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12 and to regard the submission of the estimates as a formality and the rejection of the Secretary of State's advice on important financial questions as a matter of course. I am by no means averse to such devolution in principle, and it has long seemed to me that the traditional financial tutelage by the Secretary of State is out of date in most Colonial territories. H.M.G. can and must, however, maintain the right to attach reasonable conditions when they are in a position to grant or facilitate something which an advanced Colonial territory requires. more advanced a Colonial territory is, the more do I think this right should be emphasized, since it is after all the normal process of bargaining which takes place in negotiations between equals. That is to say, it brings advancing Colonial territories face to face with the facts of life and emphasizes that they are increasingly looking after their own affairs. Relating all this to the particular case of Hong Kong, the obvious lesson seems to me to be that we should use the present occasion to bring home our point about taxation policy. In other words we should make it clear to the Governor, and ask him to make it quite clear to his unofficials, that there is no hope of Hong Kong raising a London loan unless H.M.G. can be persuaded that local resources are first being fully exploited, both by taxation and by internal borrowing.
In the first instance I think we should approve the estimates as in the attached draft telegram. When the telegram has gone off, the papers should be recirculated for further consideration of the despatch in relation to (a) the taxation issue (b) the external loan requirement as stated by the Governor and (c) the very important section in paragraph 29-31 about the cost of defence. There will be many important points to be examined, other than those to which I have already referred for example, Hong Kong's proposal to raise external money must be considered in relation to the political situation in China and perhaps the best course would be to arrange a meeting between Geographical Department, Defence Department and Finance Department.
I do not know whether it would be necessary to obtain the concurrence of the Treasury in the attached draft telegram. To judge from paragraph 5 of the immediately preceding minute this appears not to be necessary, but you may care to consult Colonel Russell Edmunds or Mr.Moberley over the telephone. I do not think the Treasury could possibly object to the telegram, since it clearly betokens that there is thunder in the air and since we obviously have no alternative but to approve the estimates.
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