42 Embassy in Washington to Department of External Affairs

Cablegram 156 WASHINGTON, 4 February 1948, 7.30 p.m.

SECRET

Indonesia You will recall that in my telegram No. 133 of 28th January [1] I advised that Armour had said he would communicate with me again.

Lacy, N.E.I. expert, today conveyed their informal reactions. He said that in the State Department's view of the 'six points' agreed to by Dutch and Republicans there was no doubt that sovereignty would reside during first period with the Kingdom of the Netherlands and afterwards with the United States of Indonesia of which Indonesian Republic would be one among a number of component parts. If this was correct they did not see how control of external trade by the Indonesian Republic would be possible. It would be inconsistent with sovereignty in both periods.

Lacy said he had had talks with Graham since his return. He Lacy felt that a very delicate balance had been achieved, the Dutch gaining more than the Indonesians from a short term point of view but not in the long run. It was a very precarious balance to maintain.

Armour and he, Lacy concluded, did not see how U.S. could influence Dutch in the direction of assuring control of external trade to Republic in view of agreement that had been reached regarding sovereignty. They would be glad however to know your views further.

Meanwhile we have continued to stress view that Dutch could well afford to be generous in this direction and to emphasise Australian Government's desire for U.S. Government to exercise its influence generally towards ensuring a satisfactory economic settlement.

Lacy said State Department had dealt very sternly with a large U.S. firm which had entered into highly profitable agreement with Indonesians for supply of needed goods in return for Indonesian exports. [2]

1 Document 38.

2 In January the State Department informed Matthew Fox, an American businessman, that a contract he had signed with A.K. Gani for the establishment of an Indonesian-American Corporation was unsatisfactory. See Department of State, Foreign Relations of the United States, 1948, vol. VI, Washington, 1974, pp. 150-2.

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