IT WAS A very tidy operation. On Thursday the German Bundesbank dropped its basic lending rate half a percentage point. Early Friday the Japanese followed; then, a little later that morning, the Federal Reserve here in Washington did the same -- in each case, half a point. The coordination was deliberately put on display, sending a signal to the doubters that the world's major financial powers are working together as they promised last September. At that time they said that they would bring the dollar's exchange rate down. They have done it with, so far, remarkable success. Now they have taken a small but useful step toward lower interest rates to benefit economic growth throughout the world.
Circumstances were certainly very helpful. The falling price of oil goes far to reassure, in particular, the anxious Germans that they can lower interest rates without risking inflation. All three countries were reacting to the astonishing good luck that cheap oil represents. But they showed that they were capable of reacting together.
It's particularly important that the Germans and Japanese should get interest down and increase their own domestic demand. Both of them have become overdependent on their exports to the United States, and, with the fall of the dollar, neither of them is going to find it as easy next year to sell their goods here as this year. If they don't want to slide into recession, they are going to have to swing their production from this country to customers at home. Lower interest will help. For 15 years the world has been afflicted with wildly unstable exchange rates and waves of high inflation. The Bretton Woods system, which governed the world's monetary machinery, broke down in the early 1970s, and there has been much learned discussion of ways to replace it. To follow that debate, it's important not to get lost in the technicalities. The Bretton Woods system was based on one dominant economic power, the United States, and its dollar. As other countries became stronger in the 1960s, the United States no longer dominated world finance as it had earlier done.
For these past 15, years the international financial system has lacked the single commanding presence to which it was accustomed. It has been unable to work out a strong and decisive form of cooperative leadership by the five or 10 countries whose currencies really count. The failure here has not been a matter of economics, and economic analysis won't tell you much about it. The failure has been political. Governments either failed to see the international consequences of their domestic policies, or they refused to acknowledge them.
With a little optimism, you can now see a change. In the record of events since September there are the signs of something better beginning to emerge. If these three countries can work together to lower interest rates half a point, perhaps they can work together for other and larger purposes as well.