What happened the last time there was a peacetime coalition in the UK? The Liberal Party enthusiastically entered it but badly split between two dominant personalities, dividing the party for generations.
Sir John Simon had served successively as Solicitor General, Attorney General and Home Secretary under Asquith and then had emerged in the 1920s as the main heir to the Asquith wing of the party in the clashes with Lloyd George. He was also appointed as the chair of the "Simon Commission" to study constitutional reform in India.
Sir Herbert Samuel had also held high office under Asquith, including as Home Secretary, but then spent most of the 1920s out of Parliament and instead served as the first High Commissioner for Palestine for five years, then returning to the United Kingdom and heading the "Samuel Commission" that investigated the coal industry and sought to solve its problems before the General Strike. He returned to active Liberal politics and was re-elected to Parliament in 1929.
The 1929-1931 Parliament saw the Liberals hold the balance of power between Labour and the Conservatives and like today the party found itself divided over what course of action to follow and which party to back, complicated further by the harsh economic climate. A minority Labour government was formed which tried to govern and made some concessions to the Liberals, including introducing a Bill to change the voting system to the Alternative Vote, but the Liberals still badly divided with Simon and Lloyd George at the head of rival factions. Eventually in the summer, Simon and some followers resigned the Liberal whip.
The events of August 1931 (see Coalition forming for more details) totally changed the situation. The Labour government fell over proposals to cut public spending and a special "National Government" that drew together politicians from all three parties was formed. Lloyd George was ill so Samuel was acting leader of the party and entered the Cabinet as Home Secretary once more. Although the Liberal ministers were all drawn from the loyalist wing of the party, unity broke out in support of the government. But it couldn't last.
The Conservatives in the National Government proposed to seek an electoral mandate to introduce protectionist tariffs to help British industry and the Liberals split three ways over this. Lloyd George and a few followers (mainly his family) completely withdrew their support from the National Government and sought an informal alliance with the Labour Party over free trade. Meanwhile the bulk of the Liberals split in two. One group under Samuel were opposed to tariffs but wished to fight the battle within government. The other group under Simon were prepared to accept tariffs. The "Samuelites" retained control of the official party apparatus and a formal faction called the "Liberal Nationals" emerged under Simon. The government won an enormous majority in the November 1931 election and in the following government reshuffle, Simon became Foreign Secretary, with both factions of Liberals now represented.
The split continued over the next two years as the Samuelites tried to resist being part of the implementation of tariffs. First the government suspended the principle of collective responsibility to allow Liberal ministers to openly oppose government policy (something we might see again in the coming years), then the Liberal ministers resigned their posts whilst still sitting on the government benches in the Commons, and then finally in November 1933 they moved to the opposition benches. In the course of these events the Samuelites and Simonites became ever more divided with the result that the Liberal Nationals had become a separate party from the Liberals.
There were attempts to reunite the various strands of the Liberal family over the next few years but apart from Lloyd George's followers rejoining the Samuelites (now the "Sinclairites" after Samuel lost his seat and was succeeded as leader by Sir Archibald Sinclair) it was not to be. The Samuelites became established as The Liberal Party and served in the wartime coalition, then went through a long history in the wilderness, eventually merging with the Social Democrats to form the Liberal Democrats. The Simonite Liberal Nationals remained strong allies of the Conservatives, formalising their alliance in 1947 before finally merging completely into the Conservatives in 1968.
The fate of the Liberal Nationals has haunted the Liberals for decades and made them wary of too closely allying with one party or another without changing the voting system. Now they’ve entered another coalition but already there are signs that some senior Liberal Democrats are not entirely happy with the new arrangements (e.g. BBC News: Charles Kennedy refused to back Lib Dem-Tory pact). Could we see the Liberal Democrats once more permanently divide over a coalition? And which side of the divide will Nick Clegg be on?