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During the early stages of the. 1973 oil crisis and the resulting worldwide recession, Schmidt, who became admiringly known as der Macher (the Doer), expertly employed a combination of jawboning and mild government pump priming to sustain Germany's growth and stability. But as the economy turned stagnant, even Schmidt has seemed to be stumped. West Germany, which is one of the most modernized of nations, does not need an expanded public works program that could create more jobs. Meanwhile, Schmidt's ambitious drive to build 17 additional nuclear plants, which would have created 200,000 jobs, foundered on objections of environmentalists and the violent protests of left-wing demonstrators.
In hopes of giving the economy a little jolt, Schmidt last November cut income taxes by $10 a month for single people and $20 a month for couples. Instead of rushing out to spend their new wealth, the thrifty Germans put it in the bank. Next, Schmidt reduced the interest rate for savings, but that had little effect; Germans sock away 15% of their net earnings, while Americans save only 5%.
As Schmidt was cautiously trying to revive the economy, the old inflationary threat came alive. In their first strike since 1896, German dock workers stomped off the job last month, demanding raises far above the government's 4.5% guideposts. After a five-day walkout, the workers won a 7% increase retroactive to January. Then other unions, whose contracts are expiring, began staging brief stoppages in plants from Hamburg to Munich.
Inflation could have unforeseeable political and social effects. A short bout of economic stagflation in the early '60s resulted in the fall of the government of Ludwig Erhard and created the uncertain political climate that led to the onset of student radicalism, which, in turn, contributed to urban terrorism. Given his nation's tragic past experience with economic crises, Schmidt believes the long-term liabilities of inflation would far outweigh any short-term benefit that Bonn and its trading partners might derive from a burst of steam from the German locomotive.
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After a rally in January as a result of U.S. support efforts, the dollar plunged last week to record lows against the world's two strongest currencies; it was worth only 2.06 German marks and 1.88 Swiss francs. The dollar also fell in relation to the British pound, the Italian lira, the Japanese yen, and even the recently troubled French franc.
In large part this week's slide was caused by Blumenthal's performance in Europe. At a meeting of finance ministers in Paris, he gave the impression that Washington was less concerned than its trading partners about the slide of the dollar and would not intervene to boost the dollar's value. Actually that is nothing new, but when word of Blumenthal's attitude leaked, the dollar began to fall again. The slide continued as Blumenthal's talks in Bonn failed to patch up the rift between the West's two most important economic powers.
Unfortunately, last week's bad news overshadowed a positive dollar development that otherwise might have added several cents to its worth. In Paris, Saudi Arabian Finance Minister Mohamed Abdel-Kheil told Blumenthal that his country would indeed continue to accept dollars as payment for oil and had no intention of switching to a mix of other currencies.