My telegram D. No. 364. [1] Reparations.

Following on the defeat of Germany the need for an agreed policy
on reparations has become urgent and we have been under increasing
pressure from the Soviet Government to appoint representatives to
the Allied Reparation Commission which it was decided at Yalta
should be set up in Moscow. We have telegraphed separately about
the difficulties which have been encountered in reaching agreement
on the composition of the Moscow Commission and though we had
hoped to secure French participation from the outset we feel as
explained in my telegram D. No. 1039 [2] that we now have no
option but to agree to the starting of discussions on a tripartite
basis.

2. Meanwhile we have been giving much thought to the problems
involved in the question of reparation and my two immediately
following telegrams [3] set out in broad outline our views on the
principles and on the machinery respectively which we propose to
instruct our delegation to put forward. At the same time it is not
to be expected that final agreement can be reached during the
course of the Moscow Conference and in our view the main object of
the Conference will be to explore the complex technical aspects of
the reparations problem. We are so informing our delegation and
asking them to treat their present instructions as provisional.

3. The position as we see it is complicated by a number of factors
including the enormous damage to German towns, the fact that
Germany will need to import goods on a considerable scale in order
to maintain a subsistence standard of living, the need for removal
of Germany's war potential and the question of territorial
adjustments. In our view it is all important to avoid a repetition
of the situation after the last war in which Germany received (and
subsequently defaulted on) loans from the Allied and Associated
Nations greater than the reparations paid. We are also deeply
conscious of the possibility of a clash between the desire to
secure a continued flow of reparations from Germany on the one
hand and the need to remove Germany's war potential on the other.

It is clear to us that destruction of Germany's war potential must
take priority though this inevitably entails reducing the volume
of reparation receipts from Germany's current production.

4. We therefore regard it as essential to establish at the outset
that-
(a) No assistance should be given to Germany to build up their
industries.

(b) Payments for essential supplies needed by Germany for
subsistence standard of living should be a first charge on German
resources even though this will tend to restrict very
substantially the extent to which we can look for reparations.

5. It is on this basis that we have worked out the proposals in my
two immediately following telegrams. We should appreciate any
comments which the Dominion Governments may wish to make on these
proposals and in particular it would be of great assistance to us
to know urgently-
(a) Whether the Dominion Governments holding German prisoners of
war intend to use prisoners as reparation labour and if so to what
extent.

(b) Whether the Dominion Governments have it in mind to make
claims to reparation in kind and if so whether they would wish our
delegation to be briefed with a view to securing provisional
allocations for them.

6. According to the agreement reached at Yalta, reparations are to
be received in the first instance by those countries which have
borne the main burden of the war, have suffered the heaviest
losses and have organised victory over the enemy. On this basis
Dominion Governments would of course be eligible to share in such
reparation as may be recoverable but no doubt there will be strong
pressure (all the more so on account of Germany's limited
reparation capacity) for reparation goods to go primarily to
countries that have suffered most physical war damage and the
question arises whether, if reparation deliveries are restricted
to the narrow limits which we suggest, Dominion Governments would
wish to participate.

7. The position of the United States is we understand in
confidence that they probably will not in fact look for any
substantial reparation for themselves (other than the proceeds of
German assets in the United States of America) but that they
propose to maintain their claim until they are satisfied that a
fair distribution to the countries whose reconstruction needs are
greatest can be agreed at Moscow or subsequently for
recommendation to the Governments concerned.

8. We should be glad to know whether the Dominion Governments
would wish for their part to take up a similar attitude to the
United States in this matter, i.e. to maintain in principle their
claim to reparation and thus secure allocations which might at a
later stage be waived at any rate in part. By so doing the
Dominion Governments would preserve their rights to-
(a) The proceeds of German assets in their countries.

(b) Their share of reparation ships (see paragraph 14 of my
immediately following telegram) and,
(c) Some reparation labour if desired.

9. We should be very grateful for earliest possible comments in
view of the prospect that discussions at Moscow will open in the
course of the next week. In the meantime we are asking the Leader
of our Delegation (Sir Walter Monckton, Solicitor-General) to keep
in touch in Moscow with Dominion Ministers there and to give them
copies of this and my two immediately following telegrams.