They turned down the proposal to use German labour for the reconstruction of their devastated North. "Their construction industry wanted the orders." Most of the financial experts who advised governments were not even aware of the transfer problem - reparations from Germany could only be in German currency unless you allowed Germany access to the victors� markets on an unprecedented scale. Keynes had pilloried that ignorance in his "Economic Consequences of the Peace" (1919).

Inflation in Germany gave way to hyper-inflation due to several strongly negative events--the Franco-Belgian occupation of the Ruhr, the French government's refusal to revise the reparation schedule of May 1921, the report of an American bankers' committee stating the impossibility of making a loan to Germany so long as the reparations were not scaled down; and on June 22, the assassination of the German Foreign Minister Walter Rathenau. A general strike was declared, and virtual civil war raged. The exchange rate went from 275 marks to the dollar in May to 370 in June. By June 1923 it was 16,667. That hyperinflation had [the] delayed result of making it difficult after 1930 to fight deflation in the midst of depression. "The collective memory of the devastation caused by inflation furnished those who believed in putting the economy through the purifying fires of deflation with inexhaustible ammunition against even moderate monetary and fiscal expansion,.

Each Allied power had its own priority in combining solutions of reparations, the debt, and the currency problems, "French policy was to �commercialize' reparations, i.e., to have Germany borrow the money to pay off its obligations to France. Washington refused to accept reparations from Germany, but wanted repayment of its loans to the Allies. It was opposed to mixing politics and economics but frowned on loans by Wall St. to countries that had not settled their debt with (he US. The British held that they had no choice but to collect the debt owed them, to the limit of the British debt to the US." In addition to all this, the outstanding issues of war debts and reparations raised transfer problems - finding the foreign currency for all these settlements. These were exploited by Washington as leverage for other ends such as pressuring Britain to stabilize the pound in 1932.

This brought to the fore almost every aspect of monetary theory, many of which had never before confronted economists. Thus "the election of a Social Democratic government in September 1932 in Sweden had led to a 1933 budget adopting the Danish device of dividing the budget between current and capital expenditures." Even today the US and Canadian governments, each in its own way, have only recently smuggled in just enough of this basic accounting principle to provide a favorable statistic on "savings" to help improve the esteem in which they are held by the bond rating agencies.

"All portions of the political spectrum associated exchange depreciation with inflation because of their close tie in the early 1920s. Anyone who recommended devaluation 'was almost in danger of his life.'"

The leading Marxist theorist and former Social Democrat minister of finance, Rudolf Hilferding, asserted in a debate with (he trade union leader, W. S. Woytinsky, that 'it was insanity for London to imperil her role as economic centre of the world [in devaluing the pound in 1931]. He predicted increased unemployment as a result of depreciation.' In answer to Woytinksy's correct prediction that Britain's credit would be stronger and that others would devalue, increase (heir exports, and reduce their unemployment, Hilferding had only one answer, "Nonsense!'

The Bruening cabinet was openly deflationist�cutting salaries by 10%�to balance the budget. His cabinet anticipated Maggy Thatcher�s war-cry "There Is No Alternative" But there was an alternative. William Lautenbach, an official in the Economics Ministry had a plan for expanding bank credit for public works by several thousands of million Reichsmarks. The head of (he Reichsbank, Hans Luther, argued them all down, but (he main point was that Bruening had adopted deflation as a means of getting rid of reparations. His detractors suggested that he was a tool of the Reichswehr, having just been put in office by Kurt von Schleicher, head of the army, two weeks after the ratification of the Young Plan in March 1930 and removed on a thin pretext of agricultural policy in May 1932.

That, significantly, was six weeks before the Lausanne Conference, which effectively ended reparations. A foreign policy success was needed to take the wind out of the sails of the radicals. The conference held in June-July at Lausanne all but wiped out reparations. Three billion marks of German debt were issued at 100 to the Bank for International Settlements, which was to sell them on the open market after three years, but not below 90. Any bonds left unsold after fifteen years would be cancelled.

"The contrast is with the gold bloc and Japan. After the fall of the pound, speculators began selling yen. Within three months, the Bank of Japan had lost 625 million yen in gold, suspending the gold standard in December 17, 1931. What followed was one of the most brilliant and highly successful combination of fiscal, monetary and foreign exchange rate policies the world has ever seen.

"During the 1920s a small minority opposition had campaigned against the restoration of the yen to par, holding out for a lower rate. Led by Tanzan Ishibashi and Kemekiki Takahashi, a distinguished journalist, it had fed on the views of Gustav Cassel and later of Keynes of the Treatise of Money.