From Stevens to Senator McBride (to be delivered to him specially
at once wherever he is in Australia).

Have completed review on number of considerations affecting the
demands likely to be placed on Australia for Eastern Group
countries. Had arranged to send this to you by Smith [1] who
leaves here Monday morning. In view of the terms of cable from
Middle East to London and repeated to us today, however, I deem it
advisable to cable you following abridged extraction following
[sic] my review and at the end to repeat cable from Middle East.

My review commences:-

'These considerations indicate that demands are likely to be both
heavier and more urgent than had been expected or had accumulated
in Australia at the time I left. Summarily stated, my appreciation
of the supply position on the basis of information disclosed to me
by military and supply experts who were familiar with the
situation in Eastern and other theatres of activity, is that it
appears to be one which will necessitate some important decisions
in wartime economic and industrial policy and administration in
Australia at a very early date, if Australia is to live up to the
hopes and expectations of the other Eastern Group countries and
implement fully its own declared policy in relation to this group.

It would seem certain that the question which must be faced
immediately is that of increasing capacity for production in
certain definite directions which are clearly discernible from a
brief experience covering only a few weeks, which I have had of
work of the Council. It is further within my knowledge, that
increased demands for war supplies are likely to be made from the
Eastern Group Council on Australia from centres other than those
whose needs are now foreseen in this important theatre. I am
therefore making this special report in order that such plans as
may be decided upon can be put into operation in time to be
effective to meet the situation which has already arisen and which
seems likely to be interrupted in the immediate future.

Already certain definite conclusions in regard to the future
developments of the supply position in the Eastern Group have
arisen from the Council's deliberations, though, of course, it is
too soon to regard them as complete or final. They may be set down
as follows:-

(a) It seems certain that in the future the United Kingdom will be
able to supply an increasingly smaller proportion of war supplies
needed for Eastern Group countries and troops in the Far, Middle
and Near East. Apart from the heavy demands upon the United
Kingdom production of warlike and general stores for other
theatres of war, the difficulties of United Kingdom production in
centres under enemy attack and of shipping, need no emphasis.

There are, of course, many important items in the schedule of war
supplies required by the Eastern Group, which only the United
Kingdom and/or North America can supply at this stage, but this
fact does not weaken the general conclusion just stated. Indeed to
maintain the flow of these irreplaceable United Kingdom and North
American products, it is vital to economise in shipping in every
other possible direction.

(b) Australia and India are outstandingly the most important
sources of supply for the forces including "home defence" units in
the respective Eastern Group countries. South Africa's capacity is
limited as is New Zealand's. The Colonies are making the best of a
very limited output capacity indeed. Upon Australia and New
Zealand will fall the main burden of supplying the present
approved strength of the thirty divisions to be maintained in
Eastern Group theatres in accordance with the scales of equipment
at present laid down. It is certain also that in the event of
increased demands for a larger force or of revised scales of
equipment, a correspondingly heavier supply burden will be thrown
on manufacturing countries particularly Australia and India.

(c) The responsibility for maintaining commodity supplies,
foodstuffs and munitions to the United Kingdom at the existing
high level-or such increased level as may be called for by the
United Kingdom-will rest principally on Australia, though it is
shared to some extent by South Africa and India.

These factors have been considered in the light of the review by
the M.G.O. [2] here of previously estimated requirements for
India, Middle East, and to some extent the Far East. The whole
nature of the problem we face has been changed by the fact that
practically all of the estimated requirements in the main groups
of war supplies have been revised appreciably upwards. The
maintenance of prisoners of war has also increased supply of
requirements in certain directions. A preliminary picture of the
extent of this revision has been conveyed to the Council by the
Chief Central Provision Office. Minutes placed before the Council
show that requirements are being increased appreciably in all
instances, and in some cases by as much as 400 per cent.

This last and other instances coming to light each day demonstrate
forcibly the magnitude of increasing demands inevitable upon all
Eastern Group countries and Australia in particular by reason of
the upward revision of requirements on the basis of existing
strategic plans and of new plans to meet the ever changing
situation. The officials of the Supply Department of the Indian
Government acting on the Central Provision Office of the Eastern
Group are now engaged on a detailed review of some 40,000 items of
supply (excluding foodstuffs and munitions) on a revised basis.

While it is not possible immediately to express in quantitive
terms the whole field which these increased requirements will
cover, some definite conclusions can be drawn from the revised
schedules already available and from other considerations. These
are:

(a) demands for war supplies are being made on the expectation of
military operations up to the end of 1942 at the earliest. (In
some cases, demands are being made up to 1943);

(b) greatly expanded reserves to provide against contingencies are
now regarded as indispensable.

It should be noticed that demands for supplies mentioned do not
cover possible requirements for such territories as Greece or the
Balkans nor for the Netherlands East Indies. It is known, however,
that some of the Eastern Group countries are meeting demands from
these territories (e.g. South Africa[n] boots to Greece) whilst
Australia has commenced to supply certain lines to the Netherlands
East Indies. If demands from these countries increase, and if
either the United Kingdom or America is unable to supply there
will be no alternative but to endeavour to fill the gaps from
reserves of the Eastern Group. I would stress this, not just as a
matter of interest, but mainly to emphasise the fact that
Australian production is bound to be called upon for increasing
war supplies.

The Honorable, the Minister, will have noticed on examination of
firm orders and enquiries cabled to Australian Department of
Supply from here recently, that these orders for which [sic]
quantities of materials and foodstuffs represent a multiplication,
manifold in some instances, of all demands previously made on
Australia for supply to India or other territories included in the
Group. Hence far, my comments have related only to demands being
made or likely to be made upon Australia principally and as a
result of initial allocations from the Eastern Group Council or
other direct ordering authorities within the Group.

My brief experience here has also shown that we are likely to be
called upon to fill the gaps in supply left by failure of other
countries in the Group to meet demands upon them.

The dominant principle which must guide the Council in its policy
is that requirements of all countries within the Group must be
drawn from resources of countries comprising the Group provided of
course that this proves to be the easiest and speediest means of
supplying at a time of great emergency. I am confident that if
this principle be adhered to, Australia will for reasons already
given, inevitably be called upon to provide in many cases the
greatest part of supplies needed by the Group.

It is however clear from a study of India's geographical and
strategic position that the Central Provision Office and/or the
military authorities concerned are bound to give high priority to
the indigenous Indian industries capable of producing war supplies
needed by the Eastern Group.

In considering the effects of application of this principle, it
should be noted that in many cases the demands are such that there
is no prospect of India's coping with them in their entirety e.g.

in certain cases such as munitions [sic] or jute, India must
produce all, or the majority of requirements, as she is already
world supplier. Equally, Australia must remain the main source of
supply of foodstuffs. It is important to realise that outside
certain well-defined lines the capacity of Indian industry is
relatively small.

After surveying the position from all angles, it is abundantly
clear that the vast bulk of the new demands for supply to this
group must fall on Australia. In addition it is certain that
Australia will be called upon to fill the gaps caused by inability
of countries which have already accepted large orders, to complete
them.

Within the few weeks since my arrival, orders to the value of
approximately 9,000,000 pounds [3] have been forwarded from here
to Australia and additional prospective orders already in sight
amount to a further 2,000,000 pounds sterling. The scope of some
of these orders is so complete that it is erroneous to suppose
that they will regularly recur but on the other hand the future
course of war is unpredictable and it is quite possible that even
though future demands be not so heavy as these recently placed for
items covered, they may well be very appreciable and a wider range
of items affected.

These orders may not recur in all instances at the same level,
because part of the contracts now being placed cover a margin for
reserves. Against this discounting influence, however, must be
reckoned possible extension of field and severity of war if
hostilities carry on over a longer period than those for which
provision is now being made.

Therefore suggest to the Honorable, the Minister, and Government
that increasing demands possibly made might be regarded by
Industry, excepting in cases where peculiar feature of items for
supply or [sic] munitions clearly indicated otherwise, as a new
level of normal demands for currency of the war.

Just what this will mean in terms of quantities or values it is
impossible to say until the whole of the 40,000 items in the
schedule have been revised and orders allocated and until further
schedules relating to munitions will have been examined.

I shall however endeavour not merely to see that new orders when
allocated to you are transmitted promptly, but to give as quickly
as is practicable a forecast of the demands likely to be made. In
a review of the problems mentioned there arise several
considerations immediately affecting Australian wartime economy
and industrial effort to some of which I, in due course, refer in
Report which should reach the Minister by A. V. Smith's hands on
22nd April.

This review of necessity relates only to the effect upon a limited
number of Australian industries. These industries, however, cover
a wide area and include some of the most important in Australia.

They are-woollens, combing and spinning, weaving and knitting
processed foodstuffs,, including meat, milk, cheese, vegetables
and other items-boots, tyres and hats. As I have already
suggested, however, as the reviews of the requirements for general
stores munitions etc. are brought to completion, a wider range of
industrial effort in Australia will be affected. The picture which
completed the reviews already outlined gives a reliable guidance
to the Government and industries affected to the extent to which
industries will need to expand to cope with these new demands
after making due allowance for purely local factors which may
operate to increase or reduce demands upon industry.

It is acknowledged of course that temporary shortages here and
there and some interference with civil supply may occur but I
cannot appreciate the suggestion of caution against acceptance of
new orders on Australia which runs through some of the official
communications reaching me from the Department. Indeed, it seems
to me there are few items in large orders already sent from here
which will seriously interfere with civil supplies.

The orders (particularly clothing, boots and the like) will ensure
continuity of employment in factories and thus assist in
offsetting any slackening of demands elsewhere due to enlistments
and army training.

In view of the facts outlined in the foregoing, I strongly urge an
immediate examination by the Department and Industries concerned
of the effect of these large orders upon existing capacity and I
further urge that a policy for the future be determined on the
assumption:

(a) that these orders constitute a new level of demands from this
group for currency of the war;

(b) it is a natural corollary that much of this new business will
remain with Australia after the war.

The extent to which such a policy formulated will involve the
extension of existing capacity should be readily determinable in
the light of such considerations as availability of plant
equipment, labour, industrial conditions and so forth.

In some branches of industry vigorous and long-range planning will
be necessary due to the fact that in many directions Australia is
the only substantial source of supply.

I need hardly stress that strategic necessities of this situation
and their relation to Australia's own security demand the
promptest attention to the problem on our part.

I suggest the wisdom of placing before industries concerned by
these unexpected large Service orders full facts of the position
as disclosed in this review. If this be done, the Government will,
I feel, readily enlist their support and co-operation. That
difficulties will be encountered is only to be expected, but I
feel that the industries themselves will surmount many of these.

Government assistance will probably be necessary in a greater or
lesser degree in many cases. Matters such as these however can be
dealt with only as they arise after a thorough examination of the
position which should, I suggest, be undertaken without any loss
of time'.

A number of sections of my review not now cabled deal with details
of orders to hand and being now dealt with, discussions on
creation of entirely new capacity, together with observation
intended to assist consideration of applications from semi-
official authorities for assistance in purchasing programmes
through the Eastern Group; post-war trade between Australia and
the eastern countries and India: special comments regarding
foodstuff position and intimation that I am having long range
requirements now dealt with: review of the effect of recent orders
upon special industries etc. Report then goes on:

'If my appreciation of the situation here be correct, it is safe
to expect for some time ahead a constant stream of enquiries and
firm orders from this end. I find already that the time factor in
many instances counts very much. Delay in dealing with enquiries
not only causes embarrassment to the purchasing Government but it
also slows down the effort of equipping forces. Moreover, as I
have pointed out in a separate communication, it also creates an
unfavourable reaction against the countries concerned which even
from the trade point of view is not good.

I recommend therefore that should Departmental machinery need
strengthening to ensure prompt attention and advice in respect of
enquiries or firm orders, necessary steps should be taken
forthwith. I specially emphasise this aspect as it is so important
and which I know will be fully appreciated within the Department.'
My review ends. Now follows full text of cable repeated here from
the Middle East today:

'To the War Office, London, (R) Eastern Group Supply Council, New
Delhi, from Middle East No. Q/55427 of 9th April. Continuation of
my 1/53112 of 31st March not repeated to Eastern Group Supply
Council:-

Report to date on Greek situation indicates that we must supply
certain items of clothing. Enquiries show that Balkan allies live
from hand to mouth and have no reserves and insufficient power of
production.

In order to increase factor of production, long-term provision
action must be manifold.

Report shows the necessity for production action to cover
requirements of clothing for 300,000 Greek plus large number of
Yugo Slav and possibly Turkish demands. These figures will be
defined more clearly by delegates at present with P.O. [4] with
Missions.

Request authority to make initial provision action for 500,000
allies.

Recommend the Eastern Group Supply Council should make enquiries
to ascertain maximum potential of the Group as figure of 500,000
may be largely exceeded and may rise to 1,000,000 or more.'
(Cable from Middle East ends.)
Council discussing urgently the position this cable discloses. I
will advise you of further developments from time to time.

However, the situation as disclosed by the Middle East cable
necessitates my cabling foregoing extractions from my Report so
that any action decided upon by the Government may be put in hand
without delay. Finally, Middle East cable indicates that demands
will probably be much heavier than was contemplated when my Report
was prepared a few days ago.