BONN -- A spitting match between West Germany and the United States over interest rates and the dollar helped trigger this week's collapse on Wall Street, like a mouse causing an elephant to stampede.
The clear link between the seemingly petty trans-Atlantic quarrel over credit and Monday's stock market massacre demonstrates once again how vulnerable the American economy has become to foreign economic decisions, and how poorly we handle these vulnerabilities.
In the interest rate dispute, Bonn and Washington are fighting each other for real assets. They are not merely engaged in trying to sort out "misunderstandings" of each other's policies, but are engaged in financial combat.
This means Treasury Secretary James A. Baker's lightning visit to West Germany Monday will paper over this round of the struggle, but only briefly.
The enormous trade and budget deficits of the Reagan years have changed the international economic landscape in ways that Baker and his advisers seem reluctant to admit, especially as they move into an election year. As long as this is so, the financial elephants will stay up on tiptoe.
One of the major changes wrought by the deficits is growing competition for foreign capital flows. While the United States seeks out foreign funds to finance the deficits, other nations are aggressively pursuing funds from abroad to finance new investment.
West Germany, now the world's largest exporter of goods, still has a puny capital market that is strangled by overregulation. When the bond market dropped dead earlier this year and foreign investors pulled out, the West German Central Bank responded with a series of short-term interest rate increases. These were to keep the German market competitive with the United States, where interest rates were also being raised to attract foreign funds.
Instead of seeing this as competition, an infuriated Baker took the increases as proof that West Germany was cheating on the G-7 monetary and financial agreement reached last February at the Louvre. His public threats to retaliate by driving the dollar down against the mark and thus scuttle the Louvre accord helped panic the already nervous stock markets.
Baker appears to have accepted the conventional wisdom that German financial policies are rooted in a nearly irrational fear of inflation growing out of the experience of the 1920s. He has sought to combine pressure and persuasion to show the Germans they are mistaken about this.
Baker hopes to persuade or force the Germans to see the light and loosen credit, expand their economy more rapidly as a way of helping cut the American trade deficit.
It is time to recognize that the Germans are being grasping instead of irrational and are not going to follow Baker's scenario. They know perfectly well what their inflation risks are, as Central Bank chairman Karl Otto Poehl made clear Oct. 6 in a Berlin speech that included an elegantly abrasive rejection of Baker's recent proposal to anchor world monetary policy on a basket of commodities, including gold.
The second level of miscalculation by Washington involves Baker's repeated urging of lower interest rates, larger tax cuts and support for an ever stronger mark on the Germans. In Bonn these sound like an effort to impose the kind of consumer spending binge and the resulting deficits of the Reagan era on West Germany's tidily managed economy.
Germans and other Europeans firmly believe that their economies would never recover from such deficits. Unlike the United States, they could not borrow their way out of the enormous debts they think they would have to incur.
Baker's reaction to West Germany's recent effort to draw in new foreign capital through interest rate increases will confirm them in that view.
Europeans watch in awe as the Reagan administration continues to turn away from the castor oil of tax increases and restrictions on credit that their governments routinely use to decrease consumption and purge a financial fever or cold.
The Germans and the markets are telling Baker that time has run out on his strategy of gently restraining only one kind of consumption, i.e., imported goods made dearer by exchange rate manipulation. Perhaps it could have worked at an earlier point during Donald Regan's benign neglect of the dollar or Baker's fevered management of the greenback. At least it is nice to think so. But this week it became clear that that time, too, has passed.