Events of the last weeks have unfolded more or less as expected.
Notwithstanding the courageous efforts of Hatta and the Republican moderates to find a basis for a settlement, the Netherlands have persisted in unacceptable demands. The moderate nationalists are now convinced the Republic has gone as far as possible and that the Dutch are determined to reimpose colonialism in Indonesia.
2. Even if Hatta's concessions had been accepted in the spirit in which they were made, he and his followers would still have had to wage a tremendous fight to have them accepted by the Republic as a whole. All political parties, with the exception of the Masjumi were strongly opposed to Hatta's Aide Memoire , and there were many Masjumi sections seriously in doubt as to whether or not he had gone too far. The closed session of the KNIP on December 1 severely criticised Hatta's policy, but it did not ask Hatta to resign. The Dutch are, therefore, missing a golden opportunity to settle with the Republicans who would do business with the Netherlands and who can be relied upon to co-operate in the reconstruction of Indonesia.
3. The talks broke down on the powers of the High Representative of the Crown, and particularly on his authority over the army, during the interim period. The latter has always been a vital issue. You will remember it proved a stumbling block in the negotiations prior to the start of the police action last year.
4. In my telegram I have outlined Stikker's report (My K.202 ) to the Good offices Committee on the last of the informal discussions. Now, for the sake of completeness, I am setting out a more detailed summary:-
(1) Talks with Hatta were continued on Saturday evening on the subject of the powers of the High Representative of the Crown in the interim period, particularly in relation to the army.
(2) The points at issue eventually boiled down to the question of sovereignty in the interim period.
(3) Hatta was prepared to accept Netherlands sovereignty in principle but in practice said that there should be a protocol or gentleman's agreement which would deny the Netherlands the exercise of that sovereignty in certain cases.
(4) In particular the Republican Prime Minister insisted that the Netherlands should not have the right to use Dutch forces against the Indonesians against the wishes of the federal interim government.
(5) Hatta also maintained that the federal forces should be under the control of the federal interim government.
(6) These Republican claims were unsatisfactory to the Dutch and could not be accepted within the terms of their instructions.
(7) The Netherlands regard Hatta's attitude as inconsistent with his Aide Memoire and with Article 1 of the six additional principles  of the Renville Agreement.
(8) Stikker said that the disagreement was a tragedy and that his mission had failed. He saw no prospect of an early settlement with the Republic.
(9) The Netherlands Ministers intend to recommend that the Government proceed immediately to the formation by the middle of December of an interim federal government without the Republic.
(10) Stikker had insisted that the draft bill for the formation of the federal interim government should be amended to include an additional clause which would leave the door open for the Republic to join.
(11) This clause had already been drafted and would permit the bill to be modified without reference to the Parliament so as to meet the terms of any subsequent agreement with the Republic.
(12) Stikker expressed his willingness to continue to seek all possible means of finding a settlement and to come to Indonesia as Beel's number two if this might help.
(13) The need for the G.O.C. to report the failure of the direct talks was acknowledged, but Stikker felt that the Committee should wait until the Ministers had reported to their Government at The Hague and the Government had made an official report to the Committee.
(14) Stikker expressed his appreciation of Hatta as an individual and for Hatta's efforts to find a settlement.
5. The Republican Delegation has reported to the Committee on the informal talks between Hatta and the Netherlands Ministers (Appendix I).  The Committee expects to receive a parallel report from the Netherlands Government today.  Much depends on the substance of the Netherlands report, but in view of the Republican report and the information already given to the Committee, we shall most probably report a serious situation to the Security Council by telegram on Sunday, December 12th.
6. Hatta insists there should have been no misunderstanding of his stand against the unrestricted use of Dutch troops. In drafting the Aide Memoire he made his position clear to the Netherlands advisers who were then in Kaliurang. Hatta draws a distinction between a state of emergency and a state of insecurity. In a state of emergency the Netherlands would control all forces in Indonesia if the interim federal government calls for the assistance of the Netherlands armed forces. Such an emergency would, for example, be an external threat of aggression. On the other hand a state of insecurity does not necessarily imply a state of emergency but merely a situation in which armed forces would be required to assist the police. I believe Hatta is sincere, but the drafting, to say the least, is unfortunate.
7. The Dutch interpretation of the Aide Memoire is unacceptable to Hatta. In any case it would be politically unacceptable to the Republic. All political parties are firmly opposed to any provision which would permit the use of Dutch troops against the wishes of the interim federal government for maintaining internal security in Indonesia or which would place the federal army under Dutch control. When rumours circulated in Djokjakarta that Hatta had given way on these points large sections of the TNI including the Siliwangi units (the West Java units which are the best troops of the Republic) took unanimous decisions to fight on if the rumours proved true. Since in practice Dutch forces could not be used against Indonesians in opposition to an interim federal government without creating a complete breakdown in the Indonesian situation, I find it difficult to understand why the Dutch, if sincere, refuse to give way on this point, if only because to do so would strengthen Hatta and the moderate groups. Clearly a clean and satisfactory settlement of the Indonesian dispute depends on a Dutch agreement with the moderates, and the control of the latter over the people of Indonesia. Any paper concessions that can be given to Hatta would facilitate the latter.
8. At present Hatta's political position within the Republic appears to be strong. His popularity has certainly increased since the breakdown of the informal direct talks. Indeed the failure of the talks following the rumours of Hatta's capitulation has brought a wave of relief. Sukarno also expressed himself strongly on the Republican minimum needs. Although he may strengthen the Cabinet he insisted that on no account would he replace Hatta as leader.
9. Hatta has explained the breakdown in the talks to a United Press correspondent. His report, as published in 'Aneta' provides a good summary, which I am attaching (Appendix 2).  While on the subject of the press, I also enclose (Appendix 3) a copy of an attack on the staff of the G.O.C. which appeared in the local Dutch press over the weekend.  I believe the attack is directed against a member of the Secretariat, but it will be apparent that the comment of the G.O.C spokesman 'nonsense' is appropriate and that the atmosphere here is not an easy one.
10. Latest developments to my mind justify the complaint of the Republic that the Netherlands have never intended to negotiate on the basis of the Cochran plan. Over the past 3 months they have cleverly hedged so as to maintain their position internationally and so as to complete their preparations for the construction of an interim federal government without the Republic. These preparations are now completed with the formation of the State of East Java this week. It remains to be seen how quickly the final structure can be erected.
11. In the last few days cracks have appeared in the Federal facade. Some dissatisfaction among the Federalists is reported to be due to the failure of the Dutch to keep them informed of the progress of the Ministerial discussions with Hatta. This is a likely story since even the Acting Chairman of the Netherlands delegation, Schuurman, knew little about last Saturday's talks. In any event, the Federalists are hardening against accepting any responsibility for further police action against the Republic.
Adil Poeradiredja, Prime Minister of Pasundan, is leading the objections and is flatly opposed to any form of Dutch military action. Close behind him is Anak Agung Gde Agung, Prime Minister of East Indonesia, who puts the case rather more cautiously that the federal interim government must take no responsibility. Both Adil Poeradiredja and Anak Agung Gde Agung have been in close contact with Hatta and Hatta's representative in Batavia, Dr.
Darmasetiawan. They have assured Darmasetiawan they will insist that their joining the federal interim government be conditional on a firm agreement that that Government will not take any decision for military action against the Republic. The other federalists are more inclined to say that a police action is a Dutch concern and that the Netherlands had better get it over.
12. Adil Poeradiredja appears to be standing out against the formation of a federal interim government without the Republic.
Pasundan party leaders and the Prime Minister of East Indonesia have told Darmasetiawan they will insist on the interim government including the Republic-the Pasundan party leaders claiming they will make a positive statement. Both Poeradiredja and Anak Agung Gde Agung are reported by Darmasetiawan to be convinced that Hatta and the Republic have made every effort to reach a settlement.
13. I have learnt that the more nationalist-minded federalists had already endeavoured to limit Netherlands control of the army in Indonesia in the Interim period. This is supported by an article in 'Het Dagblad' of December 7th, which I am attaching as Appendix 4. 
14. The Federalist paper 'Warta Indonesia' (Batavia), which is considered as giving a fair indication of the views of federalist- minded Indonesians in Batavia has outlined the various solutions which could be found in the Indonesian problem. I attach a translation of the article as Appendix 5. 
15. Republicans in Batavia who are in the 'moderate' camp are gloomy about the failure of the talks. Their feelings seem to be hardening against the Dutch and at this moment there is a spiritual readiness to face a police action with all its consequences.
The Dutch on their part seem to be incapable of appreciating the force of nationalism.
16. A similar hardening attitude is noticeable in Djokjakarta. I understand that Hatta on his return on Sunday, December 5, conferred with army leaders. Such was the feeling that the talks at Kaliurang were peace or war talks, that all precautions were immediately taken against Dutch military action. Within a few hours bombs were placed under all important buildings and bridges and general preparations were made for scorched earth and guerrilla activity.
17. The morale of the Republican army following successes against the Communists is reported as high. The morale of the people also seems good and in contrast with the period immediately before Linggadjati and in July this year there were no signs of excitement in Djokjakarta but a calm determination to meet the new situation.
18. The Dutch press in Batavia continues, of course, to solicit military action. This is the typical line of Dutch morning paper, 'Nieuwsgier', which is the best of the poor Dutch press in Batavia, 'Now that the talks have failed there are only two courses open to the Netherlands, to leave the Republic alone or to take military action against it.' Needless to say, 'Nieuwsgier' believes that because of 'the Republic's responsibility' for the unrest in Netherlands territory, the latter is the wise decision.
19. There is one aspect of military action which the Dutch might do well to consider. At present Hatta has many thousands of members of irregular armed bands in prison camps. Some estimates place their number as high as 40,000, a good estimate is probably about 30,000. These prisoners would certainly be released if the Dutch were to advance and since they are the most competent guerilla fighters in Indonesia this is a prospect of some concern for the Netherlands.
20. For all the talk of military action I feel that for the time being the possibility is remote. The Americans have obviously taken a very strong stand and are confident there will be no police action. I have been informed by the British Consul-General that Beel told the American Ambassador at The Hague that the Queen had instructed him to find a solution without bloodshed.
21. I know the Dutch (Stikker, for instance) consider that the formation of an interim government without the Republic will make things difficult for the Republic. I am not sure, however, whether they realize the difficulties they themselves will be up against.
We may expect increased disturbances and unrest which will begin in earnest after January 1st, 1949, and there may be much more concerted action from Asiatic countries, such as India to assist the Republic. Some Republicans put it this way. If the Dutch go ahead we will be able to find out who is right. For our part we are sure the Dutch efforts to form an interim federal government without the Republic will fail. Many Republicans believe they can live alone providing the Dutch do not interfere.
22. I am convinced the Netherlands intend to go ahead and complete their series of faits accomplis. They will endeavour to use the interim federal government to bring pressure on the Republic and endeavour to force it to join the Government on Dutch terms with the same status as the other States. My own opinion of probabilities at present is that the formation of an interim federal government without the Republic will make a negotiated settlement of the dispute much more difficult, that disturbances in Indonesia will grow alarmingly next year and that the Dutch will eventually attempt to use these incidents to justify military action against the Republic.
23. It was officially announced on December 6 that Sukarno would accept Nehru's invitation to visit India. I believe that his departure will not be delayed long. Sukarno seeks to avoid, however, giving the impression that he is deserting the Republic.
Sukarno's visit may be the beginning of a much stronger Indian policy towards Indonesia and I shall be most surprised if Sukarno confines his trip to India.
24. The Committee plans to leave by train for Kaliurang on December 15th for the regular visit of three weeks which it postponed to meet Dutch wishes during the ministerial talks.
Certain press correspondents have been advised by their Dutch colleagues not to make this trip. I hope this will not mean that you may be looking for a new Australian delegation for Batavia next week.