The organisation was founded in January 1917 by various London-based veterans groups opposed to the Review of Exceptions Act, which made it possible for people invalided out of the armed forces to be re-conscripted. It adopted the slogans "Every man once before any man twice" and "Justice before charity".
Although the Federation initially invited senior military figures to its meetings, they refused. The leadership was assumed by the left-wing Liberal Party MPs James Hogge and William Pringle, who fought for improved pensions and representation on relevant government committees. Frederick Lister later took over the presidency. The Federation's politics were thus broadly liberal, although there was a wide diversity of opinion.
F.B. Hughes, a member of the NFDDSS, stood on behalf of the group at the Liverpool Abercromby by-election, 1917, against Edward Stanley of the Conservative Party but was unsuccessful, taking only a quarter of the votes cast. This intervention persuaded the Earl of Derby to found Comrades of the Great War as a right-wing alternative veterans group.
The NFDDSS sponsored a considerable number of candidates at the 1918 general election. Only five of the candidates were officially approved by the National Executive Committee: Brookes, Dooley, Gebbett, Lister and Shakesby. The remainder were put forward by local branches; these included three candidates in Leeds who were jointly sponsored by the rival Comrades of the Great War and National Association of Discharged Sailors and Soldiers organisations in what was termed the "Silver Badge Party". During the campaign, both Dawson and Thompson were repudiated by the organisation.
In 1920, the Federation invited NADSS, Comrades of the Great War and the Officers' Association to a meeting to discuss a potential merger, and this was achieved in 1921, establishing the Royal British Legion.