8. The Lang Plan, 1931

Author: Frank Bongiorno

The Australian crisis of 1929–1932 was not only a matter for the politicians and parties; it was a whirlwind into which public servants, Commonwealth and state, were also swept up.¹

While no government department anywhere was remote from the crisis, NSW Treasury – numbering 85 staff by 1932 – became caught in the middle of an unusually violent political storm.

Key officials such as Under Secretary Clarence Chapman and Expenditure Accountant Tom Kelly led a team of now nameless and forgotten public servants who, for a time, found themselves managing a system that threatened to collapse into chaos.² These officers faced the challenging task of balancing their duties in carrying out the policies and instructions of the NSW Government of the day – the Labor administration led by Jack Lang as Premier and Treasurer – with their wider professional relationships and sense of fiscal responsibility. The Commonwealth would ultimately prevail in its conflict with the NSW Government and in the wake of the greatest social and political tension Australia had ever faced, calm would be restored. In the meantime, however, NSW Treasury faced its greatest ordeal.

Origins of the crisis

The background to the crisis is to be found in the course of New South Wales history during the 1920s. The State, like others, borrowed heavily for development. Much of the funding came from the bankers of the City of London, some from New York. But by the late 1920s, the size of Australia’s public debt was producing alarm in financial circles. Prices for Australian commodities were on the way down, industrial conflict and unemployment on the way up, and the nation’s capacity to service a ballooning debt – which also included war loans – was in sharp decline. When the Bruce-Page Nationalist-Country Party fell late in 1929, and the Scullin Labor government won the ensuing election, it was already clear enough that the country was in for a bad time. ‘The position is that none of them want an election’, a film industry lobbyist reported from Canberra to a friend in September 1929, ‘as you know the country is 12 million behind, so who wants the job.’³

In New South Wales, the personality and reputation of the Premier were thoroughly entangled in the crisis. Known as the ‘Big Fella’ – and by many other less flattering epithets – the physically imposing Lang emerged as the giant of New South Wales politics during the early 1920s. A real estate agent and auctioneer who had himself profited from the suburban expansion that government spending on amenity was designed to promote, Lang’s social background was modest. But he was a successful businessman and solidly bourgeois figure by the time he assumed leadership of the party in 1923. His allies were, in view of his own wealth, a rather unlikely assortment of communists, industrial militants and other radicals.⁴ The government he led from 1925 to 1927 was bold and turbulent, its life short, its leader widely accused of dictatorial behaviour. But it would not be Lang’s last roll of the dice.

Lang might not himself have had deep convictions, but his actions were invariably conditioned by the demands of his key factional supporters and his need to counter the influence of contending forces in the movement. The most significant among the latter was the Australian Workers’ Union, the country’s largest union and a power in the land. It provided backing to the man who would emerge as Lang’s key rival in the New South Wales labour movement, and in the Labor Party’s wider struggles, Edward Granville Theodore. After several years as Queensland Premier – in which he managed to abolish both the Legislative Council and capital punishment – Theodore switched to federal politics via the Sydney seat of Dalley in 1927. The allegation that the sitting member was offered a bribe to vacate the seat would create problems, as would the claim that Theodore had benefited financially from the sale of a mine in which he had an interest to the Queensland Government. Theodore became Treasurer in the Scullin Government but stood aside in July 1930 while the matter of the Mungana affair, as it was called, worked its way through the Queensland legal system following an adverse royal commission finding against him.⁵

Unlucky Australians

Any government that came to power in 1929 or 1930 had the right to consider itself unlucky. Scullin won office on 12 October 1929, a little more than a fortnight before the collapse of share prices on the New York Stock Exchange. Lang, out of office since 1927, followed a year later on 25 October 1930, his victory coinciding with the last stage of the controversial visit to Australia of Bank of England official Sir Otto Niemeyer. Niemeyer prescribed drastic cuts to wages and spending as the only way out of the Depression; the Melbourne Agreement, signed by Australian governments in August 1930, embodied this orthodoxy. It did nothing, however, to alleviate intense social and economic distress that would see somewhere between one in four and one in three workers unemployed. Lang clearly had no intention of implementing the Melbourne Agreement, but then the other premiers were not doing so either.

Lang’s early efforts to deal with the Depression were no more successful than Scullin’s – not because they were bad, but because of the sheer scale of the crisis. Early measures included an increase in a tax levied on those with jobs to pay for unemployment relief, a tax on winning bets at the racetrack, a state lottery, and the reintroduction of a 44-hour week. Other proposals would run into the hostility of the Legislative Council, which Lang had tried to abolish in the mid-1920s.⁶ His efforts to ‘swamp’ the Council with new members amenable to his policies (or, even better, amenable to voting the chamber out of existence entirely, if it could be managed) would lead to a complicated tussle with the Governor, Sir Philip Game. Game was a liberal-minded man who treated Lang with boundless courtesy, which Lang returned in kind.⁷ But the Governor was also a representative of the Imperial government and, in effect, of a class of people who were well-represented among those who had invested in New South Wales in better times. It was their interests that Lang’s plan for dealing with the State’s financial woes most threatened.

The repudiation bombshell

Lang’s bombshell came at the Premiers’ Conference held in Canberra in the second week of February in 1931. That occasion commenced what would be called ‘The Battle of the Plans’, with the Australian Government led by Scullin and Theodore – the latter only recently reinstated as Treasurer – and Lang emerging as the bearers of distinct alternatives.⁸ Scullin’s opening address presented a grim picture of a downward economic spiral that amounted to a 10 per cent decline in national income. Lang unveiled his dramatic plan on the third day: Australian governments would ‘pay no further interest to British bond-holders until Britain has dealt with the Australian overseas debt in the same manner as Britain settled her own foreign debt with America’. Here, Lang was seeking to mobilise nationalist resentment, especially over war loans, neatly ignoring that the bulk of debt had been incurred in the 1920s. The second of his proposals was that the interest payable on government internal borrowing be reduced to 3 per cent.

Both policies would offend conventional sensibilities about the sanctity of contracts, while that with which he completed his trifecta smacked of funny money: Australia should abandon the gold standard and replace it with an alternative called ‘the goods standard’ backed by the nation’s production.⁹ Lang alarmingly declared that New South Wales would pursue his plan regardless of the position of the Commonwealth and the other states. In reality, New South Wales could not go it alone as it was subject to the Financial Agreement of 1927, embedded in the Constitution via a referendum the following year, and legislated in 1929: it made the Commonwealth responsible for New South Wales’ debt in the event of a default. Accordingly, there was much bravado on Lang’s part in the pretence that he could evade a legally binding agreement: when asked if he proposed to break away from it, he replied: ‘I have no objection to that at all; in fact, I desire it.’¹⁰

The Lang Plan received predictably rough handling. James Mitchell, the Western Australian Nationalist Party Premier, dissociated himself ‘from every word and sentiment uttered by Mr Lang’. Labor state premiers Ned Hogan of Victoria and Lionel Hill of South Australia were as critical as their conservative counterparts. Theodore predicted that such policies would lead to an ‘inevitable smash’ although even he felt he had to ‘admit the truth of Mr Lang’s remark that default in some form or other is staring us in the face’.¹¹ Thomas Bavin, NSW Opposition Leader, called the Lang Plan ‘sheer madness’, a policy of ‘dishonesty and theft’.

Media reaction was no less fierce. The Sydney Morning Herald did not mince words in condemning Lang’s ‘shameless breach of his definite public pledge against repudiation’ during the recent election campaign as a ‘declaration of war on behalf of Communism against the rest of Australia’. Its editorial carried the headline ‘Repudiation And Disgrace’.¹²

Theodore’s alternative, accepted by only the Labor premiers of Victoria and South Australia, was for a fiduciary note issue of 18,000 pounds; it became the centrepiece of what would be known as the Theodore Plan, a mildly inflationary course. The Sydney Sun was unimpressed. ‘Some poisons are so deadly that they carry their own warning’, it declared in relation to Lang’s proposal for ‘a dose of financial strychnine. Mr Theodore suavely measures us out a sniff of cocaine. The citizen may well be as chary of the suave Mr Theodore as of the berserk Mr Lang’.¹³

Politics now intervened to assist Lang. On 7 March, Lang loyalist Eddie Ward won a federal by-election for East Sydney campaigning in support of the Lang Plan, and in defiance of Scullin government policy. He was subsequently refused admission to caucus. Despite the large swing against Labor, an emboldened Lang defaulted.¹⁴ When, on 23 March, Scullin asked whether Lang intended to pay interest due with the Westminster Bank in London at the end of the month, the reply was that he did not, and that if ‘you are able to arrange accommodation with Commonwealth Bank for this State we would readily apply the money for the relief of the dire distress existing here because of unemployment’.¹⁵

The musings of NSW Treasury Under Secretary Clarence Chapman, in a minute prepared for the eyes of the Premier, hint at both the desperate state of finances and the lack of genuine policy substance underlying the Lang Plan. As Chapman pointed out, government policy was to reduce interest rates to 3 per cent, and the rate being charged by the Bank of England happened to be 3 per cent (with 186,377 pounds owing in interest).

That raised the sticky question of whether the government should pay this bill and, in the case of the Westminster Bank which charged the higher rate of 5 per cent (542,875 pounds owing), whether it should at least pay an amount equal to 3 per cent. But as Chapman pointed out, the government did not have the cash to pay 3 per cent on the large sum owed to the Westminster Bank, so ‘it would appear inequitable to pay the Bank of England amount and not 3 per cent of the amount payable through the Westminster Bank’.¹⁶ No doubt Chapman’s sophistry was music to Lang’s ears, but NSW policy was being received poorly in London and New York financial circles. In April 1931, the State defaulted on the interest payments owed to the London banks, followed by further defaults in the following weeks. The federal government met the accumulated shortfall of 4,483,961 pounds for the sake of preserving the country’s credit, but also clawed back about a million pounds that the Commonwealth would otherwise have paid New South Wales.¹⁷

The NSW Government Savings Bank, with its million accounts and many small depositors, closed its doors on 23 April, to a great extent the victim of Lang’s recent defaults. That intensified public fear but unlike in the financial panic of 1893, it did not prompt a general run on the banks. Lang also gave signs of a retreat. He formally accepted the Premiers’ Plan, agreed by Australian governments in June after Scullin and Theodore had failed to gain Senate or Commonwealth Bank support for Theodore’s note issue. The Plan committed governments to large cuts in expenditure and salaries. Needing further assistance in July, Lang undertook to meet future commitments and stick to the Premiers’ Plan, and the Loans Council agreed to the issue of Treasury Bills amounting to a further 500,000 pounds.

That matters could be so simple in anything concerning Lang was wishful thinking: he only went through the motions of adhering to the agreed policy and dismissed the idea that the working class should pay the price for the financial crisis. The Lang Plan was foundational to this set of commitments, the Premiers’ Plan inconsistent with them. A reckoning seemed likely, if not inevitable, as both economic and political pressure mounted on the key national players.

On 25 November 1931 Jack Beasley, who had been leading the breakaway group of Lang supporters in the Australian Parliament for some months, moved an adjournment of the House of Representatives to discuss how the government selected men for relief work. The background was an allegation that Theodore’s organisers had exercised favouritism towards unemployed workers in Theodore’s seat of Dalley to boost his electoral stocks there. In the ensuing division on the floor of the Parliament, which saw the Langites combine with the Opposition including Lyons and his ex-Labor followers, the government was defeated by five votes. The Governor-General, Sir Isaac Isaacs, granted Scullin a dissolution, which meant an election for the House of Representatives and half the Senate, called for 19 December.¹⁸

The campaign that followed, in the words of historian Bede Nairn, ‘brought the skeleton of the Lang Plan out of the closet’ but the result killed any prospect of Lang being able to foist that plan on the Australian Labor Party or the country as a whole.¹⁹ Lyons won by a landslide and subsequently formed a United Australia Party government. A man such as Lyons who had gained a national reputation for probity through his leadership of a campaign to gain subscribers to a government loan conversion in 1930 – appealing to the public’s sense of ‘honour’ – was certain to be less cooperative in dealing with Lang than Scullin or Theodore had been.²⁰

Lang versus Lyons

The scene was now set for a showdown between the new Australian Government and Lang. The Premiers’ Conference and Loan Council were due to meet in Melbourne – suffering a blistering heatwave that had seen temperatures exceed 40 degrees – over a week in late January and early February. The next NSW interest payments would fall due in the latter stage of the meetings, 1-4 February 1932. Lang and Lyons spoke about New South Wales' position on the evening of 28 January, after the Premiers’ Conference session, which was followed by a resumption of the Loan Council meeting the next morning. Lang told the latter that he would be unable to meet the full amount falling due in London and New York – just over 958,763 pounds. His government could find 458,763 pounds, leaving a half-million-pound shortfall that he hoped the Commonwealth might advance to New South Wales.

Lyons, however, was not prepared to travel the same path as Scullin. ‘The figures agreed to by Mr Lang and his Treasury Officers, as submitted to the present meeting of the Loans Council, show that he has failed to perform his undertakings under the Premiers’ Plan by an amount of 3,460,000 pounds’, Lyons declared. Lang, he predicted, ‘will ignore any undertaking he has given whenever it suits him so long as the Commonwealth is prepared to shoulder the responsibilities of the Government of New South Wales’. The Australian Government was effectively ‘the trustee for the holders of New South Wales Bonds’ and he foreshadowed action against the NSW Government, to get hold of the funds required to meet the State’s obligations.²¹

Meanwhile, the lenders were applying the thumbscrews, ever so nicely. The chief general manager of London’s Westminster Bank wrote on 4 February to the Commonwealth’s financial advisor in Australia House in London, J. R. Collins, that investors were placing responsibility for the NSW Government’s default on the Commonwealth and that with every delay in the payment of the interest bill, ‘definite damage’ was being done ‘to the Federal Government’s credit in this Market, having particular regard to the further and future financial assistance which may be sought for Australia in this country’.²²

The message was clear: that Lyons needed to pay Lang’s bills. The new government, which would need all the cooperation in the City of London that it could get, was in no position to resist. On 10 February, Lyons cabled Lang confirming an announcement of the day before that the Commonwealth would make arrangements to pay the interest bill of the NSW Government. The message then listed all of the sums that were outstanding, and the bondholders to which they were due, asking Lang to confirm the accuracy of these amounts. Lang’s reply was typically unhelpful: he referred to legal advice that in view of existing and threatened Commonwealth litigation against New South Wales, he needed an assurance that his reply would not be used as evidence in court. Lyons professed surprise: ‘Surely these are simply facts which should not be clouded by raising legal technicalities.’ Lyons nevertheless provided the assurance Lang wanted, ‘at the same time expressing my astonishment that your Government has asked for such an undertaking’.²³

In February and March 1932, the Australian Parliament dealt with bills that clarified the government’s responsibility for making interest payments on behalf of a state that defaulted, as well as authorising Canberra to recover from that government the funds to be paid to bondholders. The two relevant acts received assent on 12 March

Late on the morning of that day, Lang and Treasury officers accompanied by police secretly visited the Bank of New South Wales and the Commercial Bank of Sydney and, having presented cheques to each, took away in suitcases well over a million pounds, mostly in small denominations that could be used to pay wages and salaries.²⁴ The cash was to be stored in Treasury vaults in the Bridge Street building and kept out of the hands of Commonwealth officials. ‘Though it is not generally known’, the Daily Telegraph explained, ‘the Treasury has commodious vaults’. These had once been used to store the colony’s gold reserve; they were now located below the Premier’s office, as if to dramatise just who was calling all the shots.²⁵ Uniformed and armed police patrolled the vicinity and the corridors to ensure that the Lang government’s need did not become a thief’s opportunity, giving the building the appearance of a barracks. Lang also initiated a High Court challenge against the Financial Agreements Enforcement Act 1932, but on 6 April a majority of 4-2 ruled that it was valid. The Australian Government ordered that state taxes be paid over to the Commonwealth: people turned up at the Commonwealth Bank building in Castlereagh Street in their hundreds to pay their dues.²⁶

The battle between Lang and Lyons, New South Wales and the Commonwealth, had strong elements of farce but it also signalled a breakdown in Australia’s federal arrangements. At the end of March, Chapman of NSW Treasury seemed exasperated in clarifying for federal Treasury officials that a previous telegram he had sent them:

This situation was frightening for some, infuriating for others, but for the Treasury officers under Chapman, it was a massive and unprecedented professional challenge.

Rising social tension did not make their task any easier. While Lang remained a popular hero to many working-class people, to a growing number of citizens he was a hated figure. Some doubted his capacity to maintain the basic functions of government; others considered that he had little interest in doing so, since he was in league with Communists who would benefit from general disorder.

The question of whether the State had the money to pay salaries to its own employees became only one among many uncertainties. Some schoolteachers had to go without their salaries for a time. Railway employees outside Sydney only received their pay once it had arrived from the city in bullion boxes guarded by armed men. Public servants became paymasters, being sent out into the countryside in pairs with bags of cash, always well armed.²⁸

A threat of civil violence hung menacingly over these proceedings. The paramilitary New Guard drilled openly and talked brazenly about getting rid of the Lang government. More covertly, another paramilitary organisation, the Old Guard, lurked in the shadows, with tentacles extending across the State, preparing quietly to take control if Lang persisted in his behaviour.²⁹ Lyons, too, was feeling the strain. One senior member of his cabinet, the former prime minister Stanley Melbourne Bruce, privately confided his fears of ‘the possibility of his breaking down when the real pressure comes as it seems to me it inevitably must’.³⁰ Lang, meanwhile, seemed his usual brazen self but it seems likely that he, too, was looking for a way out of the situation.

The crisis meant that Treasury now operated as a bank, with special cheques able to be exchanged for cash over the heavily guarded counter.³¹ Lottery winnings were for a time collected from the Treasury until it was overwhelmed by demand; officials subsequently sent thousands in cash to the State Lottery Office where the lucky winners could pick up their loot.³²

Receipts from public transport posed a particular problem. Much of this money was in silver and copper, and it would have caused ‘congestion’ to take all of it into the Treasury – so it was ‘being kept in safes, under strong guard’, at several major stations before being converted into wages and salaries. Still, the Treasury needed to acquire an additional building in Sydney with a strongroom capable of storing the mountains of cash.³³

Meanwhile, the legalities of the confrontation were far from clear. The NSW Government looked to be in breach of the Audit Act, which required that revenues be banked each day.³⁴ State officials were also now likely to receive contradictory orders from the federal and State governments. Who would they obey? The police force was under the control of the State: it seemed unlikely to be willing or able to prefer Commonwealth over state instructions, especially as Lang was on good terms with the Police Commissioner. The Australian Government had ordered people to pay their state income tax to the Commonwealth, but even here there were difficulties. The federal government had handed over administration of its own income tax to the states in the 1920s. The same official was responsible for both state and federal tax; the relevant documents and returns were under the control of New South Wales.

The government, moreover, seems to have intended that they should stay under lock and key. A senior public servant, Lawrence Stanley Jackson, recalled almost 40 years later that Lang had instructed the State Works Department to lock up securely the floors of the Taxation Office where the records and returns were stored; these were now under the guard of Lang supporters, estimated to be 40 strong. The Australian Government nonetheless hatched plans for seizing the documents by force, a scheme that aroused no great enthusiasm among anxious public servants who would be responsible for the effort:

Major Longfield Lloyd, responsible for the small contingent of Commonwealth peace officers who would be available to help out, told of ‘the strong following behind Lang in Sydney, of the occupation of the building by the large number of so-called Lang’s thugs who were reputedly armed (though not necessarily with firearms), that there were numbers of Lang’s followers drilling every morning in Paddington Park with broomsticks, that the man who forced open the doors of the various floors obviously took his life in his hands, and that he and his two Peace Officers would be promptly pitched down seven flights of stairs.

While men armed with broomsticks hardly seemed a threat to the existing order, there were also concerns that even if the documents could be removed in postal vans, the latter might be overturned by Lang supporters in the streets. Longfield Lloyd favoured the use of tear gas to deal with such problems, but he was frustrated that the army did not want to pay for it. The navy, meanwhile, was on exercises in the Pacific, so Lang would at least be spared a bombardment.³⁵

The Governor, Sir Philip Game, now stepped in. Lang’s first default of late March 1931 had caused him much anguish and the question of whether he could retain as ministers ‘a cabinet which has openly repudiated public debts’ had led him to consult the Dominions Office and raise with Lang himself the prospect of asking for the premier’s resignation.³⁶ While Game subsequently backed off, admitting that he had overstepped the mark, the idea of dismissal lingered in the wider community as NSW finances worsened and public confidence in the government disintegrated. Meanwhile, Lang’s efforts to rid himself of the Legislative Council so that he would get legislation passed that would extract sufficient funds from those he thought could and should pay to get the State through its difficulties aroused rising panic in the middle class. When Game did finally dismiss Lang on 13 May 1931, his grounds were that the government had issued circulars which, in requiring the collection of revenue in cash and their deposit in the Treasury Bank, had instructed State public servants to break federal law concerning the recovery of funds owing to the Commonwealth.³⁷ He also said the government was in breach of the Audit Act. Lang, who had refused Game’s request that he withdraw the instructions, took his medicine; he may well have been courting dismissal since all other routes out of his difficulties had been closed off.

Coda

With Lang gone, and his opponent Bavin in place as caretaker Premier, New South Wales and the Commonwealth moved to resolve their differences. Treasury officials whose loyalty Lang demanded now found themselves with a new master and a new challenge; to repair the State’s finances and restore confidence in its governmental processes. One of the first actions was to move 4,769,502 pounds from the Treasury vaults back to the private banks.³⁸ Critically, Bavin undertook to make the cuts required under the Premiers’ Plan.

Ironically, that Plan contained a milder version of a policy on interest rates that Lang has advocated: it cut the interest rate for internal government loans to a maximum of 4 per cent, higher than Lang’s 3 per cent, but hardly any less a breach of the so-called sanctity of contracts – and it was accordingly greeted with hostility by the financial community.³⁹ The crisis had always been as much about politics as about probity: it was Lang’s adherence to radical policies and his refusal to implement the Premiers’ Plan, even when he professed formal acquiescence in it, that went to the heart of the crisis.⁴⁰ The Lang Plan was merely a political expedient that sought to codify and symbolise that refusal.

The United Australia Party, led by Bavin, won the June election in a landslide, inflicting a fatal blow to any serious prospect of Lang’s return as Premier. Fear subsided, but social and economic distress continued. For Lang, there were to be many more years of agitation and manoeuvring as he sought to maintain his hold over the NSW Labor Party, but his power was spent by the end of the decade.

For NSW Treasury, the ordeal was over, but it had arguably revealed itself as adaptable and capable under the most trying of circumstances. Senior officials had provided Lang with cautiously framed and expert advice, even if he was often inclined to go it alone in his dealings with other governments.⁴¹ One consequence of the effort to implement the Lang Plan could have been the complete collapse of the State’s payment systems, even the financial system as a whole. That this did not occur owed much to the efficiency and professionalism of Treasury.

My thanks to Dr Emily Gallagher for her research and advice and to Dr Joshua Black for his comments.