1. In view of undertaking given by Australian Government with concurrence of United Kingdom and New Zealand Governments at United Nations Assembly last January , to negotiate an 'appropriate trusteeship agreement' bringing Nauru under international trusteeship system, suggest following points be brought to Minister's attention and his views sought.
2. The mandate to administer Nauru was conferred on 'His Britannic Majesty'. Responsibility for administration was vested in Great Britain, Australia and New Zealand. An agreement entered into by these Governments in July, 1919 provided that administration of island should be vested in an Administrator and that the first Administrator be appointed for five years by the Australian Government and thereafter as decided by the three Governments. All administrators have been appointed by us after consultation with United Kingdom and New Zealand. Neither United Kingdom nor New Zealand have expressed any view as to the desirability of preparing the Trusteeship agreement in time for the forthcoming General Assembly meeting. Presumably it will be necessary for Australia as the administering Power to take the initiative and prepare an agreement, either now or later, if Minister considers it undesirable to attempt to submit to the next General Assembly.
3. The agreement so drafted would follow the lines of the draft for New Guinea now under consideration by the Minister. It may be possible to reach agreement with United Kingdom and New Zealand Governments and consult informally United States and France in time to submit the agreement to the General Assembly provided a quick understanding can be reached on the application of Article 76(d) of the Charter. Article 76(d) prescribes equal treatment in social, economic and commercial matters for all members of the United Nations and their nationals, without prejudice to the attainment of the objective of the trusteeship system, the fundamental objective being the promotion of the political, economic, social and educational advancement of the inhabitants of the trust territory.
4. In the case of Nauru the problem arises in this way- (a) the three Governments in 1919 purchased from the Pacific Phosphate Company (British registered) the exclusive right to exploit phosphate deposits on Nauru and Ocean Island (British possession). A German company had previously sold its exclusive rights to the British Company. The Governments vested their interests in the deposits in three Commissioners whose functions are limited to business connected with phosphate deposits, the Administrator alone being charged with all matters pertaining to the government of the island.
(b) a royalty (per ton) is paid on phosphates. 11/2d. per ton is devoted to welfare of Nauruan natives as a whole. At least 71/2d.
per ton is paid to or held in trust for individual 'Nauruan Landowners' on whose property the phosphates are worked, resulting in practically all Nauruans receiving income from the development of phosphate resources.
(c) Expenses of the Administration have been met entirely through an additional royalty on sale of phosphates.
(d) In addition to making the payments mentioned in (b) and (c) the Commission's operations have resulted in general trading profits which, after providing for reserves, capital and sinking fund redemptions etc., have been available to the partner Governments.
(e) Output of phosphates is reserved in first instance for Australia, New Zealand and the United Kingdom to extent of their requirements at selling prices based on overall production costs.
Any phosphate not required by the three Governments may be sold by Commission at best prices obtainable.
(f) The question of the propriety of the mandatory's developing the territory's only resource for its own profit was raised in the Permanent Mandates Commission of the League of Nations. The mandatory pointed out- (i) that exploitation of phosphates in Nauru had always been a monopoly and that phosphate commissioners were merely business executives subject to control in labour recruiting and other matters by the Administrator;
(ii) open door had not been required in C Mandated areas except insofar as it could be a necessary means of promoting the interests of the natives.
5. Although the 'equal treatment' in economic and commercial matters referred to in the Charter is subject to the general obligation to promote the advancement of the inhabitants, it may be difficult to maintain successfully that the exclusive right of exploitation and distribution of phosphates in Nauru can be justified solely on the ground that it is necessary in the interests of the Nauruan natives.
6. Possible courses of action might be- (a) To face the problem squarely by including a provision in the agreement sanctioning the continuance of the present exclusive exploitation of phosphates on ground- (i) of long established usage;
(ii) continuing benefits to natives (of which evidence could be adduced);
(iii) Impracticability of discontinuing present arrangement.
Assurances could possibly be given, if such an article was queried, that (assuming discontinuance of existing controls over world phosphate distribution) in event of legitimate and grave need for phosphates in countries other than the United Kingdom, Australia and New Zealand the three Governments would be fully prepared to consider possibility of allocating supplies from Nauru. It could be indicated that an agreement on any other basis would be unsatisfactory to the Mandatory and unlikely to be concluded. Bailey and Halligan  whom we have consulted favour this course, including suggested assurances.
(b) To omit any reference in the agreement to the exploitation of phosphates leaving the matter to be raised either by states consulted or by the General Assembly or later the Trusteeship Council, and to defend the position, once the matter has been raised, on the grounds expressed in (a)(i), (ii) and (iii).
7. Question of statement to Parliament also requires consideration. If such a statement were made it would scarcely be possible to deal with matters affecting the application of Article 76(d) to the exclusive development of phosphate without prior discussion with United Kingdom and New Zealand. The supply of phosphate in greater quantities is, of course, a very important matter to Australian primary industry at present time. In any event, questions might be raised in this connection in the House which might make more difficult our efforts to reach a satisfactory settlement with other States consulted and also General Assembly.
8. Bailey and Halligan concur generally in this cable. Bailey feels that it is undesirable to proceed with submission to next General Assembly. We are already facilitating process of creating Trusteeship Council by negotiating New Guinea agreement. He also considers that Trusteeship Council, when created, may be more desirable body to negotiate with on Nauru than next General Assembly. Trusteeship Council must consist of 'specially qualified' persons (Article 86 of Charter). In all the circumstances, Minister may prefer not to proceed with submission of agreement for approval of General Assembly, but merely to indicate that agreement will be presented for consideration in due course in accordance with declaration made in London in January 1946.
9. Suggest that Minister may wish to discuss matter with United Kingdom and New Zealand representatives. Earliest advice of his views would be appreciated.