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is serious danger of persons and communities in Malaya receiving the impression that the policy of decentralization and wider union has reached a very much more advanced stage than is in fact the case. It will, therefore, I trust, be helpful if I review in some detail the proceedings at the Durbar at Sri Menanti, and indicate my views as to the present position.

4. In the first place I would refer to the memoranda circulated at that meeting regarding customs union, a Railway Board, and a Postal Board. As regards customs union, the most careful consideration will have to be given to the views of the com- mercial community, and I shall await with interest the report of the Committee which you have appointed to go into the matter. I note that it is stated definitely in the memorandum that "A Malayan customs union cannot be made a real success if Singa-

but I pore and Penang stand out

propose to keep an open mind on that question until the matter has received much fuller consideration.

5. As regards the Railway Board, there is general agreement that, as the railways are a matter of common interest to all Malaya, all the States and the Colony should have an interest in their management, and that railway finance should be separated from the Budget of the Federated Malay States. Whether the best way to secure the efficient business management of the railways is to vest them in a large Executive Board composed of members with little or no knowledge of railway working is more doubtful. As has been indicated in separate correspondence, there is in the Kenya-Uganda Railway a useful precedent for an efficient system of conducting a Government Railway in which the Governments of more than one territory are interested.

6. Somewhat similar considerations apply to the proposed Postal Board. I have asked you to supply me with a copy of the report of the Committee which recommended the setting up of a Postal Board Even if it is agreed that postal affairs should be separated from the usual functions of Government and conducted on semi-independent lines, it does not follow that a Board of as many as 10 members will be the most appropriate machinery for controlling posts, telegraphs, and telephones, in Malaya.

7. I come now to that part of your speech which dealt with the general question of decentralization in the Federated Malay States. Again, it must be borne in mind that the proposals were to be put forward merely for discussion. Whether decentraliza- tion is necessary or desirable, and if so, on what lines, are important points of policy as to which no commitments should yet be incurred. There are two aspects which require consideration here. If decentralization in the Federated Malay States is merely a means towards effecting a wider federation including all the Malay States, then it is of the first importance to ascertain how much decentralization will be necessary in order to bring some or all of the Unfederated Malay States into the Federation. I have so far received no indication as to the attitude in this matter of the Unfederated States.

8. On the other hand if it appears that any measures of decentralization in the Federated Malay States, which can be envisaged as practicable, will fall short of what would be required to bring the Unfederated Malay States within the Federation, then the question of the decentralization in the Federated Malay States has to be considered from an entirely different aspect. As you pointed out in your speech to the Rulers, the community of trade and business interests has developed the Federation into something very like amalgamation. All interests in the Federated Malay States have benefited from the prosperity which has resulted, and great caution will be necessary in taking any steps which might impair efficient government in the federated area. In the circum- stances I cannot but regret that you should have definitely announced that intended

you to ask the Federal Council to restore to the State Councils the control of a considerable number of services beginning with the Budget for 1933. It appears to me to be prema- ture to consider what services should be restored to the State Councils until the

purpose aimer at in decentralization is settled, and the general policy has received approval.

Similar considerations apply to the proposed strengthening of the State Councils. It seems almost impossible to determine on what lines they should be strengthened until the main policy is approved. If the State Councils are to be equipped to deal with a wider variety of matters of special interest to the Rulers and their subjects, persons versed in such matters would be added to them. But if they are to take over from the Federal Council all sorts of problems affecting Europeans, Chinese, and Indians, then these races must be represented on them, and it might even be necessary to adopt the rule that no person should be a member of the Federal Council unless he is already a member of a State Council. On all these points as well as on such subjects as the position of amalgamated departments, the eventual revision of the treaties. and the abolition of the post of Chief Secretary, I propose for the present to keep an open mind, as I am satisfied that the time for their consideration will come only if and when the general policy has received approval.

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10. I have been unable, on the information available, to form any clear ideas as to the financial effects of the changes you contemplate, or as to the principles upon which you consider that the division between Federal and State finances should be effected. I note that you have referred the subject of finance to a Committee, which has not yet reported; and I trust that, in their report, they will deal fully with all the major ramifications of this important question. The effect upon expenditure of a policy of decentralization will have to be carefully examined; in present financial circum- stances caution would clearly have to be exercised before accepting any net increase in the total burden of charges. The question of loan finance, as affecting the Federal and State Governments, will also have to be gone into, in detail.

If the arrangements contemplated should involve the collection, by Federal agencies, of revenue which will ultimately be divided between the Federal and State Governments, or between the State Governments only, it will be necessary to lay down definitely, in advance, the basic principles upon which such distribution is to be effected. These principles would have to be generally acceptable to the authorities concerned, and would have to be capable of being applied in practice without undue difficulty or friction.

·

If it is intended that the Federal Government should be financed, to some extent, by attributing to Federal revenues some portion of the State collections under certain revenue heads, similar considerations would apply.

In both cases, it will be appreciated that, before a satisfactory arrangement could be arrived at, it would be necessary to form some estimate as to the manner in which long-range development is likely to proceed to the Federal and State units respectively. The difficulties in making such estimates will probably prove to be so great that, in order to obtain the necessary elasticity, provision will have to be made for the revision of the arrangements at periodical, and not too long, intervals. Experience suggests that a rigid allocation, as between Federal and State Governments, would tend to become, with the lapse of time, out of touch with the realities of the situation; on the other hand, the periodic revision of such arrangements is apt to produce recurring and undesirable disputes, not only as to the allocation of revenues, but even as to the division of responsibilities.

The circumstances do not admit of reference being made to any but the most general considerations, such as I have alluded to above; the task of framing a suitable financial scheme must necessarily be undertaken, under your directions; but I am con- vinced that the possibility of evolving such a scheme, sound and economical in itself, and suited to the complicated conditions which decentralization would produce, will prove to be one of the pivotal points upon which a decision will turn.

11.

I hope that you will be able to agree that the foregoing is a fair statement of the position as regards possible changes in the machinery of Government in Malaya, and I trust that the Rulers of the Federated Malay States have not misunderstood that position. I shall always be willing to consider most carefully any suggestions put forward by those Rulers for the better Government of their States, but I am sure that efficient administration in the federated area, which has in the past ensured the rapid progress and prosperity of all communities, must not be impaired. It could not in the long run be in the interests of any section in the Federation that measures should be adopted which were detrimental to the prosperity of the Federation as a whole.

I have, &c.,

C. 92300/32 [No. 4].

SIR,

No. 11.

FEDERATED MALAY STATES.

P. CUNLIFFE-LISTER.

THE HIGH COMMISSIONER to THE SECRETARY OF STATE. (Received 11th January, 1932.)

(Confidential.)

Government House, Singapore, 17th December, 1931.

I HAVE the honour to refer to Mr. Thomas' Federated Malay States Confidential despatch of the 27th October,* on the subject of devolution in the Federated Malay States, and to forward copies of the speechest made by the Unofficial Members of the

* No. 7.

† Not reprinted.