1. The following aide memoire has been presented to the Australian Minister in Washington by the Department of State.
'The Government of the United States proposes that discussions should be begun at an early date with Representatives of the Government of Australia concerning Lend Lease termination and settlement, and the disposal of surplus property belonging to the United States Government and located within the territory of the Government of Australia. It would appear to be in the mutual interest of the Governments of the United States and of Australia that issues relating to the above subjects should be resolved as expeditiously and as completely as possible. The Government of the United States would therefore appreciate an early expression of opinion from the Government of Australia as to when such discussions might be begun.' 2. We had a preliminary discussion yesterday with the Department of State to exchange views preparatory to the opening of formal discussion as suggested in the aide memoire. Unfortunately Moore was in New York and could not attend.
3. They expressed themselves as anxious to reach an overall settlement as quickly as possible and considered that the question of disposal of United States surpluses should be linked with the settlement for Lend Lease and reciprocal Lend Lease Inventory.
They asked that the Lend Lease Inventory should be prepared as quickly as possible so that we could get down to discussion on settlement but in the meantime they thought we should be able to discuss the general principles on which settlement would be based.
I said that we were equally anxious for an early settlement, in fact it was imperative that we should know broadly the settlement which they would expect as the Australian Government was firmly resolved not to accept Lend Lease residues or United States owned surpluses to a value which they considered beyond their capacity to pay. We were, therefore, somewhat concerned at the proposal for a comprehensive inventory and detailed costing of it as this might produce a figure which the United States would regard as a sound settlement but which we would have to reject because it was beyond our financial capacity.
4. In that case we would have to take the alternative course of restricting our purchase of Lend Lease or other surpluses to goods which were absolutely essential and reject the balance. This would throw on United States the responsibility for repossession of the unwanted stocks. I pointed out further that when settlement was being discussed we would expect full weight to be given to the extent of Australian reciprocal aid particularly as if a conversion rate more in line with commodity price levels were used I thought there would be very little difference between Lend Lease and R.L.L. so far as Australia is concerned.
5. I said that we were prepared to give inventory but it must be within bounds of commonsense and practicability. We had got nowhere with Foreign Economic Administration in argument on this and I could not recommend to my Government that they should go to the point of detailed inventory for every small stores depot in Australia. To do this would mean a great amount of labour for a negligible result and it would so delay presentation of inventory that it would be months before we could get down to the vital discussions on settlement. Asked how far we thought we should go I said that we could give inventory reasonably quickly for:-
(1) Civilian type consumer goods in main stores or in transit at cut off date;
(2) Capital goods still in Government control or possession.
6. I was not prepared to recommend that we should provide inventory for:-
(A) Stores in small widely spread depots;
(B) Durable goods such as trucks and tractors which have been sold outright to civilian users and location and condition of which unknown to Government;
(C) Military stores in any comprehensive sense although we would consider special categories [e.g.]  complete aircraft which they may nominate.
If they wish to supplement our inventories to cover omitted items that was their affair but we reserved full right to question the basis of calculation and principles involved.
7. I made the following further points.
(A) That our pre-occupation was our future ability to trade and we would not allow any possibility of extracting dividends from war expenditure in disposal of war residues to prejudice this;
(B) That present relationships and future trade would suffer if they drove a hard bargain;
(C) That they have no monopoly of political difficulties.
8. In the face of my blunt statement the Department [of] State Officials seemed inclined to take a broader line but it was only a preliminary talk and their approach will probably harden when they consult Foreign Economic Administration. I sense that they think we are bluffing on the alternative of returning goods to them and you might consider doing this in a few cases where goods are clearly not wanted. If so, you should insist on them taking possession. The goods could be brought back into any overall settlement if it is satisfactorily arranged.
9. Further background is that I informed the United Kingdom Delegation last week that we would probably have to make a stand on the above lines. I also wrote officially to Keynes and said that our experience in discussion with Foreign Economic Administration did not support views which he and other United Kingdom Representatives had expressed that inventory was merely camouflage for congress and would 'have no real relationship to settlement'. I added 'it is very clear to us that if your conception is correct and has the concurrence of the United States members of your top committees their views have not been passed down the line'.
10. Keynes replied that from an informal talk with Clayton it appeared that the United States would require settlement on a bookkeeping basis for pipeline and civilian stocks of food, oil and raw material in the inventory including military food and raw material. Clayton had indicated that it would probably be a hopeless proposition to deal similarly with items such as:-
(1) Durable civilian goods;
(2) Military inventory having civilian end use;
(3) Military inventory without civilian end use;
(4) Capital installations;
(5) United States Military surpluses;
and he favoured an early settlement for a global figure arrived at on very broad lines. Keynes added that the United Kingdom had no present intention of paying anything for category (3) and would settle for category (2) only as military surpluses are actually transferred to civilian use. 
11. My previously expressed belief that the United Kingdom is following a line of appeasment under the shadow of the financial aid proposals is strengthened by Keynes' letter. I have not seen him again but I have told Henry Self  the line which it is proposed to follow and he said that from our point of view he quite agreed with this attitude and did not think it would adversely affect their own negotiations. He thought it would strengthen them.
12. Please instruct the appropriate departments to- (A) Press on with preparation of inventory on basis paragraph (5) and airmail it at earliest possible;
(B) Urge United States forces to complete R.L.L. Inventory so that it is ready same time as ours;
(C) Cable to reach here before Thursday estimated value of Lend Lease and R.L.L. Inventories with division in former between (1) Civilian goods in pipeline and store;
(2) Machine tools;
(3) Other durable goods in Government control or possession.
13. I hope to see Clayton early in the week and expect further meeting with Department of State Thursday or Friday.
14. McCarthy and I propose leaving here November 5th and expect to get a plane out of San Francisco approximately 9th. Suggest Moore should carry on discussions after we leave in consultation with Eggleston on policy.
15. Dr. Evatt holds strong views that we should object to any settlement on grounds:-
(A) That Lend Lease figures are unreliable and in the case of aircraft seriously overstated (Williams'  advice);
(B) That of correction made for (A) and conversion made at a rate closer to price levels R.L.L. at least equals Lend Lease.
He thinks we should rest on this and press for closed book on all transactions and residues.
16. Have advised him that we should keep this in reserve until we see how discussion at administrative levels develops. Equality of expenditure is difficult to argue except on broadest lines and if we have to fall back on it, the approach would need to be at ministerial level. Dr. Evatt's close personal association with Byrnes and Clayton should facilitate this.
17. I understand there has been a deterioration in the position on financial aid talks as from about the end of last week. Whereas previously United States officials had accepted the five billion figure as justified and reasonable they now have considerable doubts whether congress would agree and are talking down to three billion. Halifax made an announcement recently that the talks were not going well and this I think is partly tactics to warn the United States of their responsibilities and partly to indicate real difficulties which have developed.