Your telegrams of 22nd January No. 19 and 24th January No. 20 Disposal of Australian wool. 
I am much concerned at the dissatisfaction which exists in Australia on this question and have been engaged in a series of discussions with Mr. Bruce, who has also represented to me Mr.
Menzies' views on various aspects of the matter.  It appears that the sense of dissatisfaction which prevails in Australia is due to a misunderstanding of the position, and I am hopeful that this may be remedied by a full explanation of our policy, the considerations on which it is based and the methods by which it is put into effect. I should be glad, therefore, if you would seek an opportunity of seeing the Prime Minister and discussing the matter with him on the following lines:-
(a) We have learnt with much regret both from Mr. Bruce and yourself that the action hitherto taken as regards the disposal of wool from Australia to neutrals, and especially to Japan, has been the cause of dissatisfaction to Mr. Menzies himself and to Australian wool interests. We have had the advantage of discussing the matter fully with Mr. Bruce on several occasions recently, and it is dear that there is a widespread belief that the United Kingdom Wool Control constitutes an obstacle to the proper appreciation of Australian trading interests and to the orderly disposal of wool from Australia to Japan and other neutral countries. It is suggested that the Japanese in particular would be justified in taking up the position that the responsible authorities have failed to keep faith with them, more especially in regard to the supply of a proportion of crossbred wool, and that an impression is gaining ground that the United Kingdom authorities are indifferent to the problem of the Far East and to Australia's vital concern in the maintenance of friendly relations with Japan.
(b) At Mr. Bruce's request a very full meeting was held at the Dominions Office on the 30th January, at Which I presided and representatives were present of all the Departments concerned;
these included Lord Essendon , while Mr. Bruce was accompanied by Dr. Clunies-Ross.  This meeting enabled Mr. Bruce to make a full statement of the various heads under which misgivings and complaints had arisen in Australia. A valuable discussion followed in the course of which it became apparent that steps must at once be taken to remove certain misunderstandings by providing fuller information to the authorities and interests concerned in Australia.
(c) In the first place, it is necessary to remove the misunderstanding on the part of the Chairman of the Central Wool Committee in Australia , which is apparently shared by the Prime Minister himself, as to the general arrangements for the disposal from Australia of wool not required here. This work is undertaken on behalf of the Ministry of Supply by Lord Essendon and his staff in London. They are in dose touch with the United Kingdom Wool Control on technical matters. Such questions, however, as the policy to be adopted in regard to sales from Australia to Japan and other neutrals of wool which the Committee in Australia may have been told is not required for this or other Empire countries or for our Allies in the war do not fall within the purview of the Wool Control at Bradford or of Lord Essendon, who have no responsibility for decisions reached upon them. These decisions are reached by the United Kingdom Ministers concerned on the basis of important political considerations which have been explained to Bruce and are being reported by him in a separate telegram to Menzies.  The major consideration at present is not the risk of re-export to Germany but the importance of avoiding advance commitments in the supply of raw materials to Japan which might prejudice the understanding which we hope to reach with the United States on the denial of vital commodities to Germany (see my Most Secret No. 28 of the 3rd February to the Commonwealth Government).  Any impression that either the Control or the textile interests of the United Kingdom are endeavouring to secure any advantage over Australian interests is quite unfounded.
(d) The disposal of the balance available when the above requirements have been met is a task which has been entrusted to Lord Essendon by the Ministry of Supply. Lord Essendon's operations, however, are of course governed by considerations which may be advanced by the Secretary of State for Foreign Affairs or the Minister of Economic Warfare, and there is consultation, where necessary, with other Departments including the Dominions Office. In accordance with this procedure, it has been possible to determine and to relegate to Lord Essendon for disposal a proportion of the Australian merino clip available after Australia's own requirements and those of the United Kingdom, the Dominions, India and France have been met. This amounts approximately to one million bales. In respect of this quantity, Departments here have made no reservations except on grounds of economic warfare. Apart from this, Essendon is disposing of Australian merino wool freely to neutrals and is taking advantage of every opportunity which offers.
(e) The position in relation to Japan has been under review at frequent intervals. When it was examined in discussion with Mr.
Bruce on the 13th September last it was explained to him, and by him, we understand, to the Commonwealth Government, that as a matter of tactics we should propose to make allocations to Japan on a monthly basis and for a few months only in advance. 
(f) (The foregoing relates to merino wool only, and a separate telegram is being sent to you on the basis of your discussion with the Prime Minister in regard to Australian crossbred.) 
(g) As regards price, it is fully realised that this should not be allowed to become an obstacle to disposal, and the United Kingdom authorities share the Commonwealth Government's view that a price policy which, by diminishing sales, led to the accumulation of an embarrassing surplus of stocks or encouraged the use of substitutes would be damaging alike to Australian interests, the woollen interests in the United Kingdom and to the United Kingdom Government, which has to bear any losses. The basis upon which the price of wool was fixed was decided after full consideration of all the circumstances by the Ministries concerned. The price of issue to manufacturers in this country is calculated just to cover the cost to the Wool Control. The export price to neutrals from Australia has been fixed on a basis such as to secure parity between manufacturers in neutral countries, such as the United States, and Japan, and manufacturers in the United Kingdom. With the price which we are paying to Australia and the increased costs of bringing wool here, it is not possible to fix the export price at a lower level. Suggestions have been made from time to time that it would facilitate sales to neutrals if prices could be fixed for a considerable period ahead. This is not, of course, a normal practice in peace time, and it is not possible in present circumstances.