Imagecache not working with Private filesystem

I have a completely clean, empty, out of the box Drupal 7-19. No funny settings, data or extra modules.

Using a 'public' filesystem, Imagecache works as expected. As soon as I enable 'private' filesystem, even the default imagecache variants become unaccessible.

If you go to http://localhost/#overlay=admin/config/media/image-styles/edit/thumbnail the 'standard' image is visible, but the 'thumbnail view' shows an empty box with a red cross. Clicking on it gets you access denied.

File upload for standard images works fine. The actual file for the variant exists in the right place in the file tree. (My 'private' files system is /files).

The problem is, I've traced through the code and I cant actually see why it *should* work, but no one else seems to be complaining, so it must be me. We have a large D6 site which uses imagecache in a private filesystem with no issues which I'm in the process of upgrading.

I've tried this on both Windows and Linux. Set all the file permissions to 777 and still no joy. Standard .htaccess.

Please tell me I'm not going mad.

Ivan