On Oct. 4, 1975, West German Chancellor Helmut Schmidt paid a state visit to U.S. President Gerald Ford.
The German leader, an economist by training, had a single message: An overcautious American fiscal and monetary policy would worsen the then-existing world recession.
To help counter the depressing effect of the massive increase in oil prices perpetrated by the oil producers' cartel, the U.S. should lead the world back to a more prosperous era by stressing a more buoyant American economy, Schmidt said.
His proposition was based on a simple notion: If more people have jobs, and hence more money to spend, they will buy all manner of things, including imported goods; and if the country undergoing the expansion is big enough, it will suck in enough imports from the rest of the world so that its prosperity will be share in many places.
Initially, President Ford was not persuaded by Chancellor Schmidt. The formal rebuttal came in his Economic Report to Congress in January 1976. It referred to the pressure from Germany and other countries for the U.S. to step up its growth rate, and concluded that "further expansionary action in the United States . . . would do little to accelerate world recovery."
Today, the players are the same but, ironically, the roles are reversed: The United States is pushing Schmidt to boost the pace of the German economy, and Schmidt is resisting the pressure in language strikingly similar to that used by the Americans in 1975 and 1976.
To be sure, there are some important differences accounting for the reversal of the American and German positions. Chief among them is the enormous swing in the U.S. trade accounts from a big surplus to a big deficit, with a consequent plunge in the value of the dollar in foreign markets.
Today the big surpluses are enjoyed by Japan and West Germany, and the U.S. is trying to get both to make "a contribution" to international stability by relying less on exports and more on internal economic growth to move their economies ahead.
Anxious not to offend its strongest ally, Japan acceded to most U.S. requests, although there is considerable doubt that it can achieve a 7 per cent growth rate it now promises for 1978 following a 5.3 percent performance last year.
But U.S. German economic relations last month had become so strained in the wake of Schmidt's refusal to advance the German growth target over 3.5 percent for 1978 that the two government called a public truce. For the moment, American officials promised that they would not call for higher German growth rates and, in turn, German officials promised they would quit chastising President Carter and his aides for failing to halt the depreciation of the dollar.
But in fact, the differences remain strong and, despite a genuine effort being made some officials on both sides to understand the political restraints on the other, the bitter feeling simmers just below the surface.
A high American official puts it this way: "The Germans are genuinely convinced of two things. One, that additional stimulus in the German economy will have only a marginal, if any, effect on their growth. And two, that their growth is not going to have much of an impact on the rest of Europe. In fact, they say, if they do stimulate too much and have more inflation, it will have a negative effect on the rest of Europe."
Using his famed "LINK" computer on international economic activity, Wharton Professor Lawrence R. Klein disputes the German case. He says that an extra 1 percent growth in German gross national product would help all of Germany's European neighbors, "not enormously, but each a little bit, and the exercise adds up."
If not only Germany, but Japan, Belgium, the Netherlands and Canada each added an extra 1 percent in real growth, Klein calculates that such an effort would shave $1 billion from the U.S. trade deficit within a year, and $3 billion in two years.
But American officials stress that help for the American trade deficit - $28 billion last year - is a secondary goal of their pressure on Schmidt. "Our major concern is the rest of Europe," a high official says.
The American analysis is that European countries outside of Germany are suffering from recession primarily because of their inability to export more.
"Although we don't expect the Germans to ball out other economies, they can provide an atmosphere in which other countries can do alittle bit more on the growth side without fear of banging up against their financial limits," a U.S. official said.
There is a good deal of bitterness in many European countries about "the rich Germans," but most of Germany's trading partners are reluctant to challenge them openly. Such pressure as is applied is done very discreetly, which means that the U.S. carries the burden in openly challenging the Germans to do more on behalf of Europe.
The tension between the two countries has been exacerbated by the fall of the dollar, the reverse image of which is the appreciation of the deutschemark - a trend that German manufacturers fear will make their products less competitive.
What has made the situation even worse is a German belief, expressed freely in official circles until recently, that Treasury Secretary W. Michael Blumenthal was deliberately trying to "talk the dollar down" in an effort to ger a competitive edge for American goods.
The Germans have put an official silence to the suggestion of "benign neglect" by the U.S., but that perception persists. A Common Market finance minister quoted by The Guardian in London said:
"The West Germans and the Americans are playing a dangerous game of chicken. The U.S. wants to see how far the dollar can fall before West Germany is forced to reflate its economy, while the West Germans want to see how far it can fall before the U.S. is forced to halt the decline."
The Germans have become sensitive to what German Central Bank President Otmar Emminger calls "increasingly heavy criticsm (which) greatly underrates the scale of Germany's present stimulatory efforts."
Emminger points out - and officials here acknowledge that he is right - that the overall German public sector deficit of some 60 billion to 65 billion marks this year will amount to nearly 5 per cent of the gross national product, "a far higher percentage than in the case of the U.S. budget deficit." (A deficit here equal to 5 percent of money GNP would be around $100 billion, against Carter's projection of a $61 billion deficit.)
"But our response to them," an American official says, is that if they can't do more with an inflation rate less than 3 percent, who can?"
In an interview here last week, Dr. Klaus von Dohnanyi, an economist and an official in the German Foreign Ministry, pointed out that the German public debt in four years had increased from 18 percent to 29 percent of GNP, or from 2,000 to 5,000 marks per capita.
Such a fast step-up in public debt acts as a tremendous political constraint on the ability of any German government to do more and still stay in office, Dorangi said.
Since 1969, the mark has appreciated by 90 percent against the dollar, and the Germans naturally fear that further revaluations will hit hard domestically and in international markets.
"Many enterprises are hopelessly squeezed between rising domestic costs and falling (revenues," Emminger says. He expresses the fear - and again, American sources concede its validity - that a depreciating dollar will create such a profits squeeze that little new capital investment will take place within the Federal Republic. This would be counterproductive to the American effort to see a great economic growth within Germany.
But what really upsets the Germans is the suggestions bruited about in the United States a few weeks ago that, unless they knuckle under to the U.S. demands, President Carter might reject Schmidt's bid to an economic summit meeting in Bonn in mid-July.
In fact, the awkward relationship between the Carter administration and Schmidt has its origins in undiplomatic chatter from both sides, During the 1976 election campaign, Schmidt - despite his failure to influence Ford's economic policy - let it be known that he would have preferred to see the Republican continue in the White House. He has been reported to have let other uncomplimentary things about Carter and his administration slip into the German press in recent weeks, as well.
The 1976 indiscretion was followed by an American goof. Despite a State department warning that Schmidt should not be criticized in public, Vice President Walter F. Mondale, on his round-the-world trip in January 1977 pointedly said in a press conference in Brussels that he was on his way to Bonn to tell Schmidt to boost his economy.
The Germans at that point were projecting a 5 percent real growth rate for 1977. But with Schmidt beside him at a Bonn press conference, Mondale said he had "urged the chancellor, as I will the prime minister of Japan, to follow more stimulative policies."
American officials still think the economic analysis was correct - especially in view of the German failure to make the 5 percent target. But the public pressure proved unwise.
The U.S. lost some of the credibility of its pro-expansion stand when, prior to the London economic summit in May, it moderated its own growth target from about 5.5 percent to 5 percent, and abandoned a proposed $50 tax rebate.
The upshot was that Schmidt said at the summit that his country would try onlyto meet a 4.5 percent to 5.0 percent growth target, although he did promise further stimulative programs if it appeared that the target would not be reached. That promise was not kept, and the German growth rate for last year was a mere 2.4 percent.
Schmidt visited President Carter last July, and American officials raised the question with Schmidt's econimic aides about the reality of the 4.5 percent to 5.0 percent growth goal.
But it was clear that Schmidt was being buffeted by opposition parties who resisted further economic stimulus. In the meantime, the dollar had begun a steep decline in late summer.
Throughout the fall and winter, as the German economy went through a period of stagnation at home, and the dollar continued to plunge, German and American officials snapped at each other, claiming that each was ignoring its international responsibilities.
Federal Reserve Chairman Arthur F. Burns was publicly critical of Blumenthal's comments on the dollar, and by Jan. 4, when the dollar had moved down 13.5 percent against the mark in the space of a year, Burns persuaded the Carter administration to make a public statement promising intervention to counter "disorderly market conditions."
The dollar temporarily stabilized, primarily because wishful thinking among Europeans mistook the American statement as a commitment to prevent a further decline in the dollar. But the U.S. intention had never been to "peg" the rate at any specific level or range, merely to moderate erratic or disorderly declines.
Thus, the basic underlying conditions leading to dollar weakness - the $28 billion 1977 trade deficit, huge energy consumption, growing signs of a more serious inflation - soon took precedence again over the intervention operations, and the dollar continued its slide. The fear psychology acquired its own momentum: Members of the Organization of Petroleum Exporting Countries threatened to boost oil prices if the dollar dipped further - an event which would only boost the dollar cost of U.S. oil imports, exacerbate the deficit, and further weaken the dollar.
About a month ago, the German minister of econimics, Count Otto Lamsdorff, visited Washington for a round of talks in which he made clear that the German government considered a 3.5 percent growth target an "ambitious" goal, and warned American officicals that efforts to get that number jacked up would be useless. He brushed aside hints from Americans that the Bonn summit might be useless unless there would be more "give" from Schmidt.
Lambsdorff told his American counterparts that his government rejected the "locomotive theory", under which the United States, Japan, and West Germany - as the major countries - should provide the pulling force that would help drag the rest of the world out of recession.
This theory, which had its origin among a group of "trilateral" economists who met at the Brookings Institution on November 1976, already had been laid aside during the International Monetary Fund annual meeting in October 1977, when the finance ministers - seeing German and Japanese reluctance to play the role of engines - called on a more general effort, including input by medium-sized powers, to expand world trade.
Nevertheless, Blumenthal decided last month to go to Bonn to see Schmidt, after a meeting of the Big Five finance ministers in Paris - and that turned into such a complete rebuff that both the German and American sides agreed that there would be no public comment for a while from either side.
Blumenthal was reduced to saying that a 3.5 percent growth rate, if the Germans achieved it, would be a "contribution" to world recovery, implying that at least it would be better than last year's performance. And he endorsed Emminger's and Lambsdorff's arithmetic that estimated the German end of the year growth pace at a satisfactory 4.5 percent to 5.0 percent.
The Germans, for their part, spoke more kindly about the difficulty the Americans are encountering in managing the dolar exchange rate. But privately, like the Swiss and other Continentals, the Germans would like to see the U.S. make a large international borrowing of hard currencies to use in support of intervention operations. Some have suggested that the U.S. sell gold to get currencies for dollar support. Blumenthal views this as a bottomless pit, and has recommended against it.
As things stand, both the Americans and Germans have painted themselves into an awkward corner. U.S. officials know that the public has come to expect some positive and concrete results from summitry, and those doing the prepatory work for the Bonn meeting have been told that it must be followed up by something that seems to be useful.
To be sure, there is a considerable body of conservative Americans opinion that strongly supports the German economic policy as the right one.
But the Carter administration is not about to reverse its policies, although it may be forced into some additional cosmetic measures on intervention.
"We ought to leave them alone for a while," says an influential American policymaker. "My feeling is that the Germans have a very keen appreciation of th eir interests. They get topnotch analytical material and are very pragmatic. There's no guarantee of what they're going to do, but it seems to me that, if left to their devices for a while, they'll have to think their position through, and then we'll see where they come out.
"I don't know what more we can do at this point. Maybe we've done enough - maybe we've done more than enough."