Worldly Philosopher: The Odyssey of Albert O. Hirschman (42 page)

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.
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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.
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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.
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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.”
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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.
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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.
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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.

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.
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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.
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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.
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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.”
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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.
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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.
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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. With 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.
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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.”
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Washington should deal with Europe
as
a region.