PART I 1. Reciprocal Lend-Lease Agreement. You will recollect that the limitation of our financial liability under paragraph 3 to 'Australia or its territories and in such other cases as may be determined by common agreement in the light of the development of the war'  was only reached after considerable negotiations in which our heavy financial responsibilities were stressed.
2. We said, however, we would gladly extend scope of R.L.L. when financial circumstances permitted. With regard to extension by common agreement it was contemplated that this would not arise until there had been a substantial change in the disposition of U.S. troops-for instance a move northwards from Australia-and a request from the State Department itself.
3. In practice the Commonwealth has administered the agreement flexibly and has given Reverse Lend-Lease treatment to any urgent supplies which it has been necessary to furnish to U.S. troops in New Caledonia and the Solomons. Recently U.S.A.S.O.S.  requested blanket approval for giving Reverse Lend-Lease treatment to all supplies going to U.S. troops in New Caledonia. Upon enquiry it was ascertained that it was not desired to make Australia the main source of supply but to continue the existing arrangements whereby supplementary supplies for New Caledonia were financed as Reciprocal Lend-Lease. We agreed to do this whereupon the original request was withdrawn.
4. We have now received requests from U.S.A.S.O.S. for food supplies to roughly 10m. for U.S. Forces outside Australia and its territories. It is understood that the supplies are for U.S.
Forces in Pacific area generally including Hawaii, Solomons, etc.
One of the reasons is to economise shipping. It is anticipated further requests will be made later.
5. In the absence of any extension of our financial responsibilities by common agreement the present request for food supplies outside the South-West Pacific Area would be subject to cash payment. The financial aspect, however, has arisen as a result of an informal suggestion by U.S.A.S.O.S. that the Commonwealth might consider financing this request as Reciprocal Aid. This has now raised the general question of the Commonwealth's acceptance of a wider financial responsibility under paragraph 3 of the agreement.
6. The matter has been considered by War Cabinet and it was decided that the question of financial responsibility was outside the province of the local supply officers of the U.S. Forces and that it should be taken up by you with the State Department to ascertain unofficially whether the U.S. Government does in fact desire at this time an extension of our financial responsibility under the agreement. It is requested, therefore, that you should approach the State Department accordingly.
PART 2 [7.] For your own information the following general views of War Cabinet are communicated as background- (i) Australia should supply to the United States Forces anything it is physically capable of supplying having regard to other requirements of the war effort.
(ii) If the United States Government seeks an extension of Australia's financial responsibility under the present agreement, the Australian Government would be prepared to consider its extension to supplies to New Caledonia, the Solomon Islands, Timor, and perhaps Fiji, in view of the vital strategical importance of these regions to the defence of Australia.
(iii) No blanket cover would be given. Each request would be dealt with on its merits in a broad and flexible manner. No amendment of the agreement would be necessary or desirable.
(iv) If the commitment in (ii) were accepted, it would result in a heavy additional financial burden devolving upon the Commonwealth.
(Note:-It is impossible to estimate what this might amount to but as further demands would follow it may reach a considerable sum and, because of the indirect effect on our sterling balances and our financial arrangements with the U.K. Government, we would feel obliged to advise U.K. Government. The commitment would also add to our rapidly increasing internal financial responsibilities.) (v) Supplies to regions other than those mentioned in (ii), which are outside the terms of the present agreement, should remain on a cash basis.
8. I may add the Government feels that if, in the present circumstances, we ask for full cash payment for this particular request, it might create an unfavourable impression in Washington, whereas a reasonably generous attitude might produce favourable reaction and indirect benefits. On the other hand, further requests are likely and we feel unable to accept unlimited financial liability for all supplies that we can physically provide.
9. Accordingly, subject to your conversations indicating that the State Department does in fact desire at this time an extension of our financial responsibilities and that it would be in our interests to do so, the matter will be taken up on an official basis.
10. In the meantime the present request for 10m. food supplies will be settled with the American representatives solely on the basis of physical capacity and the question of financial liability will depend on the result of your discussions.