1. Lack of progress negotiations between Dutch and Indonesians with a view to reaching a peaceful settlement of the Indonesian problem is very disturbing. Dutch appear to be making no real effort to negotiate, but seem instead to be playing a waiting game in hope that (a) Indonesian nationalist movement will disintegrate into different factions which can be played off against one another or dealt with separately, (b) Dutch forces can be built up to a strength sufficient to deal alone with Indonesian forces after British forces have been withdrawn.
2. It seems essential that immediate steps should be taken to try to convince Dutch that this policy is misguided, may alienate world sympathy and is not likely to be successful. While British forces remain in Java, United Kingdom Government has a lever which they can use, if they so desire, to help shift Dutch from their present attitude. Once British forces leave, the issue will be entirely in hands of Dutch and all the present signs are that heavy fighting will ensue which could have far-reaching consequences for Australia.
3. I understand that when the Indonesian question came before the Security Council in London early this year, Bevin stated that British troops were sent to Indonesia for two purposes only viz., (i) to disarm and other-wise deal with Japanese forces and (ii) to rescue prisoners of war and civilian internees. Precise information is not available here, but I should have thought that these two tasks had now been substantially completed, or that they could be completed in the very near future. If so, there does not seem to be any sound reason to justify retention of British forces in Indonesia; indeed, if these forces remain in Java after completion of the above-mentioned two tasks, the United Kingdom Government may incur severe criticism particularly if, as is quite possible, the question of Indonesia again comes before the Security Council. Retention of British forces in Java, not for these two purposes, but for the purpose of sustaining Dutch interests while the Dutch are building up their own forces with a view to military action and in the meantime not making any real effort to reach a peaceful settlement would seem to be a heavy responsibility for the United Kingdom Government to undertake.
4. Recently the Royal Netherlands Navy asked our Navy Department to supply for a period of 6 to 12 months goods and services for six Dutch destroyers and one escort carrier. The supplies asked for included not only Australian ammunition but also a considerable quantity of Royal Navy ammunition lying in Australian store-houses which the Admiralty had apparently indicated could be made available to the Dutch. In effect, we were being asked for permission to base a small fleet in Australia. The matter was discussed informally in Cabinet, and the following decisions were reached which have not, of course, been made public or communicated formally to the Dutch:
(a) The Dutch should not be prevented from withdrawing from Australia their own stores (including ammunition) which they can load into their own ships with their own labour. (b) Dutch requests to be supplied with Australian munitions and war-like equipment should not be granted.
(c) As far as practicable, no encouragement or facilities should be given in connection with transportation by Dutch vessels of British Admiralty or foreign munitions or war-like equipment stored in Australia. As regards Royal Navy stores now in Australia, it should be brought to the notice of the United Kingdom Government that supply to the Dutch of Royal Navy stores in Australian ports is embarrassing. If, however, after such reference the United Kingdom Government still decides to grant Dutch requests for such stores, then Dutch labour must be used in all loading operations. Australian labour is only to be used in regard to identification, sorting of stores from Australian material and security.
(d) While fuel and food should not be refused to Dutch warships in Australian waters, no encouragement should be given to the Dutch to expect that they can regard Australian ports as a base where fuel and food can regularly and in all circumstances be obtained.
Requests by the Dutch for major repairs to Dutch warships should be refused.
Underlying these decisions was the feeling that the Dutch were not making a bona fide effort to negotiate a peaceful settlement and that if Australia facilitated the building up of Dutch military strength under these conditions we might well stir up lasting resentment amongst the Indonesians.
5. I suggest you should see Bevin or other appropriate British representative in Paris as soon as possible and discuss with him the present situation in Indonesia. You could inform him confidentially of the Australian decisions, referring specifically to the embarrassment we feel at the apparent readiness of the British Admiralty to make available to the Dutch Admiralty ammunition stored in Australia. This last point is rather urgent, as our Service authorities wish to raise the matter with the Admiralty as soon as possible, but are waiting until an approach has first been made on the political level. in addition, however, I suggest you should emphasise the points set out in paragraph 3 above, and urge that it is necessary for some positive initiative to be undertaken by the United Kingdom at once.  As I see the position, the only move which may still conceivably stir the Dutch to make an urgent and bona fide effort to reach a peaceful settlement is for the United Kingdom Government to make it clear that if no such effort is made forthwith, present arrangements for temporary retention of British troops may have to be reviewed. Any undertaking which may have been given to permit British forces to remain after completion of the only two tasks which justify their presence in Indonesia must surely have been based on the implied condition that the Dutch were making a real attempt to negotiate.
6. Please telegraph as soon as you have taken the matter up, so that I may know any preliminary United Kingdom reactions to the general question and so that I may inform the Acting Minister for the Navy that the Navy Department can take up with the Admiralty on the official level the question of Admiralty supplies stored in Australia.