My telegram D. No. 364.  Reparations.
Following on the defeat of Germany the need for an agreed policy on reparations has become urgent and we have been under increasing pressure from the Soviet Government to appoint representatives to the Allied Reparation Commission which it was decided at Yalta should be set up in Moscow. We have telegraphed separately about the difficulties which have been encountered in reaching agreement on the composition of the Moscow Commission and though we had hoped to secure French participation from the outset we feel as explained in my telegram D. No. 1039  that we now have no option but to agree to the starting of discussions on a tripartite basis.
2. Meanwhile we have been giving much thought to the problems involved in the question of reparation and my two immediately following telegrams  set out in broad outline our views on the principles and on the machinery respectively which we propose to instruct our delegation to put forward. At the same time it is not to be expected that final agreement can be reached during the course of the Moscow Conference and in our view the main object of the Conference will be to explore the complex technical aspects of the reparations problem. We are so informing our delegation and asking them to treat their present instructions as provisional.
3. The position as we see it is complicated by a number of factors including the enormous damage to German towns, the fact that Germany will need to import goods on a considerable scale in order to maintain a subsistence standard of living, the need for removal of Germany's war potential and the question of territorial adjustments. In our view it is all important to avoid a repetition of the situation after the last war in which Germany received (and subsequently defaulted on) loans from the Allied and Associated Nations greater than the reparations paid. We are also deeply conscious of the possibility of a clash between the desire to secure a continued flow of reparations from Germany on the one hand and the need to remove Germany's war potential on the other.
It is clear to us that destruction of Germany's war potential must take priority though this inevitably entails reducing the volume of reparation receipts from Germany's current production.
4. We therefore regard it as essential to establish at the outset that- (a) No assistance should be given to Germany to build up their industries.
(b) Payments for essential supplies needed by Germany for subsistence standard of living should be a first charge on German resources even though this will tend to restrict very substantially the extent to which we can look for reparations.
5. It is on this basis that we have worked out the proposals in my two immediately following telegrams. We should appreciate any comments which the Dominion Governments may wish to make on these proposals and in particular it would be of great assistance to us to know urgently- (a) Whether the Dominion Governments holding German prisoners of war intend to use prisoners as reparation labour and if so to what extent.
(b) Whether the Dominion Governments have it in mind to make claims to reparation in kind and if so whether they would wish our delegation to be briefed with a view to securing provisional allocations for them.
6. According to the agreement reached at Yalta, reparations are to be received in the first instance by those countries which have borne the main burden of the war, have suffered the heaviest losses and have organised victory over the enemy. On this basis Dominion Governments would of course be eligible to share in such reparation as may be recoverable but no doubt there will be strong pressure (all the more so on account of Germany's limited reparation capacity) for reparation goods to go primarily to countries that have suffered most physical war damage and the question arises whether, if reparation deliveries are restricted to the narrow limits which we suggest, Dominion Governments would wish to participate.
7. The position of the United States is we understand in confidence that they probably will not in fact look for any substantial reparation for themselves (other than the proceeds of German assets in the United States of America) but that they propose to maintain their claim until they are satisfied that a fair distribution to the countries whose reconstruction needs are greatest can be agreed at Moscow or subsequently for recommendation to the Governments concerned.
8. We should be glad to know whether the Dominion Governments would wish for their part to take up a similar attitude to the United States in this matter, i.e. to maintain in principle their claim to reparation and thus secure allocations which might at a later stage be waived at any rate in part. By so doing the Dominion Governments would preserve their rights to- (a) The proceeds of German assets in their countries.
(b) Their share of reparation ships (see paragraph 14 of my immediately following telegram) and, (c) Some reparation labour if desired.
9. We should be very grateful for earliest possible comments in view of the prospect that discussions at Moscow will open in the course of the next week. In the meantime we are asking the Leader of our Delegation (Sir Walter Monckton, Solicitor-General) to keep in touch in Moscow with Dominion Ministers there and to give them copies of this and my two immediately following telegrams.