37 Mr R. G. Menzies, Prime Minister, to Mr S. M. Bruce, High Commissioner in London

Cablegram unnumbered 27 July 1940,

IMMEDIATE SECRET

Your telegram 26th July. [1]

1. We did not reply to the request in telegram 254 of 17th July paragraph 6 [2] because we thought that request was superseded by amended proposals in Dominions Office telegram No. 269 [3] for a payments agreement the basis of which we agreed to.

2. We are anxious to meet request of the United Kingdom Government to delete the option of payment in yen pending conclusion of payments agreement but this requires further consideration because of the following difficulties:-

(a) Japan will not accept payment in sterling. We do not know whether she would accept payment in Australian currency which had to be converted into sterling on maturity of the drafts but this is unlikely;

(b) The Yokohama Specie Bank particularly and the Australian Banks to a less extent have developed a direct exchange business in yen between Australia and Japan. This would have to be discontinued if we insisted on sterling.

3. These difficulties need further consideration before we can agree to insist on payment in sterling particularly because trade between Australia and Japan may be seriously obstructed if we do insist. Japan may be willing to accept payment in Australian currency (blocked except with our approval) if this need not be converted into sterling on the maturity of the drafts. What would be the attitude of the United Kingdom authorities to this proposal? 4. Meanwhile we cannot see in what way shipment of wool to Japan is connected with our exchange arrangements. We consider that these two matters should be kept separate particularly as we have agreed to the basis of the proposed agreement between the Bank of England and the Bank of Japan.

5. We desire you to inform the United Kingdom authorities of the foregoing and urge in the strongest possible terms the release of wool immediately leaving outstanding exchange difficulties which are receiving immediate consideration to be negotiated separately.

MENZIES

1 On file AA: A981, Trade 68, iv. This cablegram read in part:

WOOL for JAPAN. Endeavour to finalize matter defeated by Treasury taking attitude that you have not yet replied to specific points raised in paragraph six of Dominions Office telegram 254 of 17th July.' 2 On file AA: A1608, G59/1/3, i. Paragraph six reported that pending the conclusion of a payments agreement with Japan the U.K.

Govt would not object, subject to the deletion of the option of making payment in yen, to a proposal advanced by the Commonwealth Govt in cablegram 363 of 9 July (on file AA: A1608, G59/1/3, i).

The proposal was that the Commonwealth Bank should allow letters of credit to be established providing drawings in Australian currency, with the drafts to be endorsed: 'on payment of this Bill the proceeds thereof are to be remitted by telegraphic transfer through London in sterling or in yen'.

3 Dispatched 23 July. It reported that the U.K. Govt was prepared to accept a Japanese proposal for a payments agreement permitting transactions between Japan and the Dominions (other than Canada) and India in sterling, the local currency concerned or yen. The Commonwealth Govt approved the proposal in cablegram 387 dispatched on 25 July. See file AA: A1608, G59/1/3, i.

[AA:A3196, 1940, 0.5226]