At the Tokyo summit, the heads of state of the G-7 countries put their signatures to an economic communique that contained all the correct positions on a number of topics - growth, trade, and interest rates, among others.
The need for lower rates was expressed more vigorously than usual - aimed, one assumes, mainly at Europe and Japan.
The question is, how is this message heard by the central banks that control interest rates in the key countries - some of which, like the German Bundesbank and the U.S. Federal Reserve, are quite independent of their governments.
Interest rates in key foreign markets have been declining for some time now, and more reductions are inevitable given depressed economies and low inflation.
Acting or Reacting on Rates
But it makes a great difference whether interest rates decline as a result of weakness in the economy and credit demands or whether they decline because a nation's central bank is actively attempting to pump up the supply of credit and money.
In Europe, the Bundesbank has been slowly lowering interest rates about in line with - and certainly not ahead of - the weakness in the German economy. l doubt that Chancellor Kohl got any guarantees about further rate declines from President Schlesinger of the Bundesbank before signing on to the communique.
But he probably felt safe in believing that rates would continue to fall gradually, given the slump in the economy.
Let Rates Fall
In my opinion, it would be better if rates fell quicker. The European exchange rate mechanism has again been under pressure, this time because the market has little faith in the French and Danish currencies. France is the key.
If France cannot be held within the exchange rate mechanism, or an orderly adjustment made, the future of the European drive to a common currency will be even more uncertain than it became after Britain and Italy withdrew from the exchange rate mechanism last year.
France's domestic situation is very weak, and it needs lower interest rates as much as or more than Germany does. The market's view about France is something like, though by no means as extreme as, its earlier attitude toward Britain.
The markets came to believe that the high interest rates needed to justify the relative value of the currency within the exchange rate mechanism could not be sustained because of Britain's domestic situation.
While in today's circumstances a dramatic crisis has so far been avoided, lower interest rates all around in Europe would go a long way to reducing the risk further.
In the Pacific
The Japanese central bank is not as independent as either the Fed or the Bundesbank. But with its government in disarray, it may be able to make its decisions less encumbered by intragovernmental disputes and pressures.
In the recent past, Japan's central bank has probably resisted further rate reductions partly because it believed them risky in the face of pressures for an even more active fiscal policy in Japan.
On the other hand, the Ministry of Finance in Japan has traditionally argued for lower interest rates in an effort to deflect pressure to present budgets that involve substantial deficits.
Without a strong government, the bureaucrats of the Ministry of Finance and the Bank of Japan risk a standoff. However, the continued weak economic conditions will themselves probably compel some action, and the central bank may be better positioned in current circumstances to deliver than the rest of the government.
The Federal Reserve
I doubt that the U.S. central bank generated much concern at the summit. In real terms, short-term interest rates here are the lowest in the industrial world, and longer-term interest rates are close to the lowest.
The Fed, in the person of Mr. Greenspan's policy testimony the other day before the House Banking Committee, noted that it now expected a little more inflation and less real growth this year than it had early projected.
For some time now, it has been clear that the Fed's policy dilemma has become more acute because the trade-off between inflation and growth over the short run has become less favorable. Mr. Greenspan seemed to feel that there was more reason to worry about inflation than growth, which left the impression that any move the Fed might take would be to raise rates.
However that may be, the lower rates that are needed in the industrial world should for the most part come from Europe and Japan, where economic conditions are weakest.
The quicker they come, the better, particularly since the world will soon also have to cope with a deflationary U.S. budget package on top of a continuing shift toward fiscal restraint in Germany.