This division was perhaps most strongly felt in NSW, but the issue affected the Party Australia wide. Labor Treasurer, Joe Lyons, left the Labor Party rather than act against the wishes of Sir Otto Niemeyer. As the representative of British capital, it was Niemeyer's job to make Australian Governments aware that any attempt to even defer overseas payments and use the money to alleviate the conditions of the unemployed, would lead to retaliation by overseas interests, sufficient enough to destroy any government which chose that path. Joe Lyons went on to become the UAP Prime Minister.
Discontent simmered between the industrial and political wings of the labour movement and it broke out into open factional warfare during the 30s. As a result, the Party split in NSW, into Federal Labor and Lang Labor, also known as State Labor.
Lang lost the October 1927 elections, but re-emerged in 1930 and became Premier during the early Depression years. During that time the Lang Government gave relief to tenants, restricting evictions and the sale of tenants' furniture.
When Scullin and five State Premiers proposed cuts in salaries, pensions and government expenditure, as a means of countering the Depression, J.T.Lang, the Labor Premier of NSW at first accepted and then rejected the plan and proposed the Lang Plan. This Plan called on Australian Governments to pay no further interest to British bond holders until Australian overseas debt was restructured, interest on all government borrowings to be 3 per cent and the replacement of the gold standard with a 'goods' standard. The furore this caused, with claims that Labor was financially irresponsible, scuttled Federal Treasurer Theodore's plan for a mildly expansionary budget to fund public works. This pre Keynesian measure would have created employment during the depths of the Depression. It had been a battle to get Caucus and the Commonwealth Bank to accept the proposal for a twenty million pounds of credit to be extended and Lang's actions lead to that approval being withdrawn.
The Lang Government was sacked by the NSW Governor, Sir Phillip Game on 13 May 1932 after Lang had instructed public servants not to pay money into the Federal Treasury, an instruction the Governor believed was unlawful.
This deeply divided the Party which lost the subsequent elections and stayed in opposition for nine years in NSW. By the late 1930s the Party had split into Industrial Labor (later known as Heffron Labor) and Lang Labor. In 1939, Lang's rule was finally ended and William McKell became the leader of the NSW Parliamentary Party.
A unified Labor Party was elected to govern NSW in 1941. That year marked the beginning of 24 consecutive years of Labor government in NSW, with William McKell elected as wartime Premier.
Apart from directing a successful war effort, McKell launched an elaborate scheme for social, economic and environmental reform, which was continued by successive Labor governments.
Labor was also in power federally. The Federal Government began a vigorous program of post war reconstruction and introduced a comprehensive welfare state. The Labor Government ensured that the returned service men came back to jobs and adequate benefits, unlike World War I where servicemen came back to unemployment and meagre benefits.
Australia 's veterans have one of the most generous levels of benefits in the world. The migration programme was stepped up to provide a workforce for the growing economy.