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were inevitably incurred in disposing of the goods on the local market.
6. I have stated what seem to me to be the two extreme alternatives, with arguments in favour of each, It is no doubt possible to detect weaknesses in some of the arguments in favour of the second of these alternatives. Thus, even if it were admitted that the "hangover" stores were in a real sense on all fours with the military stores which "arrived in time", it would not automatically follow from this that the Treasury are bound to rest content with the payments which have already been received. In foregoing the net costs of the military administrations, the Treasury were not proceeding in the abstract. They had definite figures in mind, and in the calculations which led them to their decision about the net costs of the military administration they had specifically excluded the costs of these "hangover" stores as something to be left over for separate consideration. This is fully realised by the Colonial Office, and it is also realised that in certain instances at least, the Colonial Governments probably did benefit from the stores to a gr cater extent than is reflected in the proceeds from sales. On the other hand, we feel very strongly that the first of the two alternatives described above is equally untenable. If His Majesty's Government supplied the stores in good faith, then it is equally true to say that the Colonial Governments, who did not order them and had nothing to do with their procurement, attempted to dispose of them in good faith and to the best possible advantage. Against this it could be argued that the Colonial Governments could have checked the flow of supplies as soon as they found they were unsuitable, whereas in fact they went un receiving them without protest until they finally came to an end. Such an argument, however, would be extremely theoritical. As you know, military supplies and civil supplies were arriving concurrently with no clear distinction (so far as the receiving authorities were concerned) between the two. The restored Civil Administration, in the first few months of their existence, were overwhelmed with problems for which they were quite insufficiently staffed and equipped. In these circumstances it was surely inevitable that they should accept such stores as arrived without question, and use them to the best possible advantage. As I said at the beginning of this letter, the sums involved are large (in Malaya alone the difference between the proceeds from sales and the invoice costs of the stores is in the region of £8 millions, as against the £10 millions free gift from His Majesty's Government in respect of the war damage scheme). If we were now to go to the Far Eastern Colonial Governments and demand a settlement on the basis of full invoice costs for these supplies which were procured and shipped in the circumstances I have just described, the dismay and disappointment would lead to the most serious political results. This would have been true at any time, but it is duubly true now that such a long period has elapsed. In this context I cannot refrain from referring to the Chancellor's and the Secretary of State's desire, fully endorsed at the official level in both Departments, that His Majesty's Government's generous financial settlement in respect of the Far Eastern territories should have the best possible political effect.
7. I have said that it is probably true that at least in some cases the Colonial Governments derived benefit from the "hangover" supplies which is not fully reflected in the proceeds from sales. This leads me to a positive suggestion for solving the problem on the basis of a compromise. I understand that there were, or may have been, certain substantial items amongst the stores with which we are concerned, which were taken over on arrival by the governments themselves, and have since been used by them for their own purposes. These supplies may include, in particular, such things as public transport vehicles. In these cases there will, of course, have
been
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