My dear P.M.,
Hankey  had a heart to heart after-dinner conversation a few days ago with an ex-Minister in the late Labour Government, from whom he got the definite impression that they are not at all hopeful about their chances at the next election. The renegades from the Liberal Party to the Labour Party are not at all cheerful about any coalition with the Liberals, as they know how unpopular they are with the Liberals and that they would individually meet great opposition in getting office in the event of a Liberal- Labour majority. These people are the Rt. Hon. C. P. Trevelyan , Lieut.-Commdr. the Hon. J.M. Kenworthy , Arthur Ponsonby , the Rt. Hon. Noel Buxton  and Lord Arnold. 
The other two prominent Labourites who came to the Labour Party from outside are Lord Haldane , who presumably has outgrown a desire for office, and Lord Parmoor , who was a Tory before he crossed over. Lord Thomson  started life as a Labourite and was made a Peer by the Labour Party from being a retired R.E. officer.
Lloyd George  and Ramsay MacDonald  I do not like each other; but as a pis aller Lloyd George will be willing to serve under MacDonald as Prime Minister.
Winston Churchill  has lately been thinking hard about how he can save money in view of his forthcoming Budget, and has apparently seized on this blockade question  as a potential lifebelt. He has leanings towards some arrangement with the Americans. Hankey has had indications of the above and very much hopes that it doesn't mean reopening the question again when he had it all nicely tucked up in a Committee of which Winston was not a member.
I send you from time to time copies of the telegrams that are being exchanged regarding the trouble between Canada and Mexico, not that it has any real interest for us but rather because you may wish to have on record a typical case of how a foreign Consul- General may mix himself up in the domestic affairs of the country to which he is accredited.  The papers are of interest but not of sufficient importance for you to read.
The Foreign Office are rather perturbed that it may result in this country having to break off relations with Mexico. Anglo-Mexican diplomatic relations are of infinitely greater value to Great Britain than they are to Mexico. There are large British interests in Mexico, but no Mexican interests in England. The same applies to Canada. The Mexicans are proud and stiff-necked and they rather like humbling a great power.
Canada has apparently been rather foolish over the whole matter.
If Mackenzie King  had reported the incident to the Foreign Office as soon as it occurred, they say they could probably have smoothed it over, but the Canadians let so much time go by that the Mexican Consul-General at Ottawa  was able to get his own story into his own Government, who immediately set about raising public opinion in Mexico City against the Canadians, with the result that the situation was out of hand by the time Canada asked His Majesty's Government to come to their assistance. It looks now very much as if the Canadians will have to eat humble pie, or else be the cause of His Majesty's Government breaking off relations with Mexico, which would be a real case of the tail wagging the dog.
The Government enquiry is proceeding in the unfortunate 'Francs' case , in which Gregory , O'Malley  and Maxse  are involved. The French press treats the matter in the way one would expect-the non-Socialist section records the disclosed facts fully but suspends judgment until the affair is thrashed out-the Socialist and Left wing press leap into the air with indignation and publish scandalous articles of which the following extract from 'Humanite' is an example:-
They (His Majesty's Government) will not get it out of anyone's head that the venal 'canailles' who could traffic in influence were the same people who in 1924 inspired the Zinovief forgery.
Such is diplomacy but it must not be supposed that London is an exception.
I remember that Gregory said to me two years ago, when he was talking of the Zinovief letter , that if ever the Labour Party in this country could get anything against him, he knew he could expect no mercy. He happened by chance to have had to sign the letter to the Russian Charge d'Affaires  with regard to the discovery of the Zinovief letter and, not unnaturally, the ignorant public connected his (Gregory's) name with the affair, with regard to which he was, of course, not in any way responsible. 
I know all three men (Gregory, O'Malley and Maxse) quite well, and am very sorry for them. No doubt it was particularly unwise to have done what they are supposed to have done. None of them has any business experience whatever. I am afraid nothing can save Gregory, but I very much hope that the other two will not be completely undone.
There is, I should say, about the average amount of speculating amongst Civil Servants who have a little money, but, as far as I have come across it, it has been in securities and not in currency. No doubt this enquiry will damp down any and all forms of Stock Exchange operations by people in official positions.
Amongst the Foreign Office print going to you officially by this mail are two articles descriptive of the position in Russia-mainly with regard to the exile of the Opposition. They are of interest but of no immediate importance.
I enclose article on Australian Finance from the 'Times' Annual Financial and Commercial Review of 7th February. It is gloomy and pessimistic in tone. I understand that McDougall  is drafting a reply for the High Commissioner's approval.
In conversation with Sir Austen Chamberlain  this week, he gave me to understand that he intended to press very hard to get the appointment of the British representative to Canada (High Commissioner, or whatever he is to be called) for the Foreign Office. He realised that he would probably find opposition from Mr. Amery  on his return. However, I know that Chamberlain has been enlisting the sympathy of the Prime Minister  on his side, and my impression is that Chamberlain will win. I have heard the name of Sir F. Lindley suggested, who is at present H.M.
Minister to Norway.  It is also probable that H. G. Chilton will be considered.  He is Minister at H.M. Embassy at Washington, but is on a few months' leave in London at present.
I lunched yesterday with Sir Charles Hipwood, the Head of the Marine Department of the Board of Trade. He asked me to lunch primarily to tell me his ideas about the Italian reply to His Majesty's Government's last Note on the Italian Flag Discrimination position.  He thinks we are getting reasonably close to a satisfactory solution. He is particularly keen that we should win this argument without reservations as the result, he thinks, will have a very salutary effect on a number of other countries that have it in mind to bolster up their national mercantile marine to the exclusion of British shipping.
On other subjects he is quite interesting. He says that he has reason to think that the Americans are very scared of the possible outcome of what he says is called the 'Amery stunt' of Imperial economic solidarity. They see a great world rival in a solid British Empire, and he thinks he sees all sorts of efforts to combat it by offering baits to Dominions to fall away from the Imperial centre.
Comparing the United States with the British Empire he makes what I think is a true, if perhaps trite, generalisation that we have a large invisible balance in our favour in the shape of our national character which sets great store on fair play (based on the spirit of the public school and similar organisations), which, in general, makes us believe that success can at times be too dearly bought-a principle that it would take a good deal of effort to make the average American understand.
He is interesting about Inchcape , who he thinks is quite unconscious of the unpopularity of his company and himself. He lives for his shipping interests and the other members of his Board are terrified of him. He says it is essentially a one-man organisation and is, in many ways, an antiquated machine. Inchcape is an old man (76). He says he doesn't know what will happen to the organisation when Inchcape goes.
He can't understand how Kylsant  has built up and maintains his big shipping interests, but that as his own people always speak well and respectfully of him, he must have hidden merit which isn't open to the eye of the ordinary observer.
With regard to the Senior Air Force Officer to go to Australia.
Sir John Salmond, who commands the Air Defences of this country and who is fully in touch with the most recent 'Air' point of view, from the best information that I can get, would be the best man for you. But unfortunately his wife is to have a baby in June and it is thought that his arrival in Australia in August at earliest would be rather too long delayed. So that means have been put in train to get his brother, Sir Geoffrey Salmond (commanding the 'Air' of India), to go to you. He isn't quite as good a man as John but apparently runs him fairly close. If it is decided that Geoffrey is to go, the Air Ministry would set about posting him up in all their latest lines of thought. 
If, as I gather, you are postponing consideration of the Defence of Australian Ports until you get the papers that I have sent out, then, if the matter is not particularly urgent, might it not be a good thing to postpone it a little longer until this Senior Air Officer gets out to Australia and can let you have the benefit of his advice on the spot?
About the Gregory affair, I have since heard on the best authority that they have been able to produce no adequate defence and that it looks black for all three. They have, I am told, transgressed no written law but have contravened the unwritten standard of conduct of civil servants in responsible positions. I have heard on less good authority that Gregory's defence consisted in trying to implicate a number of other people, but it is hard to believe it.
In another letter by this mail I send you an important Cabinet paper by Chamberlain (actually written in the main by Craigie  of the American Department) on the proposed United States-French 'Renunciation of War' Pact , and on the renewal of the Anglo- American 'Root' Arbitration Treaty.  It is not worth your while to read the paper itself, but I should certainly, if I were you, read my able summary of the two treaties in letter covering (LON. 693).
An individual who might be said to be rather a good connoisseur of Cabinet Ministers tells me that Lord Cushendun is as poor a specimen as any that have come his way for many years. He was Ronald McNeill (Financial Secretary to the Treasury) and became Chancellor of the Duchy of Lancaster in succession to Lord Cecil.
He is the most vocal-indeed, almost the sole-advocate of the cession of our rights of blockade in favour of Freedom of the Seas.
I enclose cutting from today's 'Times', containing criticisms of the new Canadian diplomatic posts about to be created.
I welcome Vansittart's  appointment as Chief Private Secretary to the Prime Minister, as it will give me a line of approach to the Prime Minister and his office that did not exist for me before. I know and get on well with Vansittart and he has, of his own accord, asked me to keep in touch with him in his new job. Sir Ronald Waterhouse was a very difficult person to do anything with, and the result was that I had no real access to the Prime Minister. 
When I have got one week's mail off to you, I have the feeling that there can't possibly be anything more of interest to tell you now for some time. But as the next week matures, things crop up out of the blue and I find myself again putting down just about the same amount of material. The range is so wide, I suppose, that what one loses on the swings one picks up on the roundabouts. I find things coming rather easier now than when I was here before- material of interest to us positively flows in now.
I enclose Low's  latest political cartoon-'The Unveiling of Parliament'. I think his skill in drawing native bears stands him in good stead in drawing Lloyd George.
I am, Yours sincerely, R. G. CASEY