Germany Is Cautioned on Interest Rates : Baker Warns Further Hikes May Bring U.S. to Foster Fall in Dollar

Treasury Secretary James A. Baker III warned West Germany on Saturday that the United States will respond to further German interest rate increases by encouraging a fall in the dollar rather than continuing to raise U.S. interest rates just to keep the dollar steady.

“They should not expect us to simply . . . accept increased tightening on their part on the assumption that somehow we are going to follow them on a path of deflation,” Baker said in a television interview on Cable News Network. “That’s an assumption that’s not warranted.”

Higher interest rates abroad could weaken the U.S. currency by luring money out of dollar-denominated securities to foreign assets unless rates rise enough in the United States to encourage investors to keep it here.

Calming the Markets

Baker, continuing the Reagan Administration’s attempt to calm tumultuous financial markets, stepped up the campaign he launched Thursday against the German interest rate increases. At a White House briefing for reporters Thursday, he suggested he might favor a decline in the dollar against the German mark from the currency levels that major industrial nations had agreed upon last February in Paris.

When top economic officials from the seven largest industrial democracies met in Washington last month, Baker suggested Saturday, they agreed to avoid interest rate increases that might threaten currency stability. “If (the Germans) feel that there’s a need to tighten up over there,” Baker said, “then perhaps it’s important that we sit down and examine what the consequences of such a move would be for our undertakings under the (currency stabilization) agreement.”

Meanwhile, Baker also accused congressional Democrats of contributing to the recent plunge in the stock market by considering several tax proposals that would raise business taxes and restrict takeovers.

Proposed Tax Hike

“They’re (proposing) increasing the corporate minimum tax right after we have tax reform,” Baker said. “They’re restricting takeovers and the deductibility of interest in takeovers. And they’re doing other things that will have a very detrimental effect on business and then they wonder why we have an adverse effect on the stock market.”

But House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), in the weekly Democratic radio talk, defended the tax proposals offered by his committee as the fairest way to avoid indiscriminate budget cuts later this year under the Gramm-Rudman legislation. Rostenkowski accused the Administration of following a “cynical and dangerous strategy” in refusing to negotiate a budget compromise with Congress.

“About half of the Democratic deficit reduction package is revenues, but we do not affect the taxes of average, middle- and low-income Americans,” Rostenkowski said. “Unfortunately, Republican members of Congress have refused to support any alternative to the Gramm-Rudman cuts. . . . They have followed the President and walked off the job.”

Baker, however, warned that President Reagan is prepared to accept the drastic cuts in defense spending and social programs that would automatically go into effect in late November under Gramm-Rudman rather than agree to the $12-billion tax increase proposed by congressional Democrats.

“They’re offering him new taxes and that’s all,” Baker said. “They’re not telling him what, if anything, he’ll get by way of spending cuts. . . . So, the answer to new taxes is absolutely not. That’s no bargain.”

But Baker left open the remote possibility of a budget compromise when he suggested that Democrats look at the variety of minor tax increases and user fees proposed in Reagan’s initial budget plan last January.

“If the Congress were able to assure the President that he would get sufficient domestic spending cuts . . . and they wanted to look in his budget for perhaps an equivalent amount of revenue,” Baker said, “then maybe we find some basis to reach an accommodation.”

From what Baker and Rostenkowski said, however, it seems clear the Administration and Congress remain on a collision course. “Democrats want health care for the elderly, effective drug enforcement programs, good schools for our children and a strong defense,” Rostenkowski said. “We’re not going to risk those programs just because the President doesn’t have the guts to close tax loopholes or make large corporations pay their fair share of taxes.”