The history of the USPD began on December 21 1915, when 20 members of the SPD fraction in the Reichstag, the German parliament, voted against the authorization of further credits to finance World War I, an incident that emphasized existing tensions between the party's leadership and the left-wing pacifists surrounding Hugo Haase and ultimately led to the expulsion of the group from the SPD fraction on March 24 1916.
To be able to continue their parliamentary work, the group formed the Sozialdemokratische Arbeitsgemeinschaft (SAG, "Social Democratic Working Group"); concerns from the SPD leadership and Friedrich Ebert that the SAG was intent on dividing the SPD then led to the expulsion of the SAG members from the SPD on January 18 1917. Three months later, on April 6 1917, the USPD was founded at a conference in Gotha, with Hugo Haase as the party's first chairman; the Spartakusbund also merged into the newly-founded party, but retained relative autonomy. To avoid confusion, the existing SPD was typically called MSPD (Mehrheits-SPD, "majority-SPD") from then on.
Following the Januarstreik in January 1918, a strike demanding an end to the war and better food provisioning that was organized by revolutionaries affiliated with the USPD and officially supported by the party, the USPD quickly rose to about 120,000 members; despite harsh criticism of the SPD for becoming part of the government of the newly-formed German republic during the Oktoberreform, the USPD reached a settlement with the SPD as the Novemberrevolution began, and even became part of the government in the form of the Rat der Volksbeauftragten ("council of people's deputies"), which was formed on November 10 1918 and mutually led by Friedrich Ebert and Hugo Haase.
The agreement did not last long, though, for on December 29 1918, Haase, Wilhelm Dittmann and Emil Barth left the council again to protest the SPD's actions during the soldier mutiny in Berlin on November 23 1918. At the same time, the Spartakusbund, led by Rosa Luxemburg and Karl Liebknecht, separated from the USPD again as well to merge with other left wing extremist groups and form the KPD (Kommunistische Partei Deutschlands, "Communist Party of Germany").
During the elections for the national assembly on January 19 1919, from which the SPD emerged as the strongest party with 37,9 percent of the votes, the USPD only managed to attract 7,6 percent; nevertheless, the party's strong support for the introduction of a system of councils (Räterepublik) instead of a parliamentary democracy attracted many former SPD members, and in spring 1920, the USPD had grown to more than 750,000 members, managing to increase their share of votes to 17,9 percent during the parliamentary elections on June 6 1920 and becoming one of the largest fractions in the new Reichstag, second only to the SPD (21,7 percent).
However, at the same time, a controversial debate over joining the Komintern broke out in the USPD; many members felt that the necessary requirements for joining would lead to a loss of the party's independence and a perceived "dictate from Moscow", while others, especially younger members such as Ernst Thälmann, argued that only the joining of the Komintern would allow the party to implement its socialist ideals.
Ultimately, the proposition to join the Komintern was approved at a party convention in Halle in October 1920, but the USPD split up in the process, with both groups seeing themselves as the rightful USPD and the other one as being outcast. On December 4 1920, the left wing of the USPD, with about 400,000 members, merged into the KPD, forming the VKPD (Vereinigte Kommunistische Partei Deutschlands, "United Communist Party of Germany"), while the other half of the party, with about 340,000 members and including three quarters of the 81 Reichstag members, continued under the name USPD; led by Georg Ledebour and Arthur Crispien, they advocated a parliamentary democracy.
Over time, the political differences between SPD and USPD dwindled, and following the assassination of foreign minister Walther Rathenau by right wing extremists in June 1922, the two parties' fractions in the Reichstag formed a common working group on July 14 1922; two months later, on September 24, the parties officially merged again after a joint party convention in Nürnberg, adopting the name Vereinigte Sozialdemokratische Partei Deutschlands (VSPD, "United Social Democratic Party of Germany"), which was shortened again to SPD in 1924.
The USPD was continued as an independent party by Georg Ledebour and Theodor Liebknecht, who refused to work with the SPD, but it never attained any significance again and merged into the Sozialistische Arbeiterpartei Deutschland (SAPD, "Socialist Worker's Party of Germany") in 1931.