These works did not anticipate the theory of public spending, but they impressed Ishibashi and Takahashi with their advocacy of a managed currency.

The journalist Takahashi was initially critical of the theories of Korekiyo Takahashi, the former prime minister and minister of finance in the new cabinet that took power after the fall of the yen. But the politician Takahashi [no relative of the journalist of (he same name] intuitively understood the potential of deficit financing with a flexible exchange rate. His writing of the period showed that he had already grasped the mechanism of (he Keynesian multiplier, without any indication of contact with the R. F. Kahn 1931 Economic Journal article. The balance of payments was protected not only by the flexible exchange rate, but also by the foreign exchange control laws of July 1932 and March 1933. The Bank of Japan lowered discount rates from 6.57% to 2.29% in April 1936. The Bank of Japan's fiduciary issue [i.e.. unbacked by anything but general government credit] was raised from 120 million yen to 1 billion.

But the primary reflationary mechanism was government spending. Under Takahashi's finance ministry, central government expenditures rose 20% in each year of 1932, 1933 and 1934, and all in all from 31 to 38% of net domestic product. Sufficient to produce recovery, this, however, failed to satisfy the militarists, who wanted unlimited military expenditures. In consequence, they assassinated Takahashi, aged eighty-two, in 1939 - an ominous pendant to the murder of Foreign Minister Rathenau in Germany a few years before. The Japanese share in imports of the Netherlands East Indies rose from 12% in 1930 to 31% 1933 when the Indies took protective measures."

Gradually all this policy flailing came to focus on governments seeking the lowest exchange value of their currencies for competitive position in international trade.

During the London conference in 1933, the dollar firmed from $4.12 to $4.02 to the pound, and the American commodity and stock markets declined." The competitive position of the US urgently needed a weaker dollar � the world was entering a period of "beggar thy neighbour." In the US exporters' lobbyists were calling for a 43% cut in the exchange value of the dollar. "On July 3rd when the dollar had reached $4.33 against the pound, commodity prices had risen to 130. Roosevelt released a pungent message that drove a nail into the coffin of the conference. It concluded: "Our broad purpose is the permanent stabilization of every country's currency. When the world works out concerted policies to produce balanced budgets and living within their means, then we can properly discuss better distribution of the world's gold and silver."

Roosevelt, who loved discoursing on American diplomats being no match for the wily Europeans, was leading the US back into its shell to work at pumping up domestic prices and stock markets to secure a greater competitive edge. The British Empire concentrated on building a sterling trading area. The gold bloc organized what deafened it could. The pound soared to $5.15 by the autumn. Ramsay MacDonald cabled Roosevelt that Europe had no desire to interfere with domestic American policies but counted on the US to find an arrangement that would not bring chaos to Europe as the price of American success."

And Roosevelt retired into the murk of amateur explorations of other ways of skinning the cat. His good neighbour. Henry Morgenthau, also Secretary of the Treasury, was with him holidaying at Campobello,and while returning to Washington on the Indianapolis, showed the President charts prepared by Professor George Warren, a Cornell agricultural economist. The charts purported to show from the prices during the Greenback period from the Civil War to 1879 a connection between the price of gold and the price level. But the connection between prices and gold "was not as direct as Warren seemed to think, but went through the exchange rate." The theory assumed a fixed price of gold in London, but as a commodity, the price of gold varied with demand and the opening of new mines.

"Roosevelt, however, was impressed and a week later informed Morgen�thau that he would like to buy gold on the open market in an effort to raise commodity prices."

What ensued reads like farce. "Beginning on October 25, Morgen�thau, breakfasting with Roosevelt in his bedroom, set the price higher each day by amounts that varied arbitrarily. Morgenthau reported that Roosevelt once proposed raising the price 21 cents because it was three times 7 cents and 7 was a lucky number.

"In no event is it likely that world economic recovery could have been accomplished by truces in the fields of tariffs and exchange depreciation." Though the diplomatic talk was of coordinating the gold price of all currencies simultaneously, that missed the point. To reflate the American economy, Roosevelt was seeking a competitive advantage over other countries by raising the price of gold. If the exercise were joined by all, there would remain no competitive advantage for American trade, other than the higher value placed on US gold stocks.