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' [1] 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. [2]
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the original request was withdrawn.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.