Returning to Australia in 1931, Scullin was faced with a party now deeply divided over how to respond to the Depression.
Jack Lang had won election as Premier of New South Wales and had become a leading alternative voice within Labor, advocating radical measures including repudiation of interest on debts to Britain and printing money to pay for public works programs to relieve unemployment and inflate the currency.
The NSW contingent in Federal parliament was sympathetic to Lang's views and had become disillusioned with Scullin's leadership and his compromises with conservative interests.
At the first meeting of cabinet upon his return, Scullin made things worse by reappointing Theodore as treasurer, despite his name not having been yet cleared over the Mungana Affair.
Although arguably Theodore was the most competent man available to implement Scullin's economic program, Lyons and Fenton (as well as several others) were strongly opposed and resigned from the cabinet in protest.
Making matters worse, Theodore had become a fierce personal rival of Lang within the New South Wales branch, and his return as treasurer further isolated radical elements of the party.
At the same time, the economy had continued to decline and unemployment had soared, with most of the government measures designed to combat the crisis still in limbo due to opposition either from the Senate or refusal of funding by the Commonwealth Bank.

In February Scullin and Theodore presented a comprehensive plan at a conference of the state premiers that attempted to straddle both orthodox and radical approaches.
While maintaining heavy budgetary cuts, it also planned to provide economic stimulus to help the unemployed and farmers, as well as repaying short-term debts and overdrafts held by British banks.
This would require substantial further funds to be advanced by the Commonwealth Bank, however Gibson soon made it clear he would not do so unless significant cuts to social spending (particularly pensions) was also implemented.
Scullin refused, instead planning to pay for the plan through the expanding the note issue.
This 'Theodore Plan' was approved by narrow majorities of the state premiers and then the parliamentary party.
However, Jack Lang rejected the plan, stating instead that Australia should default on its British debts until more equitable repayment terms were agreed to.
Lyons and the conservatives within the party were horrified, as were the Opposition, seeing note issue as a sure path to hyperinflation and complete economic ruin.

In March matters came to a head.
The East Sydney by-election saw Eddie Ward elected on a specifically pro-Lang platform, and the bitter campaign within the seat saw federal Labor and NSW Labor mutually expel each other from the party.
Scullin and the Federal party refused to admit Ward to the caucus, and subsequently Jack Beasley led five others out of the party room to sit on the cross-benches as "Lang Labor".
With chaos in Labor ranks and parliament facing a highly controversial plan for economic rehabilitation, the Opposition presented a motion of no confidence.
Lyons, Fenton and four others on the conservative wing resigned from Labor and crossed over to the opposition benches.
 Scullin was reduced to a minority government of just 35 members, depending on the Lang faction to stay in power.
Having built a large and popular following among the public, Lyons and his ex-Labor followers joined the Nationalists and the followers of the erstwhile Hughes in United Australia Party, with Lyons becoming the new Leader of the Opposition.
With a possible default by the Commonwealth looming in June, Scullin's minority government attempted to push through the Theodore Plan.
Although under pressure given the prospect of bankruptcy, the Senate and Gibson did not relent, and nearly all the bills needed to implement the Theodore Plan were rejected.
Nationwide opinion was divided on the government plan, however many were extremely concerned about the prospect of excessive inflation should the government start printing money to pay its b
Returning to Australia in 1931, Scullin was faced with a party now deeply divided over how to respond to the Depression. Jack Lang had won election as Premier of New South Wales and had become a leading alternative voice within Labor, advocating radical measures including repudiation of interest on debts to Britain and printing money to pay for public works programs to relieve unemployment and inflate the currency. The NSW contingent in Federal parliament was sympathetic to Lang's views and had become disillusioned with Scullin's leadership and his compromises with conservative interests. At the first meeting of cabinet upon his return, Scullin made things worse by reappointing Theodore as treasurer, despite his name not having been yet cleared over the Mungana Affair. Although arguably Theodore was the most competent man available to implement Scullin's economic program, Lyons and Fenton (as well as several others) were strongly opposed and resigned from the cabinet in protest. Making matters worse, Theodore had become a fierce personal rival of Lang within the New South Wales branch, and his return as treasurer further isolated radical elements of the party. At the same time, the economy had continued to decline and unemployment had soared, with most of the government measures designed to combat the crisis still in limbo due to opposition either from the Senate or refusal of funding by the Commonwealth Bank.
In February Scullin and Theodore presented a comprehensive plan at a conference of the state premiers that attempted to straddle both orthodox and radical approaches. While maintaining heavy budgetary cuts, it also planned to provide economic stimulus to help the unemployed and farmers, as well as repaying short-term debts and overdrafts held by British banks. This would require substantial further funds to be advanced by the Commonwealth Bank, however Gibson soon made it clear he would not do so unless significant cuts to social spending (particularly pensions) was also implemented. Scullin refused, instead planning to pay for the plan through the expanding the note issue. This 'Theodore Plan' was approved by narrow majorities of the state premiers and then the parliamentary party. However, Jack Lang rejected the plan, stating instead that Australia should default on its British debts until more equitable repayment terms were agreed to. Lyons and the conservatives within the party were horrified, as were the Opposition, seeing note issue as a sure path to hyperinflation and complete economic ruin.
In March matters came to a head. The East Sydney by-election saw Eddie Ward elected on a specifically pro-Lang platform, and the bitter campaign within the seat saw federal Labor and NSW Labor mutually expel each other from the party. Scullin and the Federal party refused to admit Ward to the caucus, and subsequently Jack Beasley led five others out of the party room to sit on the cross-benches as "Lang Labor". With chaos in Labor ranks and parliament facing a highly controversial plan for economic rehabilitation, the Opposition presented a motion of no confidence. Lyons, Fenton and four others on the conservative wing resigned from Labor and crossed over to the opposition benches.  Scullin was reduced to a minority government of just 35 members, depending on the Lang faction to stay in power. Having built a large and popular following among the public, Lyons and his ex-Labor followers joined the Nationalists and the followers of the erstwhile Hughes in United Australia Party, with Lyons becoming the new Leader of the Opposition. With a possible default by the Commonwealth looming in June, Scullin's minority government attempted to push through the Theodore Plan. Although under pressure given the prospect of bankruptcy, the Senate and Gibson did not relent, and nearly all the bills needed to implement the Theodore Plan were rejected. Nationwide opinion was divided on the government plan, however many were extremely concerned about the prospect of excessive inflation should the government start printing money to pay its b
James Scullin