500 Critchley to Department of External Affairs

Cablegram C18 THE HAGUE, 4 October 1949, 1.44 a.m.

TOP SECRET

Economic and Financial Talks over the week-end, which were held in a good atmosphere, centred on the two difficulties outlined in paragraph two of my C.17. [1] The Netherlands Delegation appeared to be ready to meet the Indonesians by giving way to its earlier demands for participation in the decisions on monetary and banking policy, but there was a wide discrepancy between the respective views on the Indonesian debt.

2. The Netherlands Delegation put forward orally five points which it stressed were tentative and subject to agreement being reached on issues. The Netherlands provisionally:-

(a) Agreed to reduce the total amount of the Indonesian debt to the Netherlands by five hundred million Guilders.

(b) Suggested that additional guarantees might be required in connection with the repayment of the debt; in particular that the tin pledge whereby the Netherlands maintained a lien on the proceeds of exports of tin should continue and that a small proportion of all foreign exchange from exports should be ear- marked for amortisation and interest. It was explained by the Netherlands that as all parties wanted a prosperous Indonesia, no amortisation would be required for the first two years and from then on would be arranged according to an easy plan.

(c) Offered to keep open the account providing Netherlands credits to Indonesia. The amounts would have to be considered further.

(d) Expressed regret that the Indonesians were only prepared to hold consultations with the Netherlands regarding the appointment of the President and Directors of the Note Issue Bank for the interim period between the transfer of sovereignty and the enactment of the new Central Bank legislation.

(e) Stressed willingness to help and advise the new state if requested to do so on matters of monetary policy, particularly those connected with the application of international regulations, such as the Bretton Woods Agreement.

3. Indonesia in due course welcomed the offers of assistance, but could not accept the Netherlands estimate of the Indonesian debt.

They stressed that they were not prepared to take over the debts connected directly or indirectly with military actions against the Republicans.

4. The following figures (all in million Guilders) were put forward for the Indonesian debt as at August 1949: Netherlands external, three thousand one hundred and sixty-seven (subject to possible reduction by five hundred million of debt due to the Netherlands); internal, two thousand nine hundred and ninety-six;

total six thousand one hundred and sixty-three. Indonesian estimate: external, one thousand eight hundred and thirty-eight point 8 (of which one thousand six hundred and fifty-eight due to Netherlands); internal, seven hundred and sixty-one point two;

total two thousand six hundred.

5. It will be seen that Indonesia have rejected three thousand five hundred and sixty-three million Guilders of the debt. As complete data have not yet been made available their figure is based on:-

(a) an estimated average of one hundred thousand men in the Army from 1946 to 1949 inclusive;

(b) an estimate that the costs per capita per diem for Indonesia could not have been less than thirty Guilders;

(c) an estimate that a normal army in Indonesia would not have been more than thirty-thousand strong;

(d) assumption that five hundred and thirty-nine million Guilders of civil expenditure is indirectly attributable to military campaigns or expense in the interests of Netherlands nationals.

6. Indonesians intend to argue that instead of Indonesia being in debt to the Netherlands, the Netherlands are indebted to Indonesia. Argument runs, internal Indonesian debt (Netherlands estimate) two thousand nine hundred and ninety-six to be assumed by the R.I.S. (Indonesian estimate) seven hundred and sixty-one point two, balance two thousand two hundred and thirty-four point eight constituting claim of R.I.S. on the Netherlands. Thus, the actual position according to Indonesia is the debt of the R.I.S.

to the Netherlands one thousand six hundred and fifty-eight; debt of the Netherlands to R.I.S. two thousand two hundred and thirty- four point eight, balance of five hundred and seventy-six point eight million Guilders as net debt of the Netherlands to the R.I.S.

Van Maarseveen believes that military expenditure has been over- estimated by Indonesia and that the Netherlands have already met major part of expense. He has suggested working group should study informally the question of how much has actually been spent on military campaigns. The Netherlands Government, which had previously agreed to five hundred million Guilders reduction, is considering its position this afternoon.

8. Question of debt has now become the focal point of the Conference. Issues are so complicated and emotional that they could easily prejudice the successful outcome of The Hague talks.

My own efforts are therefore directed to limiting The Hague agreement to general principles and to leaving to a technical commission, after the transfer of the Sovereignty, the task of assessing the debt and working out a scheme of amortisation. It could be agreed that such a debt commission could call on independent assistance such as might be available from international banks. Indonesians are not averse to such proposals but the Dutch are anxious to have the debt question formally decided as part of the agreement to transfer the Sovereignty. On present indication, Indonesia might be prepared to write off what they regard as a Netherlands debt but are unlikely to adjust the balance due to the Netherlands.

1 Document 499.

[AA : A1838, ts383/6/1, i]