For Dunk from McFarlane.

Your 1026 [2] and W.10269. [3] Lend Lease Stage 2.

1. Further to our 1700 [4], if United States authorities raise
questions of Reciprocal Aid you should give due emphasis to our
liberal and realistic implementation of present agreement. United
States forces are operating in areas well beyond Australian
territory and our practice has been to finance as Reciprocal Aid
all supplies made available to those forces.

2. In considering the future application of the Reciprocal Aid
Agreement two questions arise (a) the volume and categories of
supplies which it will be possible for Australia physically to
make available in the changed circumstances (b) the financing of
those supplies.

3. With regard to (b) the Treasurer feels that, for the time being
at any rate, we must continue to finance as Reciprocal Aid any
supplies made available to the United States forces and although
this will require Government consideration and decision I think we
may assume the Government will adopt the Treasurer's view.

4. With regard therefore to (a) and (b) although we would be
prepared to examine any further requests we could not contemplate
giving 'assurance that Reciprocal Aid be continued at somewhere
about the present magnitude'. (Your 1026.) Any definition of the
area, magnitude and categories of our future Reciprocal Aid must
take account of recent and projected developments such as
(i) changes in location of United States forces and bases which
because of shipping and other factors may make United States of
America a more convenient source of supply,
(ii) need for Australia to supply British or other Allied forces
which may be based in or upon Australia,
(iii) easing of restrictions on civilian production in other
Allied countries,
(iv) food surpluses in United States of America,
(v) drought conditions in Australia,
(vi) the exhaustion of stocks of civilian goods in the hands of
the consumer and the merchant.

5. With regard to (iii) and (iv) persistent reports have been
reaching us of trend in United States of America towards easing of
restrictions on civilian production and also on food surpluses in
United States of America. On latter see, for example, Director-
General's Weekly News letter No. 16 of October 9th, paragraph 10.

[5] Further the United States Administration has announced a
degree of reconversion to a peace-time economy at the end of the
German war which will be quite impossible for Australia. It is
difficult and perhaps dangerous for you to place much emphasis on
this aspect in your discussions but in considering the future
scope of our Reciprocal Aid we should have in mind the War Cabinet
direction to provide for the essential needs of the civilian
population 'on standards appropriate to the present stage of the
war, and the civilian standards of the countries whose forces will
be supplied from Australian sources' (5th July, 1944). [6]

6. Further in approving on 19th October [7] the manpower re-
allocations advised in my 1699 [8], War Cabinet noted that it had
not been

possible to make provision on the prescribed standard for the
essential needs of the civilian population and War Cabinet decided
that the further review to be made in December should be on the
basis of the release from the Services at the earliest possible
date of an additional 40,000 men. At the same time War Cabinet
decided on measures to reduce progressively the supply of building
materials to the United States forces and also that in the
allocation to United States forces of food supplies in 1945
special attention should be given to the need to relieve the
strain on Australian manpower by arranging for the United States
forces to ship direct to forward bases larger supplies of canned
and other processed food from United States of America. In the
latter connection the serious drought conditions are of course
intensifying the difficulties of food production.

7. On (ii) War Cabinet noted that the manpower re-allocation made
no provision for British or other forces which may be based on
Australia.

8. I would be glad to have your views on whether, if United States
authorities in Washington do not raise question of our future
Reciprocal Aid, we should ourselves initiate discussions.

9. My present feeling is that if discussions in Washington were
purely on question of extension of area there would be no
advantage and some disadvantages in our taking the initiative. It
might be best for Australia to retain the present formal
limitation and continue to determine the scope of our Reciprocal
Aid on lines agreed between the Prime Minister and General
MacArthur from time to time.