveland asked Hirschman to sketch the outlines of a monetary authority for a federated Europe. Scarcely two years after the Second World War, Hirschman rolled up his sleeves to begin “drafting a project for a European central bank and currency.” It would take a while to finish. But he was excited: “the ECA finally seems to get ready to exert real pressure.”37
The convergence of Paris and Washington led to a fundamental shift in the Marshall Plan. Hoffman picked up the brain-trust papers and went on the campaign trail, opting personally to deliver a powerful speech in Paris to the OEEC Council that explained why a new structure was necessary for Europeans to close the dollar gap for good. The State Department, which felt the ECA was muscling in too deep into its diplomatic territory, howled, but it did not stop Hoffman who was, by now, fatigued at the bureaucratic wrangling in the administration and despondent about the ill-temper in Congress, and thus losing some of his energy. He mustered his clout for one final push. The word “integration” was mentioned fifteen times in his speech. This time, many European leaders were ready; the OEEC under Marjolin responded immediately by proclaiming as its goal the creation of a “single large market in Europe” and inaugurated an aggressive process that compelled its members to slash restrictions on imports from other members. Hoffman, emboldened by the new OEEC spirit, rushed back to Washington to get Congress to apportion more funds, this time making the case, as one would expect from an automobile executive, that loans would help Europe become more efficient because integration would yield greater economies of scale.
Behind the scenes, Hirschman was working on the details of how Europeans might cooperate and bury the temptations of bilateralism for good. He himself had thus come a long way from thinking that this temptation was inherent to international trade, a gist of National Power and the Structure of Foreign Trade. One idea that Cleveland had invited Hirschman to consider was a common monetary authority. His response laid out the immense difficulties of erecting a supranational agency over the heads of state leaders who were just rebuilding their sovereignty of their countries. But this did not make it unimaginable. “While it may be impossible to tear down the economic and fiscal attributes of national sovereignty by direct assault, it may be possible to coordinate these attributes and to build … new institutions in the ‘interstices’ of the national prerogatives.” What followed was a step-by-step guide for how such a process would unfold, from coordinating monetary stability to institutional innovations. The issue for Hirschman was not whether Europe should have a common currency, but rather how “to think of a monetary and financial organization for Europe that does not ask for the impossible, yet which would result in a closely knit European monetary and financial structure.” He did not discount the idea of a common currency but made it clear that it was a goal rather than a means for creating a larger, integrated market. He likened the arrangement to a return to the principles of the nineteenth-century open markets, but without the gold standard whose inflexibility gave way to nationalism and bilateralism. “The 19th century method of allowing coordination of national economic policies to be brought about by their automatic adjustments to foreign development, no matter how drastic, is impossible for governments whose political existence depends on the maintenance of full employment and the achievement of continuously rising living standards.” What was necessary was a successor that was more accommodating to governments’ needs for political legitimacy while premised on economies that were dependent on trade with neighbors. The blueprint for what he labeled a European Monetary Authority made its rounds through the ECA echelons as a “secret memorandum.”38
This was a visionary idea whose day had not yet come. In the meantime, Europeans came up with their own plan, the European Payments Union (EPU). Hirschman’s brass wanted his evaluations. He applauded it as a milestone for multilateralism: “It really is obvious that the greatest advantages from world trade are realized when every country can buy in the cheapest market.” It was a return, he felt, to a system that had flourished in the middle of the nineteenth century. “The choice before us,” he insisted, “is not integration or maintenance of the status quo, but rather whether we wish to stop and then reverse the slow process of disintegration, which has been taking place in Europe almost uninterruptedly at least since the First World War.” Without some kind of general framing agreement of this sort, “at every shock, cyclical or otherwise, the national economies are likely to look to further insulation as a way out.” This, he noted in his last line, reminds us that the goal is not just trading for its own sake, but fostering “a healthy Western European society in our struggle for peace.”39
Looking back, Bissell considered the EPU “the greatest achievement of the Marshall Plan.” For Marjolin, it was the framework for “a habit of working together which may perhaps be regarded as the most important political success of the Marshall Plan.”40 Finally, European trade was released from the obstinate intricacies of quantitative restrictions that had flourished in the 1930s. In a lecture he delivered to the State Department, Hirschman tried to dispel the fears that European regional integration would create a bloc that would stymie worldwide integration. There he argued for the need for “multiple approaches” to multilateralism, that worldwide efforts to dismantle barriers to trade could be reinforced by regional unions; lowering the walls of individual countries was by far the toughest hurdle, and if the easiest way to bring them down was with openness to neighbors, then that was a useful expedient and intermediate step. Once they began to fall, the process could build on itself. “I thus believe,” he told his audience, “that it is not necessary to choose between the one-by-one and the collective approach.” This would be the first time he would advocate that reformers think about multiple strategies and not a single road to change.41
There was an irony buried in these reformist years. As they began to yield their fruits, the cause seemed less desperate. The need to think openly became less urgent. So it was that as Europe finally bounced back after a nail-biting reconstruction, the window that was open to Hirschman’s thinking began to close. By the end of 1949, the Communists had completed their triumph over Nationalists in China; the following January, Mao went to Moscow to spend a month meeting with Stalin. That s
ame month, Alger Hiss faced convictions of perjury for lying while testifying under oath. Richard Nixon pounced and denounced the State Department as “Acheson’s College of Cowardly Communist Containment.” Matters went from bad to worse with the arrest of the physicist Klaus Fuchs and disclosures—after the Soviets had detonated their atomic bomb—that nuclear secrets might have been leaked. Joseph McCarthy went wild. In the summer, North Korean forces invaded the South; by August, NATO forces under General Douglas MacArthur were on their heels. Seoul was an occupied city. Three days after the North Korean assault, Congress authorized $4 billion in military spending and cut $200 million from the ERP appropriation. “Mutual security” replaced “economic cooperation.”42
The Cold War turned the screws on Hirschman’s style of open reformism. The partition of Berlin brought the drama close to his heart. The decision to create a new West German currency, the deutschmark, which is what sparked the Soviet blockade, was discussed intensely in his section of the Fed. Writing to Ursula in mid-1949, Hirschman had mused that world peace may require a defeat of the USSR. An irate sister accused him of American warmongering. Albert’s response, which coincided with the lifting of the Berlin blockade, was a measure of his ideological development since his socialist days in Berlin. “I, of course, cannot change anything about your judgment of me,” he explained, but he felt the need to correct Ursula’s “errors of fact” and “misunderstandings in particular regarding my alleged conformism.” He did not endorse a “preemptive war against Russia,” but rather “a revolutionary struggle against the Stalin regime in Russia itself.” One does not have to labor to read sibling disappointment between the lines to his sister; Ursula did not understand him. “I found it outright funny that … you accused me of conformism.” In fact, his disappointment lay in her failure to read his real mood—of growing isolation. “If you knew how little [my conviction] corresponds with the milieu in which I live!” Surrounded by good “liberal” men bereft of humility or humor who wanted to solve all the world’s problems with “far-reaching state intervention in the economy,” he was stung that Ursula did not understand that his turn of mind implied unease with all simple explanatory models or worldviews. Stung, but not entirely surprised; secretly, he felt that she had not fully appreciated this turn of Eugenio’s mind. He was not about to abjure self-doubting in order to cling with Ursula to the purity of youthful beliefs or to concede to Cold War convictions and to fold into the gathering mainstream American thinking about freedom.43
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