My telegram 38  and No.1 from London to Batavia expressing the views of the Minister , I respectfully submit the following background information and suggestions as to policy.
1. It is becoming more apparent every day that the Dutch community in Java is rotten with Nazism and [the methods]  adopted by N.E.F.I.S. can only be described as Gestapo methods. This is not my opinion only but is held by British officers who in the course of their other duties find continuous evidence of it.
2. In my view the Dutch here are unfit to govern and I can see no possibility of sufficient new blood being introduced from Holland.
The Dutch are living in a dream world bounded by their pre-war prejudices. In the main their senses of reality are so warped, that although they are a [defeated] nation both at home and in the Indies, they seem unable to appreciate and recognise the rise of eastern nationalism in the same way as Great Britain, a powerful victorious nation.
3. You know how conservative Van Mook has been in the past.
To-day he is the most liberal Dutchman in a senior position and for his recent and comparatively liberal policy has earned a bitter and growing criticism from his countrymen here. Van Mook's liberalism has in no small measure been due to pressure from Clark Kerr and other British authorities.
4. Apart from Van Mook, the impression I have gained is that many individual Dutchmen, who are not opposed to negotiating, are two faced in their sincerity. This accounts for Sjahrir's desire not to negotiate with any other Dutchman save Van Mook. In Dutch circles here there is a lot of talk of [the] re-imposition of the colonial system by force of arms. This appears impossible for the Dutch to achieve.
5. I cannot see any likelihood of its being safe for a Dutchman to venture in the interior for many years to come. This is caused not only by the hatred of many Indonesians for the Dutch but because of the intransigent attitude of the Dutch themselves. The latter has been evidenced in such recent happenings as the Pessing incident.  it would seem then that from the trade standpoint a close association of Australia with the Dutch in the Netherlands East Indies would bear little fruit. Already there are indications that the Dutch will commence to exercise a policy of [gradual exclusion of] British and especially Australian goods. This would doubtless in part be due to their shortage of foreign exchange. I do not believe we can expect the Dutch to welcome expansion of Australian import and export trade to Indonesia.
6. Regarding defence, as with trade, I believe they will place obstacles in the way of any joint scheme as they did before the war. I remember during the war that they were suspicious of a supposed intention on our part to annex Dutch New Guinea and other islands proximate to our shores.
7. Believing future safety and to a large extent trade expansion of Australia depends on the situation in the Indies, and having the belief that whatever the outcome of the present negotiations  [is, that the] days of Dutch supremacy will not return, it seems that to support the Dutch would mean joining a lost cause.
In addition such a course of action would alienate pro-Australian sentiments among the Indonesians.
8. I understand the Sjahrir Government is opposed to the suggestion that the Indies should become a U.N.O. mandate. I think the Indonesians would only agree to this under pressure of force majeur. To accept a U.N.O. mandateship after holding out for independence for so long would appear to strengthen the hand of the extremists who are better armed than [the] T.R.I. who are under Sjahrir's control and also partially undermine the hopes of stable government.
9. Further background information is contained in my telegram 82.
10. In the light of above ideas, I respectfully submit for consideration the following suggestions.
1. As Indonesia apparently does not wish for U.N.O. trusteeship, then Australia might suggest that two U.N.O. commissioners should be sent here:
(a) To establish that Sjahrir's Government with the assistance of European advisers could run Java and Sumatra as an independent nation. The crux of the present negotiations seems to revolve around whether the Dutch are prepared to acknowledge that Sumatra should be included in [the] Indonesian Republic. My own impression is that Sjahrir will not compromise on this point. He may well compromise on the question of inclusion of Southern Borneo and Southern Celebes in [the] direct Dutch sphere of control.
(b) To hold a poll as to whether inhabitants of the outer Indies wish to join the Indonesian republic or remain under Dutch sovereignty. It might be considered also as to whether the outer Indies should be either a Dutch or a U.N.O. mandate.
2. If Australia were to propose course of action suggested above, Sjahrir's hand would be strengthened vis-a-vis the Dutch and [the] extremists. His appreciation of this action might well lead to:
(a) Desire to integrate the defence of Java and Sumatra with Australia.
(b) The rapid development of trade between both parties.
(c) A request for Australian advisers and technicians.
(d) The attendance of Indonesian students at Australian universities, technical colleges and service training academies.
In this way lasting friendship of Indonesian peoples, which would seem to be of such significance to our own security and trade expansion, might be secured.
3. If, as appears likely, negotiations will drag on, it might be considered desirable to raise the suggestion in paragraph one above without awaiting the outcome of negotiations. Naturally without instructions I have mentioned nothing of the above suggestions to anybody and therefore, the supposition of Sjahrir's reactions is unconfirmed save in regard to U.N.O. mandateship to which the Indonesians have already expressed themselves as being opposed.
In any event if these suggestions were made to U.N.O. by Australia, it might well force the Dutch to come to a speedy and liberal agreement.