On 12 October 1929, James Scullin led the Labor Party to what was then its largest ever majority. It was unfortunate timing. Over the 1920s Australian governments had become the largest borrowers on the London money markets. In 1925, the United Kingdom returned to the gold standard. And then on October 24, just twelve days after winning its record breaking majority, Wall Street collapsed.
Looking back, this period became a textbook example of what not to do in economic policy. Scrambling to make good on our debts to London, Australian governments desperately tried to balance their books, only to plunge the country deeper and deeper into depression.
Labor faced a difficult set of circumstances. Australia’s identity was bound to the UK. Our defence strategy and economic strategy were effectively subordinate to the UK’s. Labor was also eager to demonstrate its economic credibility. And the dominant economic thinking said the books must be balanced.
In 1931 Labor was wiped out. It had already split internally through the pressures created by the Depression. Federal Treasurer Ted Theodore argued for a new economic orthodoxy, based on what at the time seemed like the radical teachings of John Maynard Keynes. NSW Premier Jack Lang rejected paying London banks over the livelihoods of NSW workers. Both were ignored and Lang was eventually dismissed by the Governor, leading a group of Labor MPs in a split.
