Mr. MacDonald said he was anxious to have another informal chat on the matters in dispute between the two countries. The previous discussions in the Grosvenor¹ had been very helpful to him and enabled him to understand matters which he would not otherwise have been able to understand and put him in a position to explain them similarly to his colleagues. There were matters in regard to the new Constitution which he would like to come back on, but it was better to leave that over for a subsequent talk. He wished to take up at the moment the three or four problems - the financial dispute, the treaty ports and defence, trade and partition.

With regard to the latter, he said that I had repeatedly stated that without a settlement of the partition problem it would not be possible to have between the two countries that goodwill and co-operation which both of us desired. On partition he just wished to repeat what he had said before - that they could do nothing to force the North to join with the South. They could see no way in which the ending of partition could be brought about in a short period of time, and that if progress was to be made it was necessary to turn to the other questions.

Finance and Defence could perhaps be linked together, as I had suggested, but the British Government regarded the annuities as due on the foot of Mr. Cosgrave's agreement in the Ultimate Financial Settlement². He did not think they could go before their people and ask them to forego repayment of that debt. On the other hand, I had repeatedly, he said, committed myself in public to the statement that not one single penny of the land annuities would be paid. There were also other monies withheld - Local Loans, Pensions, etc. I had not committed myself in regard to them in the same way, but he feared payment of these alone would not satisfy the British public or the British Government could not take the responsibility for urging a settlement on these lines.

With regard to Defence, they were advised by their military and naval experts that our ports were necessary for them for the purpose of defending their food supplies in time of war and that whilst they would be quite ready to hand over the ports they would want to be assured that an invitation to use these ports would be forthcoming in time of need for the purpose indicated.

On my side I made it clear that my commitment in regard to the annuities was definite and that I could not possibly recede from it. I asked him, if he, himself, had ever made himself acquainted with our case on the annuities. I gave him a rough idea of the basis of our position; said I was perfectly satisfied that the monies were not due and that as a private individual I would not pay monies to which I regarded myself as having such a right and that as a public representative I would regard it as a duty to oppose the payment of them whether in office or not in office. If there was to be a financial settlement the payment of these monies would have to be excluded.

With regard to the other monies, I had not examined the merits of the case as I had with the land annuities. I felt justified in retaining them because of the fact that I regarded the land annuity payments that had been made as having been wrongfully paid and that we were entitled to be given credit for them and they would more than counterbalance the amounts due on the other payments even if on the merits these were found to be due to Britain. That was why I had not therefore felt obliged so far to examine the merits in detail. The land annuities had been specifically given to Ireland, North and South, by the 1920 Act, and the British Parliament had taken on itself the exclusive liability of meeting the interest and security fund of the stock.

Mr. MacDonald reverted to the old position that they had Mr. Cosgrave's agreement and that they regarded us as bound by that. It would not be fair that they should suffer even if from the point of view of Irish procedure Mr. Cosgrave was acting ultra vires. The matter of Irish procedure was something in which they had no concern. I put it to him that if there was a departure from universal custom of States there should be some provision in the constitution or custom of a particular State to warrant it. After all Ireland was not an unknown State with procedures with which they were not aware, etc. Mr. MacDonald repeated the difficulty they would have with the parliament and people; whilst I insisted that the present Irish Government could not consider the payment of the annuities, but we would I thought be able to consider a compromise on the other payments particularly if the payments were to be made by way of defence. He said that his defence experts were of opinion that the bringing up to date of the existing ports and the treaty ports would not involve expenditure of much over half a million pounds. I pointed out, and he agreed, that it was the continuing expense, the upkeep that mattered. The present strength of our army was probably much too low for purposes of adequate defence. We would have to increase the strength of the regular army and provide for the training of a Volunteer force. The upkeep of some ships and aeroplanes would be an additional cost, and our people were already taxed to the utmost. I would require to go into the matter in detail as regards our defence requirements, and in that we would have to take the advice of the British or some other great power that had experience as to what our requirements would be. I would also have to examine in detail the financial items.

Mr. MacDonald asked could we put experts or officials to continue conversations, and I thought it would be of no use. These were negotiations obviously for principals.

We discussed the advantages to Britain of a complete settlement with Ireland. It would change the attitude of the Irish people throughout the world towards Britain if the old quarrel was definitely settled. He thought the settlement of partition was out of the question. I said our aim must be then to make the other settlements, it being understood that they could only be partial in the hope that the making of them would prepare the way for the ultimate settlement. Before he left he had quite definitely my views on the following matters:

1. That the ending of partition was absolutely necessary for the good relations we both desired.
2. That we could not consent to paying a penny of the land annuity money.
3. That we could not consent to any commitment to invite the British to our ports when they might desire the use of these ports for the defence of their supplies in time of war.
4. That the line to pursue for a solution was to find how our increased commitments in regard to defence (so as to make good the policy of preventing a foreign power from using our island as a basis of attack against Britain) would be held to equate the payments on which a compromise could be made.

I indicated that I was willing to meet representatives of their Government for the purpose of hammering out the financial agreement once the main lines were fixed and that it was certain that an agreement could be arrived at.

We agreed to resume the discussion at 4 tomorrow (the 16th) when he wished to take up some points in the Constitution, and I agreed to lunch with Eden and himself on Saturday to hear from Eden the position in regard to international affairs.