At the beginning of 2001 a group of young Australians recognised the inadequacy of the political choices facing the Australian electorate and banded together to create a serious, progressive, small-government alternative.

The ACT Division of the Liberal Democratic Party (LDP) was formed in March 2001. The party was registered in late August (despite objections from both the Liberals and the Democrats) and participated in the ACT Legislative Assembly election. It ran the fifth biggest ticket (7 candidates) and polled 1% of the vote - defeating most minor parties and independents.

In the 2004 ACT election the LDP increased its vote to 1.3%. In the seat of Molonglo, the party's founder John Humphreys picked up 1.8% of the vote and beat the Australian Democrats.

In 2005 David Leyonhjelm joined the party and, in conjunction with Peter Whelan and party President David McAlary, set out to recruit members and achieve federal registration. A new constitution was adopted, administration upgraded and membership increased to more than 1300.

An application for Federal registration was lodged in January 2007.  However, the Australian Electoral Commission declined to register the party under that name because of new legislation prohibiting registration of parties with names that "a reasonable person would think suggests that a connection or relationship exists between the party and a registered party if that connection or relationship does not in fact exist."

The party took a pragmatic decision that a change in the party's name would allow it to achieve registration in time to enter the 2007 federal election, opting to use the name Liberty and Democracy Party. The AEC advertised its intention to register the LDP in August 2007 and registration was achieved in September.

In the 2007 election the party fielded Senate candidates in all States and the ACT, plus 47 lower house seats. Appearing as simply LDP on the ballot paper, the party's vote ranged from 0.1% to 1.6% in the HoR and up to 0.24% in the Senate.

In June 2008 the party contested the Gippsland by-election, endorsing local Councillor Ben Buckley and using television advertising for the first time. The party's vote rose to 4.2%.  In October 2008 it ran in the ACT election again, achieving 0.9% of the vote.

In late 2007 the party applied to regain the name to Liberal Democratic Party. Despite objections by the Liberals and Democrats, the application succeeded in December 2008.