(1) I have just returned from Batavia and have had discussions with senior British Dutch and Indonesian leaders. The situation is particularly confusing owing to the surprising action of the States General in appointing a Commission of Enquiry into van Mook's conduct.  As I consider some urgent action on Australia's part is necessary, I am reporting fully in this telegram.
(2) In the British Command there is considerable confusion owing to Christison's disagreement with Dening on the policy to be followed. Christison believes that some form of international intervention is necessary whereas Dening was anxious that the Dutch and Indonesians should settle the question among themselves.
The policy of the Command is also affected by the conflicting views among Departmental heads varying from extreme conservatism to extreme pro-Indonesian. This has the effect in many cases of nullifying Christison's actions.
(3) In the case of the Dutch, there is very strong resentment against what they describe as the 'British policy of appeasement' and this is tied up with their refusal to admit Dutch troops and failure to implement full control in West Java. This resentment is not limited to reactionary Dutch officers but is general and was expressed to me by Blom , Hoogstraten , Dewein.  On the other hand moderate opinion as typified by Dutch political as distinct from military leaders has complete confidence in van Mook. The Netherlands East Indies Government officials have been considerably shaken[ed] by the action of the States General. In view of erratic information regarding van Mook's future movements, they are now completely at a loss and are awaiting information from Holland.
(4) The Indonesian Cabinet is in a state of equal confusion.
Sjahrir and other members of the Cabinet informed me that van Mook was the only Dutchman who would be acceptable to them as a negotiator.
Although I could not get Sjahrir to commit himself, the Minister for Economic Affairs  informed me that they were prepared to negotiate direct with van Mook, but cannot visualise satisfactory negotiations with any other Dutch representative. As they are as anxious as the Dutch for an early settlement, it can be seen that they are now feeling the action of the States General and are equally bewildered as to the future.
(5) From discussions with the Indonesians and several with neutral Indonesians and Chinese, I am convinced that there was every prospect of a settlement and there still is a possibility, providing van Mook has power to negotiate.
(6) The Indonesian Cabinet believe they are gradually strengthening their control over Soetomo, the most prominent of the extremists, but are concerned with the popular front which is allied with the Communist party, and greatly under the influence of a man named Tan Malacca. Soekarno is according to Sjahrir in close contact with Tan Malacca but the main difference between Cabinet and the popular front is that the popular front are pursuing a definite policy for sequestration of all European property supplied to the Netherlands East Indies. I was informed that Cabinet would never consent to this policy and Sjahrir and those in the Cabinet at present in Batavia are proceeding to Djokjakarta to-day and a full Cabinet meeting will be held there on Thursday, primarily to decide this question. If the popular front, with whom the extremists may associate themselves, win, then the Cabinet is very likely to resign.
(7) In view of the factors I have mentioned and the confusion caused by the action of the States General, I consider it now most unlikely that any negotiations can be successfully carried on without mediation. The appointment of Sir Archibald Clark Kerr will probably have the effect of raising the settlement of this dispute to a much higher plane and may introduce an international element. In view of Australia's vital interest in this matter and the fact that the Dutch and Indonesians at the moment consider that the Australian Government's policy is expressed by the waterside workers (an impression which I have endeavoured to correct) I recommend most strongly that the Commonwealth Government should take some action which would show to the other nations concerned in the question its own vital interest in a stable and fast settlement.  I, therefore, suggest for your consideration that the following action should be taken:-
(1) That the Commonwealth Government should announce that the Australian Government representative at SACSEA has just returned from Batavia and has reported fully to Cabinet on the question ; that Cabinet is now studying this report in view of Australia's vital interest in the matter and will decide what policy it should adopt.
(2) That Cabinet should consider sending to this area as soon as possible after the arrival of Sir Archibald Clark Kerr a senior Cabinet Minister who will himself visit Java and study the situation first hand.
I consider that these two moves would immediately make it clear that Australia has a vital interest, and it is intending at least to watch the situation very closely.
(3) That the Cabinet Minister, if he should proceed should consider, after discussion with Sir Archibald Clark Kerr, pressing for Australian representation on any body which may be set up to mediate in the dispute.
There is certain danger that Australia's representation in addition to United Kingdom may raise the question of representation of other powers, particularly China and Russia. It may be possible, however, to evolve a formula by which Australia, in view of her vital interests, should mediate on behalf of the Empire or in conjunction with the United Kingdom.
These recommendations, and particularly two and three are, of course, on the assumption that, because of the action of the States General van Mook will either not return to Java or not be in a position to carry out effective negotiations.
(8) I may say that Dening does not agree with my point of view on the necessity for a third party mediation. He considers that if negotiations do not take place or break down, then a concerted policy for the restoration of law and order in the whole of West Java should be carried out as quickly as possible; that the Dutch Government should then negotiate with such Indonesian leaders as remain in West Java, and are prepared to work with them, and set up an order based on Dutch terms of settlement. I believe that such a solution would not have the basis of any permanent understanding between the Dutch and the Indonesians, no matter how successful it might be in the early stages.
(9) I will report fully details of conversations in to-morrow's mail.