Lend Lease Stage II.
1. Snelling  has advised Dunk that Morgenthau has set dead line of Saturday for completion of Stage II agreement. Keynes proposes to leave for Canada early next week and will probably return directly from there to London.
2. Keynes has pressed and apparently Morgenthau has agreed that agreement reached will be set out in a formal document complete with schedules which will become a firm programme for the purpose of fixing Lend Lease supply through 1945.
3. United Kingdom delegates are convinced that this documentation has real advantages and will simplify Lend Lease procurement.
United States, however, are certain to insert qualifying clauses which will make supply dependent upon congressional act in extending existing Lend Lease period, provision of Lend Lease funds, etc.
4. The proposal which we have only had informally from Snelling is that as Australia had a separate chapter in the presentation of case, they will have a separate section of the agreement with supporting schedules constituting supply programmes for:
(a) Aircraft, etc. which are handled directly in Washington.
(b) Non-munitions items (except for shipping and petroleum which will be included in the United Kingdom programme).
5. United States viewpoint is expressed in reports from munition sub-committees to Morgenthau as chairman British American Committee on Lend Lease. They endeavour to place the United Kingdom in a position of underwriter of reciprocal aid.
6. For example, the report of the sub-committee on air items includes the following paragraphs:
'In the interest of the most efficient utilisation of shipping at the disposal of the two countries and depending upon the production or stock position at the time, the United Kingdom undertakes to continue to supply air items of reciprocal aid within the limits prevailing at the time of the defeat of Germany.
The United States representatives also recommend that as a condition of the acceptance of the scheduled United Kingdom requirements by the United States, the United Kingdom accept the responsibility for furnishing reciprocal aid throughout the British Empire and Commonwealth as required by the common interest.' It is unlikely that the United Kingdom will accept the responsibility and will therefore want a separate reciprocal aid paragraph in the Australian section.
7. Our conversations on details of non-munitions programme have been friendly and satisfactory. We have had to make a few downward adjustments in values but Foreign Economic Administration have been willing to liberalise Lend Lease eligibility  which should result in easier procurement. The net programme as accepted by Foreign Economic Administration after making up and down adjustments is 103-5M dollars.
8. However, we are by no means convinced that execution of final agreement will result in any substantial advantage for Australia.
But if an agreement is entered into (and this seems to be certain) our absence from it would be apt to excite comment and it would be almost impossible to get our reasons understood.
9. We have not yet been able to obtain any form of words which either the United Kingdom or United States suggest should be included in the Australian section on reciprocal aid.
10. Dunk has informed Snelling, however, that there is little likelihood that we would be able to sign an unqualified undertaking to furnish reciprocal aid either- (a) On present magnitudes or (b) Without regard to areas.
He has indicated that the furthest that we might be able to agree, would be to include a paragraph to the following effect:
'The Australian Government will continue to supply to the United States forces, as reciprocal aid, such goods and services as it now furnishes and which are locally available. The underlying principle governing such supply to continue to be as expressed in the reciprocal aid agreement between the two countries which provides for the general principle to be followed in providing such aid as that the War Production and War Resources of both nations should be used by the armed forces of each, in the ways which most effectively utilise available materials, manpower, production facilities, and shipping space and that while each government retains the right of final decision, in the light of its own potentialities and responsibilities, decisions as to the most effective use of resources shall, so far as possible, be made in common, pursuant to common plans for winning the war.'
11. This, of course, contains nothing that is not in the present reciprocal aid agreement  but it lays emphasis more on common use of resources and decision by common agreement without specifically mentioning the area limitation. If it is acceptable (and we don't know this yet) it will have the effect of leaving discussion and decision in Australia which fits in with our reciprocal aid administration.
12. We would like to have your comment on the two fundamental questions, viz:
(a) Whether we should agree to a separate Australian section of the agreement;
(b) Or some form of words which we can approve covering reciprocal aid.
13. After consultation with Australian War Supplies Procurement and Dunk we feel that we  hold out against an agreement but that we could go no further quickly on the reciprocal aid section than the words given in paragraph  above.
14. It is essential that we should have a reply before Saturday.
We appreciate the difficulty which we make for you in asking for this with such short notice. We knew nothing of Morgenthau's dead- line until last evening.