While the conscription crisis of 1916-17 did great damage to the Labor Party, it also had a destructive impact on Australian society as a whole. Australia emerged from the war with the memory of contested loyalties, so that the 1920s saw society bitterly divided along lines of class, ethnicity and religion and still plagued by questions about loyalty. The economy stubbornly refused to revive to pre-war levels, so that soldiers returning from the war had difficulty finding employment. Many Australians were looking for someone to blame. You could blame the unions, blame Irish Catholics, blame those Australians who wanted to wave an Australian flag rather than the Union Jack, blame the banks, or blame anyone else other than your own kind of people.
While conservative sections of society fostered this politics of blame, the Labor Party was more interested in recovering from its recent split so that it could begin again to present a reforming program to the electorate. Although the party remained out of office federally through most of the 1920s, it was remarkably successful in putting the split behind it and presenting an image of idealism and responsibility. Indeed, at the State level the 1920s saw some of the most important and historic achievements of Labor governments.
There were two developments in the party system about 1920 that were to make life more difficult for the Labor Party. The most direct challenge came from the foundation of the Communist Party in that year. Communists were never able to mount a challenge in the electorate, but their presence, and the Russian trajectory towards dictatorship and civil war, meant that conservative politicians had an easy target in portraying all Labor politicians as influenced by Communists. It was a damaging and probably determining issue for the ALP in the 1922 Federal election. The Communist bogey would continue to be a thorn in the side of Labor for the next half century.
The other development was the foundation of the Country Party around this time. At first it seemed more of a challenge to the Nationalist Party from which it generally emerged, and it certainly worked to the advantage of Labor a number of times in the 1920s, but the ALP had always portrayed itself as the natural party for rural voters, and that was now under serious challenge. To win office in the future it would need to win more seats in the cities.