I acknowledge receipt of your long radio message, copy attached , relating to several matters which are discussed hereunder. I must draw your attention to the inadvisability of sending long code messages by radio, if the subject matter is not very urgent.
The transmission of radio messages to and from Dilli is permitted only in certain European languages. The use of code is forbidden.
Messages between Darwin and Dilli are sent without the knowledge of the Portuguese administration, and strictly speaking, any such messages, other than those relating specifically to flying boat operations, should be sent in clear, and should also be paid for.
It is most desirable therefore that code messages between Darwin and Dilli should be kept at a minimum, and should be as short as possible, if the present irregular procedure is to remain secret, and available for our benefit.
In the last mail leaving Dilli on 11th June, I reported my interview with the Governor  regarding approval for two assistants to join me here, but I assume your radio message was drafted before receipt of my report. The Governor gave verbal approval to me, and stated that he would reply formally to the letter from the Minister for External Affairs , which I handed to him. I cannot quite understand your instruction to forward advice of the Governor's approval by aeradio, and that the two assistants will then leave Australia by the first available aircraft, as Mr. F. J. A. Whittaker arrived here on 10th June last. I received advice of his impending arrival from the Director General of Civil Aviation , some days before he left Australia.
Actually he arrived from Koepang a few hours after I had presented the letter from your Minister, and had obtained the Governor's approval. The Governor had however given me his approval in principle many weeks before.
Now that I am well informed upon conditions in Timor, I feel that it would be uneconomical to send a third officer to Dilli, ostensibly as a member of the Department of Civil Aviation.
Whittaker and I can handle all problems which can be foreseen at present, and the arrival of a third officer would give cause for comment by some people. The Governor himself is, I think, wide awake to the reasons for additional officers, although he has not said anything to me on this subject, but others will draw conclusions if three officers are now found necessary to handle the work which has been done by one man for many months. I appreciate that decision in this regard rests with the Department concerned, and merely give my opinion in the light of conditions as I know them to exist. In addition to speaking as an officer of the Department of Civil Aviation, I also speak as an officer with both active Naval and Air Force experience.
This morning I had a long interview with the Governor in regard to the several matters raised in your message. During my talk, I made the following assumptions, which I trust are acceptable to you.
(a) that the Commonwealth Government desires to cultivate good relations between the two countries, by promoting trade, (b) that in doing so, it is not desired to enter into competition with other buyers of Timor products, if this should be uneconomical, (c) that it was not desired to bolster up a subsidised and unsound trade, which would be of no lasting benefit to either party.
The Governor said that he agreed with the principles outlined above, and that he was very keen to see commercial relations established between the two countries. At present, with the exception of a certain amount of coffee, all products of Portuguese Timor are finding a good market. About 80 tons only of last season's crop of coffee remains unsold, and that will be disposed of probably within a few weeks. Small quantities of most products are bought by Japan and although the Governor would prefer to see these products sold elsewhere, he can make no restrictions whilst Portugal remains neutral. So long as Japan has an advantage with cheap freight in their own ships, then they will be able to purchase in Timor at a higher price, and thus obtain such products as they need. However the quantities are very small, with the exception of manganese which will be discussed later, and it would be unsound and uneconomical for a market to be found in Australia, for the small quantities of products, other than coffee and perhaps one or two additional items. If any Australian firm is prepared to offer a price higher than the Japanese for any particular goods, then they will not go to Japan, but it would probably be necessary to subsidise the purchaser in Australia.
I will now deal with the method of trading. In the first place I do not consider that the state of this territory so far as disposal of products is concerned requires active buying by the Commonwealth Government to enable the administration to continue to function. Lack of an export market is not affecting the progress of the colony to nearly the same extent as the harm caused by graft, absurd customs and export duties, and inefficient administration. There is no question of the colony requiring immediate assistance with an export market, as occurred with New Caledonia, and I therefore consider that trade with Timor should be established with private firms in Australia, and that products should be sold on their merits. If circumstances warrant a reversal of this opinion, then further steps can be taken, but there are no circumstances at present which lead me to recommend active purchase by the Commonwealth Government.
The local Government here is always in need of foreign currency for the purchase of materials for public works, and the payment of pensions and proportion of salary of officials retired and living abroad, or of others going on leave. Always there is a shortage, and at times the Government is hard pressed for foreign currency.
The local currency is valueless outside the colony, so some method of obtaining foreign currency is imperative, if the Government is to continue to function. The method now employed is to license all exporters and to take 70% of all foreign currency received for the sale of exports, giving the exporter the equivalent in local currency. Knowing this, I asked the Governor whether he would prefer all trade with Australia to pass through the Government organisation known as F.O.A.G. as, in this case, the Government would obtain all the foreign currency involved and not just 70%.
As dealings up to date with F.O.A.G. have been most unsatisfactory, and have given me cause for considerable adverse comment in reporting to Australia, I was very agreeably surprised when the Governor said that he did not want F.O.A.G. to function as a trader, but to act merely as an official link between exporters here and importers in other countries. F.O.A.G. was originally formed for this purpose.
F.O.A.G. will deal with the export of cotton and manganese ore, both of which products are solely under Government control, but with any other products, the Governor stated, he would prefer merchants in Australia to deal direct with S.A.P.T. commonly known as Sociedade, or with Chinese firms in Dilli. I raised the question of Japanese interest in Sociedade, and gave the opinion that for this reason, we would probably prefer to deal with the Chinese, but he raised the following interesting outlook.
Up to the present time, the majority of the trade of Sociedade has been with Japan, partly because the Japanese have been prepared to buy the products which were available for sale, and partly I feel because of the 45% Japanese interest in the company. The senior director of the company, Jaime Cavalho, has just succeeded his father in control, and both he and the Governor feel that Sociedade should try to extend its dealings to countries other than Japan, and in this way, reduce the percentage of total trade now being done with Japan. In this way a gradual reduction of importance of the Japanese market will take place, and with it, of course, a reduction of the Japanese scope of operations within the company.
As our aim is primarily to reduce or hinder Japanese commercial and political expansion in Portuguese Timor, it would best be achieved by trading with Sociedade, as although the Japanese shareholders might reap a small profit thereby the company will not be forced to rely almost wholly upon the Japanese market for its very existence. The Sociedade is, as far as I can gather, a thoroughly reliable business house, and this fact is important if trade with Australia is to be established, and maintained in a satisfactory manner for all parties concerned.
The Governor himself said that he would like trade relations to be established also with the Chinese, who were very reliable, and who were also responsible for a good deal of the trade of the colony, but having regard to our primary object I think that Sociedade would be sufficient for the time being, and that at a later stage, if trade grew to a reasonable extent, orders should then be given to the Chinese firms capable of fulfilling them. In a previous report I expressed the opinion that it was undesirable to trade with Sociedade owing to its Japanese control of 45%, but I did not, at the time, appreciate the possibility of trade with this organisation reducing the proportion of Japanese trade, and with it, Japanese influence.
With regard to banking facilities, the position has now been clarified by the passage of time, and Fowler's coffee order, which has been shipped. The Bank of New South Wales in Australia acts as agent for the Government Bank in Dilli, and payment for goods exported to Australia can now be made immediately to the Bank of N.S.W. Sydney.
The shipping problem is difficult, as at present the only company calling at Dilli, apart from the Japanese, is the Dutch K.P.M.
Line. This company is far from popular with the Portuguese, or for that matter the Dutch in Netherlands East Indies, because the freights charged are most exorbitant. The K.P.M. has a monopoly of inter island trade throughout the East Indies, and therefore is able to charge any freight rates which suit itself. If there were competition, then the freights would be reduced very much indeed, but until there is, then there is no possibility of a reduction.
If trade relations between Australia and Portuguese Timor are considered to be of any real importance, then Australian ships trading between Australia and Singapore must stop at Dilli when there is any cargo offering for Australia, or to be dropped from Australia. Freight rates would also have to be scaled in accordance to the distance carried and not with respect to inter shipping company agreements, or monopolistic considerations. I believe that between the years 1917 and 1920 ships of an Australian Line called regularly at Dilli, and if such action was then considered necessary, I assume that similar action is even more warranted at the present time.
As various crops are grown throughout the territory, in widely separated areas with which there is very little communication, it is impossible to obtain an estimate of the production until the crop is actually harvested, treated if necessary, and shipped to Dilli. Information in this regard will be obtained and forwarded from time to time, as it becomes available. I have already mentioned that the position in Timor is not likely to require large Government purchases to keep the Portuguese administration in action, so the question of stocks in hand in Australia does not enter into the picture at present. As the Portuguese have only 80 tons of coffee on hand from last year, and as this is by far the most important crop, some months will elapse before it becomes known whether this year's crop, due in September, will be sold with ease or not.
On June 11th the radio operator here showed me a commercial telegram from Japan, addressed to Segawa, the chief Japanese man in Sociedade, apparently offering 70 guilders per ton for manganese between 85% and 90% pure, and enquiring the amount available per month. This telegram contained a lot of other commercial matters which made it difficult for me to say with certainty whether the offer of 70 guilders was correct. It hardly appeared likely in view of Eveready's offer of only 36 guilders, given after an examination of samples from Timor. Later I was shown the reply from Segawa, in which he said that manganese of 98% purity was available at 100 tons per month, at a price of 60 guilders per ton. I advised you of this offer by radio, but in my aim to achieve brevity of code communication I did not convey the full facts and my meaning was not clear. However, the next morning, Barbosa who is in charge of F.O.A.G. which deals with manganese, called and told me that a contract was to be signed for the supply of 1,000 tons of manganese to Japan at 47 guilders. The Governor also told me this later. It will be seen that the difference between 60 and 47 guilders, the price at which the Japanese are going to buy, and the price which the Government is going to receive, has leaked away. Things like this often happen in this country. No further messages have been sent to Japan regarding the Government price of 47 guilders, and I can only assume that 13 guilders per ton will be split between Segawa and Barbosa. When the Governor told me about the contract, I felt like asking if he knew why there was such a difference between the Japanese payments, and what the Government would receive, but had I done so, he would have wondered at my sources of information. In any case it is not my business, although I am sure that the Governor has had no hand in the transaction. The Governor said that although 100 tons per month were to be supplied to the Japanese to fill an order for 1,000 tons, the production was in excess of this monthly total, and that manganese would be available for any other buyers at about 45 guilders. The administrator from Bau Cau, in whose territory the manganese is found, has arrived in Dilli to discuss the production required for the Japanese order. I may be able to obtain some relevant information from him, and if so, I will inform you accordingly.
It would appear that the Japanese have some pressing demand for manganese as there has not been much interest displayed by them up to recently, and a sudden order for a large quantity at a very high price naturally raises interest as to its uses, and the Japanese needs.
If firms in Australia are not prepared to pay at least 40 to 45 guilders for manganese F.O.B. Dilli, then I do not think there is any chance now of this product being bought by Australia.
In conclusion, I might sum up the existing position in Portuguese Timor, as follows:-
(a) There is no need at present for the Commonwealth Government to purchase large and possibly unwanted products from Timor, for the purpose of assisting the Portuguese Administration to function effectively.
(b) The Portuguese Government welcomes the establishment of active trade relations with Australia, and is prepared to give all possible assistance.
(c) Trade relations should be established directly between firms in Australia and Sociedade and Chinese firms in Dilli-the former receiving preference for the time being.
(d) If practicable, ships on the Australian Register plying regularly between Southern Australian ports and the East Indies should call at Dilli whenever there is cargo ready for shipment to Australia, or from Australia to Dilli.
(e) No reliable estimate of the quantity of products likely to be available for disposal, the probable average prices, or whether any difficulty will be found in effecting sales, can be given at present.
Any further developments in the trade question, together with details of new crops and exports, will be forwarded whenever reliable information becomes available.