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It was a political deal made between Alexander Hamilton, James Madison and Thomas Jefferson in 1790 that made a site on the Potomac River the actual capital. But George Washington created it by picking the spot on the Potomac where it would be and drawing the boundaries. The Constitution gives the Congress the power to select a seat of government not exceeding ten square miles from parts of different states that may wish to cede such areas to the Federal Government. Several sites were in the running to be capital. At the time there were two great issues being debated. One was whether the federal government should assume the debts the states had incurred in fighting the war. The other was where the capital of the new country would be located.

Hamilton, a northerner, wanted the federal government to assume all state war debts, but Madison and the southern states did not want this. Madison had Hamilton's plan completely stalled. As to the new capital, the southern states wanted it to be in Virginia or Maryland. Northern states wanted it kept in the north. Jefferson was afraid these impasses would destroy the union. So he got Hamilton and Madison together for dinner one night and the three of them hammered out a compromise: Debts for Capital. The House of Representatives passed the Residence Bill locating the capital at some site to be chosen on the Potomac River on July 9, 1790. The House then passed the Assumption Bill, having the federal government assume state war debts, on July 26, 1790. Then Congress authorized Washington to create a district on the Potomac River to be capital.

If you look at a map of D.C. it looks like a partial square north of the Potomac with nothing south of it. It used to be a full square when Washington laid it out. Maryland gave up land north of the Potomac and Virginia gave up land south of it to form a perfect square. Several years later residents on the Virginia side petitioned Congress to have the former Viginia land given back to Virginia, which Congress did.

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