In the 1923 General Election, the Labour Party won 191 seats. Although the Conservatives had 258, Ramsay MacDonald agreed to head a minority government, and therefore became the first member of the party to become Prime Minister. As MacDonald had to rely on the support of the Liberal Party, he was unable to get any socialist legislation passed by the House of Commons. The only significant measure was the Wheatley Housing Act which began a building programme of 500,000 homes for rent to working-class families.
Members of establishment were appalled by the idea of a Prime Minister who was a socialist. As Gill Bennett pointed out: "It was not just the intelligence community, but more precisely the community of an elite - senior officials in government departments, men in "the City", men in politics, men who controlled the Press - which was narrow, interconnected (sometimes intermarried) and mutually supportive. Many of these men... had been to the same schools and universities, and belonged to the same clubs. Feeling themselves part of a special and closed community, they exchanged confidences secure in the knowledge, as they thought, that they were protected by that community from indiscretion."
Two days after forming the first Labour government Ramsay MacDonald received a note from General Borlass Childs of Special Branch that said "in accordance with custom" a copy was enclosed of his weekly report on revolutionary movements in Britain. MacDonald wrote back that the weekly report would be more useful if it also contained details of the "political activities... of the Fascist movement in this country". Childs wrote back that he had never thought it right to investigate movements which wished to achieve their aims peacefully. In reality, MI5 was already working very closely with the British Fascisti, that had been established in 1923. Maxwell Knight was the organization's Director of Intelligence. In this role he had responsibility for compiling intelligence dossiers on its enemies; for planning counter-espionage and for establishing and supervising fascist cells operating in the trade union movement. This information was then passed onto Vernon Kell, Director of the Home Section of the Secret Service Bureau (MI5). Later Maxwell Knight was placed in charge of B5b, a unit that conducted the monitoring of political subversion.
In September 1924 MI5 intercepted a letter signed by Grigory Zinoviev, chairman of the Comintern in the Soviet Union, and Arthur McManus, the British representative on the committee. In the letter British communists were urged to promote revolution through acts of sedition. Hugh Sinclair, head of MI6, provided "five very good reasons" why he believed the letter was genuine. However, one of these reasons, that the letter came "direct from an agent in Moscow for a long time in our service, and of proved reliability" was incorrect.
Vernon Kell, the head of MI5 and Sir Basil Thomson the head of Special Branch, were also convinced that the letter was genuine. Kell showed the letter to Ramsay MacDonald, the Labour Prime Minister. It was agreed that the letter should be kept secret but someone leaked news of the letter to the Times and the Daily Mail.
The letter was published in these newspapers four days before the 1924 General Election and contributed to the defeat of MacDonald and the Labour Party. In a speech he made on 24th October, Ramsay MacDonald suggested he had been a victim of a political conspiracy: "I am also informed that the Conservative Headquarters had been spreading abroad for some days that... a mine was going to be sprung under our feet, and that the name of Zinoviev was to be associated with mine. Another Guy Fawkes - a new Gunpowder Plot... The letter might have originated anywhere. The staff of the Foreign Office up to the end of the week thought it was authentic... I have not seen the evidence yet. All I say is this, that it is a most suspicious circumstance that a certain newspaper and the headquarters of the Conservative Association seem to have had copies of it at the same time as the Foreign Office, and if that is true how can I avoid the suspicion - I will not say the conclusion - that the whole thing is a political plot?"
After the election it was claimed that two of MI5's agents, Sidney Reilly and Arthur Maundy Gregory, had forged the letter. According to Christopher Andrew, the author of Secret Service: The Making of the British Intelligence Community (1985): "Reilly played an active part in ensuring that the letter was publicised. A copy of the Russian version of the letter has been discovered in what appears to be Reilly's handwriting, and there can scarcely have been another past or present SIS agent with so few scruples about exploiting it in the anti-Bolshevik cause."
It later became clear that Major George Joseph Ball (1885-1961), a MI5 officer, played an important role in leaking it to the press. In 1927 Ball went to work for the Conservative Central Office where he pioneered the idea of spin-doctoring. Later, Desmond Morton, who worked under Hugh Sinclair, at MI6 claimed that it was Stewart Menzies who sent the Zinoviev letter to the Daily Mail.
In his book, The Defence of the Realm: The Authorized History of MI5 (2009), Christopher Andrew argues that on 9th October 1924 SIS forwarded the Zinoviev letter to the Foreign Office, MI5 and Scotland Yard with the assurance that “the authenticity is undoubted” when they knew it had been forged by anti-Bolshevik White Russians. Desmond Morton, the head of SIS, provided extra information about the letter being confirmed as being genuine by an agent, Jim Finney, who had penetrated Comintern and the Communist Party of Great Britain. Andrew claims this was untrue as the so-called Finney report does not make any reference to the Zinoviev letter. Finney was also employed by George Makgill, the head of the Industrial Intelligence Bureau (IIB).
Christopher Andrew also argues that it was probably George Joseph Ball, head of B Branch, who passed the letter onto Conservative Central Office on 22nd October, 1924. As Andrew points out: “Ball’s subsequent lack of scruples in using intelligence for party-political advantage while at central office in the later 1920s strongly suggests” that he was guilty of this action. The following day, someone phoned Thomas Marlowe, the editor of The Daily Mail, with information about the Zinoviev letter. According to the author of Secret Service: The Making of the British Intelligence Community (1985), the man who made the phone-call "was almost certainly" William Reginald Hall, the former head of Naval Intelligence Division of the Royal Navy (NID).
Stanley Baldwin, the head of the new Conservative Party government, set up a Cabinet committee to look into the Zinoviev Letter. On 19th November, 1924, the Foreign Secretary, Austin Chamberlain, reported that members of the committee were "unanimously of opinion that there was no doubt as to the authenticity of the Letter". However, eight days later, Desmond Morton admitted in a letter to MI5 that "we are firmly convinced this actual thing (the Zinoviev letter) is a forgery."
Morton also wrote a report for Chamberlain's Cabinet Committee explaining why the SIS originally considered the Zinoviev letter was genuine. According to Gill Bennett, the author of Churchill's Man of Mystery (2009), Morton came up with "five very good reasons" why he thought the letter was genuine. These were: its source, an agent in Moscow "of proved reliability"; "direct independent confirmation" from CPGB and ARCOS sources in London; "subsidiary confirmation" in the form of supposed "frantic activity" in Moscow; because the possibility of SIS being taken in by White Russians was "entirely excluded"; and because the subject matter of the Letter was "entirely consistent with all that the Communists have been enunciating and putting into effect". Bennett goes onto argue: "All five of these reasons can be shown to be misleading, if not downright false."
Research carried out by Gill Bennett in 1999 suggested that there were several MI5 and MI6 officers attempting the bring down the Labour Government in 1924, including Stewart Menzies, the future head of MI6. Bennett developed this theory in her book, Churchill's Man of Mystery: Desmond Morton and the World of Intelligence (2006). According to her research, Desmond Morton, Secret Intelligence Service's Section V, was the key figure in this conspiracy.