Great Depression in Australia - 1929-1935: Scullin and Lang

1929-1935: Scullin and Lang

The Scullin Labor Government was sworn in on 21 October 1929. The Wall Street Crash took place within the first week of James Scullin's government and from the outset it was buffeted by the effects of the global economic crisis.

Throughout Scullin's term, commodity prices continued to fall, unemployment rose, and Australia's big cities were depopulated as thousands of unemployed men took to the countryside in search of menial agricultural work. The stagnant economy had reduced economic activity and therefore tax revenues. However, the debt commitments of both state and federal governments remained the same. Australia became severely at risk of defaulting on its foreign debt which had been accumulated during the relative prosperity and infrastructure-building frenzy of the 1920s.

The Great Depression in Australia saw huge levels of unemployment and economic suffering amid plummeting export income. Although the economic downturn was a product of international events, Australian governments grappled with how to respond. Conventional economists said governments should pursue deflationary policies. Radicals proposed inflationary responses and increased government spending. Division emerged within the Labor Party over how to respond.

Scullin invited Sir Otto Niemeyer of the Bank of England to come to Australia to advise on economic policy. Niemeyer recommended a traditional deflationary response of balanced budgets to combat Australia's high levels of debt and insisted that interest on loans be met. Labor Treasurer Ted Theodore meanwhile supported the view of John Maynard Keynes that an inflationary policy of increased government spending was required. The Senate and Commonwealth Bank rejected his spending plans. The Labor Premier of New South Wales meanwhile announced the Lang Plan in February 1931, which entailed a cessation of interest repayments on debts to Britain and that interest on all government borrowings be reduced by 3% to free up money for injection into the economy.

In August 1930, a Bank of England delegation led by Niemeyer, had met with Federal and State leaders at a conference in Melbourne. The "Melbourne Plan", an economic plan devised by the Niemeyer group and Robert Gibson was agreed to by the premiers and Prime Minister Scullin. It entailed the balancing of the budget through expenditure and wage cuts, without additional overseas borrowing, necessitating reductions in social welfare programs, defence spending and other sweeping cutbacks.

Starting in September 1930, the Australian Banks began to slowly devalue the Australian Pound, and a year later it had been devalued 30% against the Pound Sterling.

In early 1931 the Federal Government defaulted on interest payments on its bonds, forcing a reduction from 9 to 3 percent.

Jack Lang, the Labor Party Leader of the Opposition in New South Wales and a fiery left-wing populist, campaigned vigorously against the provisions of the Melbourne Agreement. He was elected in a landslide in the NSW state election of 1930.

Scullin departed for an Imperial economic conference in London, necessitating an absence of five months, during which time he managed to secure reduced interest payments for Australia. With James Fenton as acting Prime Minister and Joseph Lyons as acting treasurer in his absence, Labor continued to negotiate Australia's economic response - with Fenton and Lyons advocating a more conservative fiscal approach and the unions and caucus calling for repudiation of debts.

In 1931 at an economic crisis conference in Canberra, Jack Lang issued his own programme for economic recovery. The "Lang Plan" advocated the repudiation of interest payments to overseas creditors until domestic conditions improved, the abolition of the Gold Standard to be replaced by a "Goods Standard" where the amount of money in circulation was linked to the amount of goods produced, and the immediate injection of £18 million of new money into the economy in the form of Commonwealth Bank of Australia credit. The Prime Minister and all other state Premiers refused.

With the rejection of the Theodore and Lang inflationary plans, the governments of Australia met to negotiate a compromise in 1931. The resulting Premiers' Plan required the Australian Federal and State governments to cut spending by 20%, including cuts to wages and pensions and was to be accompanied by tax increases, reductions in interest on bank deposits and a 22.5% reduction in the interest the government paid on internal loans.

The policy contrasted with the approach put forward by the British economist John Maynard Keynes and which was pursued by the United States, which held that governments needed to "spend" their way out of the Depression. The plan was signed by New South Wales Labor Premier Jack Lang, but he was a notable critic of its underlying philosophy and went on to pursue his own policy of defaulting on debt repayments, which led to confrontation with the Federal Scullin and Lyons Governments and resulted in the Lang Dismissal Crisis of 1932.

The Labor Party soon split into three separate factions. Jack Lang and his supporters, mainly in New South Wales, were expelled from the party and formed a left-wing splinter party officially known as the "New South Wales Labor Party," popularly known as "Lang Labor". The Minister for Public Works and Railways, Joseph Lyons, led a conservative faction, which believed in a fiscally conservative approach of balanced budgets and cuts in spending and opposed defaulting on debt repayments. When the more radical Ted Theodore was reinstated as Treasurer by Scullin on 29 January, Joseph Lyons and James Fenton along with three others resigned from the government. Merging with the opposition Nationalist Party, they form the United Australia Party. An Australian Labor Party rump remained with Scullin as Prime Minister and Theodore as Treasurer.