401 Sir Bertram Stevens, Australian Representative on Eastern Group Supply Council, New Delhi, to Senator P. A. M. McBride, Minister for Supply and Development

Cablegram 2184 NEW DELHI, 13 April 1941, 1.25 a.m.

SECRET PRIORITY PERSONAL

From Stevens to Senator McBride (to be delivered to him specially at once wherever he is in Australia).

Have completed review on number of considerations affecting the demands likely to be placed on Australia for Eastern Group countries. Had arranged to send this to you by Smith [1] who leaves here Monday morning. In view of the terms of cable from Middle East to London and repeated to us today, however, I deem it advisable to cable you following abridged extraction following [sic] my review and at the end to repeat cable from Middle East.

My review commences:-

'These considerations indicate that demands are likely to be both heavier and more urgent than had been expected or had accumulated in Australia at the time I left. Summarily stated, my appreciation of the supply position on the basis of information disclosed to me by military and supply experts who were familiar with the situation in Eastern and other theatres of activity, is that it appears to be one which will necessitate some important decisions in wartime economic and industrial policy and administration in Australia at a very early date, if Australia is to live up to the hopes and expectations of the other Eastern Group countries and implement fully its own declared policy in relation to this group.

It would seem certain that the question which must be faced immediately is that of increasing capacity for production in certain definite directions which are clearly discernible from a brief experience covering only a few weeks, which I have had of work of the Council. It is further within my knowledge, that increased demands for war supplies are likely to be made from the Eastern Group Council on Australia from centres other than those whose needs are now foreseen in this important theatre. I am therefore making this special report in order that such plans as may be decided upon can be put into operation in time to be effective to meet the situation which has already arisen and which seems likely to be interrupted in the immediate future.

Already certain definite conclusions in regard to the future developments of the supply position in the Eastern Group have arisen from the Council's deliberations, though, of course, it is too soon to regard them as complete or final. They may be set down as follows:-

(a) It seems certain that in the future the United Kingdom will be able to supply an increasingly smaller proportion of war supplies needed for Eastern Group countries and troops in the Far, Middle and Near East. Apart from the heavy demands upon the United Kingdom production of warlike and general stores for other theatres of war, the difficulties of United Kingdom production in centres under enemy attack and of shipping, need no emphasis.

There are, of course, many important items in the schedule of war supplies required by the Eastern Group, which only the United Kingdom and/or North America can supply at this stage, but this fact does not weaken the general conclusion just stated. Indeed to maintain the flow of these irreplaceable United Kingdom and North American products, it is vital to economise in shipping in every other possible direction.

(b) Australia and India are outstandingly the most important sources of supply for the forces including "home defence" units in the respective Eastern Group countries. South Africa's capacity is limited as is New Zealand's. The Colonies are making the best of a very limited output capacity indeed. Upon Australia and New Zealand will fall the main burden of supplying the present approved strength of the thirty divisions to be maintained in Eastern Group theatres in accordance with the scales of equipment at present laid down. It is certain also that in the event of increased demands for a larger force or of revised scales of equipment, a correspondingly heavier supply burden will be thrown on manufacturing countries particularly Australia and India.

(c) The responsibility for maintaining commodity supplies, foodstuffs and munitions to the United Kingdom at the existing high level-or such increased level as may be called for by the United Kingdom-will rest principally on Australia, though it is shared to some extent by South Africa and India.

These factors have been considered in the light of the review by the M.G.O. [2] here of previously estimated requirements for India, Middle East, and to some extent the Far East. The whole nature of the problem we face has been changed by the fact that practically all of the estimated requirements in the main groups of war supplies have been revised appreciably upwards. The maintenance of prisoners of war has also increased supply of requirements in certain directions. A preliminary picture of the extent of this revision has been conveyed to the Council by the Chief Central Provision Office. Minutes placed before the Council show that requirements are being increased appreciably in all instances, and in some cases by as much as 400 per cent.

This last and other instances coming to light each day demonstrate forcibly the magnitude of increasing demands inevitable upon all Eastern Group countries and Australia in particular by reason of the upward revision of requirements on the basis of existing strategic plans and of new plans to meet the ever changing situation. The officials of the Supply Department of the Indian Government acting on the Central Provision Office of the Eastern Group are now engaged on a detailed review of some 40,000 items of supply (excluding foodstuffs and munitions) on a revised basis.

While it is not possible immediately to express in quantitive terms the whole field which these increased requirements will cover, some definite conclusions can be drawn from the revised schedules already available and from other considerations. These are:

(a) demands for war supplies are being made on the expectation of military operations up to the end of 1942 at the earliest. (In some cases, demands are being made up to 1943);

(b) greatly expanded reserves to provide against contingencies are now regarded as indispensable.

It should be noticed that demands for supplies mentioned do not cover possible requirements for such territories as Greece or the Balkans nor for the Netherlands East Indies. It is known, however, that some of the Eastern Group countries are meeting demands from these territories (e.g. South Africa[n] boots to Greece) whilst Australia has commenced to supply certain lines to the Netherlands East Indies. If demands from these countries increase, and if either the United Kingdom or America is unable to supply there will be no alternative but to endeavour to fill the gaps from reserves of the Eastern Group. I would stress this, not just as a matter of interest, but mainly to emphasise the fact that Australian production is bound to be called upon for increasing war supplies.

The Honorable, the Minister, will have noticed on examination of firm orders and enquiries cabled to Australian Department of Supply from here recently, that these orders for which [sic] quantities of materials and foodstuffs represent a multiplication, manifold in some instances, of all demands previously made on Australia for supply to India or other territories included in the Group. Hence far, my comments have related only to demands being made or likely to be made upon Australia principally and as a result of initial allocations from the Eastern Group Council or other direct ordering authorities within the Group.

My brief experience here has also shown that we are likely to be called upon to fill the gaps in supply left by failure of other countries in the Group to meet demands upon them.

The dominant principle which must guide the Council in its policy is that requirements of all countries within the Group must be drawn from resources of countries comprising the Group provided of course that this proves to be the easiest and speediest means of supplying at a time of great emergency. I am confident that if this principle be adhered to, Australia will for reasons already given, inevitably be called upon to provide in many cases the greatest part of supplies needed by the Group.

It is however clear from a study of India's geographical and strategic position that the Central Provision Office and/or the military authorities concerned are bound to give high priority to the indigenous Indian industries capable of producing war supplies needed by the Eastern Group.

In considering the effects of application of this principle, it should be noted that in many cases the demands are such that there is no prospect of India's coping with them in their entirety e.g.

in certain cases such as munitions [sic] or jute, India must produce all, or the majority of requirements, as she is already world supplier. Equally, Australia must remain the main source of supply of foodstuffs. It is important to realise that outside certain well-defined lines the capacity of Indian industry is relatively small.

After surveying the position from all angles, it is abundantly clear that the vast bulk of the new demands for supply to this group must fall on Australia. In addition it is certain that Australia will be called upon to fill the gaps caused by inability of countries which have already accepted large orders, to complete them.

Within the few weeks since my arrival, orders to the value of approximately 9,000,000 pounds [3] have been forwarded from here to Australia and additional prospective orders already in sight amount to a further 2,000,000 pounds sterling. The scope of some of these orders is so complete that it is erroneous to suppose that they will regularly recur but on the other hand the future course of war is unpredictable and it is quite possible that even though future demands be not so heavy as these recently placed for items covered, they may well be very appreciable and a wider range of items affected.

These orders may not recur in all instances at the same level, because part of the contracts now being placed cover a margin for reserves. Against this discounting influence, however, must be reckoned possible extension of field and severity of war if hostilities carry on over a longer period than those for which provision is now being made.

Therefore suggest to the Honorable, the Minister, and Government that increasing demands possibly made might be regarded by Industry, excepting in cases where peculiar feature of items for supply or [sic] munitions clearly indicated otherwise, as a new level of normal demands for currency of the war.

Just what this will mean in terms of quantities or values it is impossible to say until the whole of the 40,000 items in the schedule have been revised and orders allocated and until further schedules relating to munitions will have been examined.

I shall however endeavour not merely to see that new orders when allocated to you are transmitted promptly, but to give as quickly as is practicable a forecast of the demands likely to be made. In a review of the problems mentioned there arise several considerations immediately affecting Australian wartime economy and industrial effort to some of which I, in due course, refer in Report which should reach the Minister by A. V. Smith's hands on 22nd April.

This review of necessity relates only to the effect upon a limited number of Australian industries. These industries, however, cover a wide area and include some of the most important in Australia.

They are-woollens, combing and spinning, weaving and knitting processed foodstuffs,, including meat, milk, cheese, vegetables and other items-boots, tyres and hats. As I have already suggested, however, as the reviews of the requirements for general stores munitions etc. are brought to completion, a wider range of industrial effort in Australia will be affected. The picture which completed the reviews already outlined gives a reliable guidance to the Government and industries affected to the extent to which industries will need to expand to cope with these new demands after making due allowance for purely local factors which may operate to increase or reduce demands upon industry.

It is acknowledged of course that temporary shortages here and there and some interference with civil supply may occur but I cannot appreciate the suggestion of caution against acceptance of new orders on Australia which runs through some of the official communications reaching me from the Department. Indeed, it seems to me there are few items in large orders already sent from here which will seriously interfere with civil supplies.

The orders (particularly clothing, boots and the like) will ensure continuity of employment in factories and thus assist in offsetting any slackening of demands elsewhere due to enlistments and army training.

In view of the facts outlined in the foregoing, I strongly urge an immediate examination by the Department and Industries concerned of the effect of these large orders upon existing capacity and I further urge that a policy for the future be determined on the assumption:

(a) that these orders constitute a new level of demands from this group for currency of the war;

(b) it is a natural corollary that much of this new business will remain with Australia after the war.

The extent to which such a policy formulated will involve the extension of existing capacity should be readily determinable in the light of such considerations as availability of plant equipment, labour, industrial conditions and so forth.

In some branches of industry vigorous and long-range planning will be necessary due to the fact that in many directions Australia is the only substantial source of supply.

I need hardly stress that strategic necessities of this situation and their relation to Australia's own security demand the promptest attention to the problem on our part.

I suggest the wisdom of placing before industries concerned by these unexpected large Service orders full facts of the position as disclosed in this review. If this be done, the Government will, I feel, readily enlist their support and co-operation. That difficulties will be encountered is only to be expected, but I feel that the industries themselves will surmount many of these.

Government assistance will probably be necessary in a greater or lesser degree in many cases. Matters such as these however can be dealt with only as they arise after a thorough examination of the position which should, I suggest, be undertaken without any loss of time'.

A number of sections of my review not now cabled deal with details of orders to hand and being now dealt with, discussions on creation of entirely new capacity, together with observation intended to assist consideration of applications from semi- official authorities for assistance in purchasing programmes through the Eastern Group; post-war trade between Australia and the eastern countries and India: special comments regarding foodstuff position and intimation that I am having long range requirements now dealt with: review of the effect of recent orders upon special industries etc. Report then goes on:

'If my appreciation of the situation here be correct, it is safe to expect for some time ahead a constant stream of enquiries and firm orders from this end. I find already that the time factor in many instances counts very much. Delay in dealing with enquiries not only causes embarrassment to the purchasing Government but it also slows down the effort of equipping forces. Moreover, as I have pointed out in a separate communication, it also creates an unfavourable reaction against the countries concerned which even from the trade point of view is not good.

I recommend therefore that should Departmental machinery need strengthening to ensure prompt attention and advice in respect of enquiries or firm orders, necessary steps should be taken forthwith. I specially emphasise this aspect as it is so important and which I know will be fully appreciated within the Department.' My review ends. Now follows full text of cable repeated here from the Middle East today:

'To the War Office, London, (R) Eastern Group Supply Council, New Delhi, from Middle East No. Q/55427 of 9th April. Continuation of my 1/53112 of 31st March not repeated to Eastern Group Supply Council:-

Report to date on Greek situation indicates that we must supply certain items of clothing. Enquiries show that Balkan allies live from hand to mouth and have no reserves and insufficient power of production.

In order to increase factor of production, long-term provision action must be manifold.

Report shows the necessity for production action to cover requirements of clothing for 300,000 Greek plus large number of Yugo Slav and possibly Turkish demands. These figures will be defined more clearly by delegates at present with P.O. [4] with Missions.

Request authority to make initial provision action for 500,000 allies.

Recommend the Eastern Group Supply Council should make enquiries to ascertain maximum potential of the Group as figure of 500,000 may be largely exceeded and may rise to 1,000,000 or more.' (Cable from Middle East ends.) Council discussing urgently the position this cable discloses. I will advise you of further developments from time to time.

However, the situation as disclosed by the Middle East cable necessitates my cabling foregoing extractions from my Report so that any action decided upon by the Government may be put in hand without delay. Finally, Middle East cable indicates that demands will probably be much heavier than was contemplated when my Report was prepared a few days ago.

1 A. S. V. Smith, Assistant Secretary, Dept of Supply and Development.

2 Master-General of the Ordnance.

3 The original was here annotated' mutilated'.

4 The original was here annotated 'mutilated'.

[AA: A3195, 1941, 1.5640, 1.5653-6]