Following is an appreciation of the present situation in
Indonesia. [1] The Dutch-Indonesian negotiations on implementation
of the political and economic provisions of Linggadjati reached a
deadlock about a fortnight ago. Since then there have been ups and
downs in the degree of tension but talks have been abortive and
all evidence suggests that the situation is now very grave.

1. Military. Military considerations have been tending
increasingly to dominate all other questions and there are strong
indications that a crisis involving renewal of outright warfare is
imminent. The economic impasse is now being referred to as
'politico-military' impasse. We are informed that Hirschfeld,
Economic Adviser to the Dutch Foreign Office who accompanied Beel
and Jonkman [2] stated privately to the United Kingdom Consul-
General that there is now no hope whatever of the Dutch-Indonesian
negotiations solving the economic deadlock. (The source of the
information is most confidential.) We also learn on excellent
authority that Beel and Jonkman have come to the firm opinion
that, if necessary, force must be used. This corroborates earlier
information that the Dutch authorities recently decided, in
principle, on the use of force in the last resort. The United
Kingdom Military Attache, Van Der Post, talked to General Spoor
this morning. Spoor spoke of increased tension in Modjokerto area
instancing kidnappings by Indonesians and destruction of bridges.

The Attache observed to us that the atmosphere and content of
talks was reminiscent of that on earlier occasions preceding
military action by the Dutch. (This is also most confidential.)
The Dutch are known to have a plan for a series of rapidly
coordinated moves to occupy roads and inland cities, establish
themselves on the South coast and subdue the whole of West Java as
a preliminary to extending control over the remainder of the
island. Far from reducing their forces, they will have well over
100,000 troops in Java by the end of July, i.e. at least a
division more than before the signing of the Linggadjati
agreement. They believe that they can succeed in a blitzkrieg.

Sjahrir confesses that the Indonesians lack material for offensive
action but our impression from his remark is that he believes that
the Indonesians can hold at least the country side, i.e. the
greater part of the interior. Good opinion is that the Dutch can
take the main roads and towns, the air arm having been shown to be
extremely effective against Indonesian forces.

2. Economic. The Dutch opinion is that the Indonesians have been
using delaying tactics. The Dutch are adamant on single control of
foreign trade and exchange for the whole area, (i.e. the Republic
of N.E.I. and newly formed states). They consider the Republicans
technically incapable of carrying out a separate system of
external economic relations which they wish to set up. In any case
the Dutch want an integrated system within the economic framework
of the Dutch Empire. Meanwhile they cannot obtain estate products
from the interior or begin reconstruction on estates. Their
imports into the area are roughly twice the value of their
exports. In the conversation referred to, Hirschfeld said that the
Dutch are rapidly exhausting their foreign exchange in the
maintenance of their forces and cannot afford waiting much longer.

This confirms the conclusion arrived at by Richardson when here.

[3] The Indonesians refuse to conclude economic agreement covering
trade, foreign exchange, food control and return of estate owners,
until the Dutch reduce forces. Sjahrir in our talk with him on
Saturday said that a compromise on economic questions was
impossible for the Indonesians before the Dutch forces were
reduced, as they would have no guarantee of fulfilment of
agreements by the Dutch, while the latter possessed the means of
using force. The talks between Van Mook, Hoogstraten, Sjahrir and
Gani on Saturday morning reached no conclusion on economic issues.

3. Political. The root of the difficulties is profound mutual
distrust. We have repeatedly noticed this in our discussions with
each side. The cracks which were papered over at Linggadjati are
now wider than ever. The economic and military aspects have been
dealt with in paragraphs 1 and 2 above. Even less progress has
been made on the question of foreign representation, the
Indonesians seeking independent Republican representation abroad
for all matters concerning the Republic and cooperation only on
questions of common concern, the Dutch insisting on inclusion of
Indonesians in their foreign service. As for the new states of
East Indonesia and West Borneo, the Sundanese move for a state in
West Java, and projected state of East Borneo, the Indonesians say
that failure to consult the Republic is a breach of Linggadjati.

They regard these entities as puppet states designed to whittle
down the area of Republican influence and not conceived in the
spirit of the Linggadjati. They are confident that Soekarno's
influence will easily preserve Republic control in West Java, and
he is at present touring the area.

The Dutch clearly have an interest in any. such division in Java
as evidence of political disunity amongst the Indonesians and thus
tending to support doubts abroad as to their capacity to construct
a workable state. The United Kingdom Representatives here gathered
from high Dutch officials tha[t] they believe that world opinion
might accept a fait accompli; the Dutch say that a military
solution would be achieved very quickly. They are endeavouring to
persuade the United Kingdom that such a solution would be in its
interests since resumption of N.E.I. trade would enable the United
Kingdom to use large United Kingdom holdings in Guilders and
exports especially to the United States would strengthen the
sterling area generally. They also assert that the alternative of
Dutch withdrawal from Java would result in chaos and an increase
of Communist influence which they say is already important. The
best informed United Kingdom officials here do not accept
statements concerning Communist influence. We consider the
economic argument is also hollow, as military 'solution' would
result in endemic disturbance and guerilla warfare during which
little active production could be carried on. It is also likely
that the present stocks would be destroyed before the Dutch could
recover them. Sjahrir's record and personality suggest that while
averse from violence he would be a dogged fighter and confidence
the Indonesians clearly have in him suggests that he would be a
rallying factor in a prolonged war of resistance. The Dutch seem
to us to be quite blind to the fervour of the Indonesian
nationalists, perseverance and strength of will of the people
sympathetic for independence. This obtuseness is one of the major
elements of danger.

4. Van Mook appears at the moment to be interested in it as a
peaceful solution. He has been warned that he is to be replaced by
Van Meynen, ex-Minister for War, but we understand that he is not
anxious to go, at any rate without some positive achievement to
his credit. His proposed visit to the United States has been
cancelled. [4] He is now making a last minute bid for a political
solution along the lines of an interim Federal Government. Gani
told us of this approach which was discussed on Saturday morning.

Van Mook is now engaged on a draft. If he achieved agreement with
the Indonesians on this there might be hope of a solution of
economic and other issues. Failing this, we are of the opinion
that an armed clash on a large scale in the very near future will
probably be unavoidable unless some initiative were taken by
interested powers. We have heard nothing to suggest that recourse
to Article 17 (2) of Linggadjati (Arbitration) is being considered
before resort to force. We will endeavour to keep you informed of
progress of proposal for an interim Federal Government.