Lend Lease Stage II.

1. Snelling [1] has advised Dunk that Morgenthau has set dead line
of Saturday for completion of Stage II agreement. Keynes proposes
to leave for Canada early next week and will probably return
directly from there to London.

2. Keynes has pressed and apparently Morgenthau has agreed that
agreement reached will be set out in a formal document complete
with schedules which will become a firm programme for the purpose
of fixing Lend Lease supply through 1945.

3. United Kingdom delegates are convinced that this documentation
has real advantages and will simplify Lend Lease procurement.

United States, however, are certain to insert qualifying clauses
which will make supply dependent upon congressional act in
extending existing Lend Lease period, provision of Lend Lease
funds, etc.

4. The proposal which we have only had informally from Snelling is
that as Australia had a separate chapter in the presentation of
case, they will have a separate section of the agreement with
supporting schedules constituting supply programmes for:

(a) Aircraft, etc. which are handled directly in Washington.

(b) Non-munitions items (except for shipping and petroleum which
will be included in the United Kingdom programme).

5. United States viewpoint is expressed in reports from munition
sub-committees to Morgenthau as chairman British American
Committee on Lend Lease. They endeavour to place the United
Kingdom in a position of underwriter of reciprocal aid.

6. For example, the report of the sub-committee on air items
includes the following paragraphs:

'In the interest of the most efficient utilisation of shipping at
the disposal of the two countries and depending upon the
production or stock position at the time, the United Kingdom
undertakes to continue to supply air items of reciprocal aid
within the limits prevailing at the time of the defeat of Germany.

The United States representatives also recommend that as a
condition of the acceptance of the scheduled United Kingdom
requirements by the United States, the United Kingdom accept the
responsibility for furnishing reciprocal aid throughout the
British Empire and Commonwealth as required by the common
interest.'
It is unlikely that the United Kingdom will accept the
responsibility and will therefore want a separate reciprocal aid
paragraph in the Australian section.

7. Our conversations on details of non-munitions programme have
been friendly and satisfactory. We have had to make a few downward
adjustments in values but Foreign Economic Administration have
been willing to liberalise Lend Lease eligibility [2] which should
result in easier procurement. The net programme as accepted by
Foreign Economic Administration after making up and down
adjustments is 103-5M dollars.

8. However, we are by no means convinced that execution of final
agreement will result in any substantial advantage for Australia.

But if an agreement is entered into (and this seems to be certain)
our absence from it would be apt to excite comment and it would be
almost impossible to get our reasons understood.

9. We have not yet been able to obtain any form of words which
either the United Kingdom or United States suggest should be
included in the Australian section on reciprocal aid.

10. Dunk has informed Snelling, however, that there is little
likelihood that we would be able to sign an unqualified
undertaking to furnish reciprocal aid either-
(a) On present magnitudes or
(b) Without regard to areas.

He has indicated that the furthest that we might be able to agree,
would be to include a paragraph to the following effect:

'The Australian Government will continue to supply to the United
States forces, as reciprocal aid, such goods and services as it
now furnishes and which are locally available. The underlying
principle governing such supply to continue to be as expressed in
the reciprocal aid agreement between the two countries which
provides for the general principle to be followed in providing
such aid as that the War Production and War Resources of both
nations should be used by the armed forces of each, in the ways
which most effectively utilise available materials, manpower,
production facilities, and shipping space and that while each
government retains the right of final decision, in the light of
its own potentialities and responsibilities, decisions as to the
most effective use of resources shall, so far as possible, be made
in common, pursuant to common plans for winning the war.'

11. This, of course, contains nothing that is not in the present
reciprocal aid agreement [3] but it lays emphasis more on common
use of resources and decision by common agreement without
specifically mentioning the area limitation. If it is acceptable
(and we don't know this yet) it will have the effect of leaving
discussion and decision in Australia which fits in with our
reciprocal aid administration.

12. We would like to have your comment on the two fundamental
questions, viz:

(a) Whether we should agree to a separate Australian section of
the agreement;

(b) Or some form of words which we can approve covering reciprocal
aid.

13. After consultation with Australian War Supplies Procurement
and Dunk we feel that we [4] hold out against an agreement but
that we could go no further quickly on the reciprocal aid section
than the words given in paragraph [10] above.

14. It is essential that we should have a reply before Saturday.

We appreciate the difficulty which we make for you in asking for
this with such short notice. We knew nothing of Morgenthau's dead-
line until last evening.