Your telegrams Numbers 23 and 24. [1]

1. We note that United States Foreign Economic Administration is
pressing for your 'agreement' to their latest proposals
particularly those affecting capital goods and off-shore
purchases. We had understood from your telegram 399 [2] that you
were taking the line that the decision as to what shall or shall
not be included within the scope of Lend Lease rests purely with
the United States Government and that the question of 'agreement'
by the Governments of the British Commonwealth does not therefore
arise. We have adopted a similar line as indicated in our telegram
10 of 11th January. [3] We feel it is important to maintain this
position and we therefore suggest for your consideration that the
reply you give to the United States Foreign Economic
Administration be worded in such a way as to avoid any possibility
that it may be subsequently quoted as indicating that the scope of
Lend Lease has been restricted by agreement with British
Commonwealth Governments. We, for our part, feel we must adhere to
the attitude outlined in our telegram 10.

2. Until we received your telegram No. 24 we had not seen the text
of the note from the United States Secretary of State outlining
the latest United States proposals for further restricting the
scope of Lend Lease. These proposals go further than anything
which we have so far had indicated to us and we have not yet had
an opportunity to examine them in any detail. However, as you
propose replying to the United States note [on] January 26th we
offer the following preliminary comments on the various categories
of goods listed by the United States authorities :

(a) Capital Goods
3. Your telegram 23 was mutilated in transmission and we are not
entirely clear as to the nature of the latest United States
proposals. We gather, however, that Foreign Economic
Administration now wishes to apply the ruling excluding certain
classes of capital goods from Lend Lease not only to orders placed
after 15th November, 1943, but also to shipments after November
15th 1943 under already existing indents. [4] If this
interpretation is correct we are, of course, in full agreement
with your view that the proposal should be resisted and that
Foreign Economic Administration should be induced if possible to
limit the application of the ruling to requisitions filed after
15th November, 1943.

4. We do not know whether you are aware that so far as machine
tools are concerned Foreign Economic Administration has already
put forward a proposal which would have the effect of applying the
capital goods ruling in certain instances to Lend Lease machine
tools imported into Australia long before the 15th November ruling
was promulgated. We have been notified that any Lend Lease machine
tools which have been out of use for a period of 60 days are to be
returned for retention in a Foreign Economic Administration
inventory and that they will be released from this inventory for
use on some other project only if payment is made in cash.

5. We have received from our representatives in Washington a list
of the Kolesnikoff code [5] numbers which Foreign Economic
Administration proposes should constitute the list of the
ineligible capital goods [6] but we have not yet had sufficient
time to examine it in detail. The inclusion of maintenance and
repair parts, however, appears unwarranted as these are more in
the nature of consumable stores than durable equipment. We note
that agricultural machinery has been deferred for further
consideration. We, of course, feel very strongly that we should
not be called on to pay cash for the equipment we need from the
United States to step up the production of food-stuffs for supply
to the United States Forces under Reciprocal Aid.

6. We note that Foreign Economic Administration has stated that
the listed capital goods will be regarded as ineligible for Lend
Lease only if they are required for non-military purposes. A great
deal, of course, depends on the definition of 'non-military
purposes'. We have had a recent example of Foreign Economic
Administration rejecting as ineligible for Lend Lease a
requisition for sewing machines to be used by the Australian Army
in forward areas for repairing parachutes.

7. We have been informed that any items included in the United
States Army Supply Programme are not subject to the capital goods
ruling and are eligible for Lend Lease. From our point of view,
however, the division between the items in the United States Army
Supply Programme and the items procured through Foreign Economic
Administration is entirely arbitrary and we are more concerned
with the use to which the goods are to be put in Australia than
with the procuring agency in the United States.

8. However much we may disagree with particular Foreign Economic
Administration rulings, we recognise that where the items are
required for the exclusive use of Australia it is entirely a
matter for the United States Government to determine whether or
not supply should be granted on Lend Lease terms. However, where
capital goods are required from the United States to undertake or
step up production to meet the demands of the United States Forces
under Reciprocal Aid, we feet that there should be no question as
to Lend Lease eligibility. in those cases where the equipment is
required wholly for the purpose of producing commodities for the
United States Forces we would certainly not be willing to pay
dollars for it. If Lend Lease supply were refused we should throw
the responsibility for obtaining the necessary equipment on to the
United States Army authorities.

(b) Off-Shore Purchases
9. Petroleum is the most important item in this category so far as
we are concerned. We are at present studying the position arising
from the recent United States decision to discontinue the supply
of certain classes of petroleum products to Australia from the
United States West Coast. We are being supplied to a limited
extent from Talara and we shall in future be obliged to draw a
very large part of our requirements from the Persian Gulf area.

Talara oil is being Lend Leased but we are informed that Bahrein
oil is not regarded as being Lend Leasable. The financial
implications of this change in the source of supply are serious
from the Australian point of view particularly as we are supplying
large quantities of petroleum products to the United States Forces
under Reciprocal Aid. The question is one of first rate importance
to us and as soon as we have completed our review of the position
we propose taking the matter up with you through the Australian
High Commissioner. We feel, however, that the case should not be
prejudged at this stage by any message to the U.S. authorities
indicating acceptance of their proposal to exclude all off-shore
purchases from Lend Lease. We regard it as of the utmost
importance to keep the way open for further negotiations on
petroleum products.

(c) Civilian goods for the Middle East
10. This is, of course, of no direct interest to us and we offer
no comment on it.

(d) Pulp and paper
11. We have recently adopted the policy of obtaining as much as
possible of our requirements of pulp and paper from Canada but we
will still have to obtain substantial quantities from the United
States. So far as paper is concerned Government orders to meet the
needs of Australian Departments and the Australian and American
services in this area have practically preempted Australian
domestic production. Our requirements from the United States for
the second six months of 1943 were initially ruled ineligible for
Lend Lease by Foreign Economic Administration but after we had
made strong representations to them they agreed to reinstate our
requisition. We would certainly wish to reserve the right to make
further representations to Foreign Economic Administration for
Lend Lease treatment of our future requirements of paper and pulp
from the United States.

(e) Tobacco for the Armed Forces
12. We fully support your proposal to try to obtain an assurance
that tobacco for the forces will continue to be supplied under
Lend Lease.

(f) Other Controversial Items
13. We feel it is not possible to offer any useful comment until
the various categories of goods and services mentioned under this
heading are more clearly defined. We should be glad of any
elucidation you can offer particularly in relation to the
reference to the rental or charter of vessels. We should
appreciate the earliest possible advice if there is any suggestion
of excluding from Lend Lease freight charges on goods carried in
U.S. vessels.

14. Whilst recognising the general desirability of dealing
expeditiously with this matter we must point out that it is not
possible to deal with such important questions in the time limit
laid down by you in your telegram.