By the end of Washington's second term, the ideological and personal differences between Hamilton and Jefferson had spread to politicians nationwide. The Hamiltonians coalesced into the Federalists—loose constructionists who favored a strong national government over the states, a solid economy based on manufacturing, and improved relations with Britain.

The Jeffersonians coalesced into the Democratic-Republicans—strict constructionists who feared a centralized government, supported the development and expansion of agriculture, and were generally pro-France.

The Election of 1796

Because rivalry between the Federalists and Democratic-Republicans had intensified, the election of 1796 was quite heated, unlike either of the previous presidential elections. Debates in Congress were passionate and sometimes even bloody, as was the case when one Federalist attacked a Democratic-Republican with a cane, only to be struck back with a fireplace poker.

Washington's vice president, John Adams, became the Federalist candidate, while Thomas Jefferson ran for the Democratic-Republicans. Adams received more Electoral College votes than Jefferson and thus became president. However, under the original Constitution, the candidate with the second-highest number of electoral votes—in this case, Jefferson—became vice president. Consequently, Adams was left saddled with a vice president from the opposing party. The presence of a Democratic-Republican so high up in the Adams administration made it difficult at times for the president to promote his Federalist agenda.

Undeclared Warfare with France

The first test of Adams's mettle came from France in 1796, when Paris ended all diplomatic relations with the United States in response to Jay's Treaty of the previous year. Having expected the United States to uphold the Franco-American alliance of 1778, France had been stunned when Washington issued the Neutrality Proclamation, then further stunned when Jay's Treaty had normalized relations with Britain. The French navy began to seize hundreds of American ships and millions of dollars worth of cargo without cause or compensation.

The XYZ Affair

Adams, wanting to avoid open war with France, sent ambassadors to Paris in 1797 to negotiate peace and normalize relations. When the emissaries arrived, however, French officials demanded a $250,000 bribe before they would even speak with the Americans, let alone guarantee a truce. These officials, whom Adams dubbed X, Y, and Z, outraged Congress and the American public. The XYZ Affair prompted many to cry, “Millions for defense, but not one cent for tribute!”

Adams's popularity skyrocketed, and Congress braced for war. Although no war declaration was ever made, the United States and France waged undeclared naval warfare in the Atlantic for several years. Shortly before he left office several years later, Adams negotiated an end to the fighting: in exchange for ignoring damages to seized cargos, France agreed to annul the Franco-American alliance.

The Alien and Sedition Acts

Adams's sudden boost in popularity gave him and the Federalist-controlled Congress the confidence to make the federal government even stronger. In an attempt to prevent French immigrants from making trouble within the United States in the event of a war with France, Congress in 1798 passed the Alien Acts, which extended the residency time required for foreigners to become American citizens from five years to fourteen years and gave the president the power to expel any aliens who were considered to be dangerous.

In the hopes of seriously weakening or eliminating the Democratic-Republicans, Congress also passed the Sedition Act in the same year, which banned all forms of public expression critical of the president or Congress.

Democratic-Republican Reaction

The Alien and Sedition Acts kicked the Democratic-Republican opposition into high gear despite the fact that the laws were intended to silence them. They considered the laws unrepublican and an affront to their First-Amendment right to free speech. For the first time, the Democratic-Republicans began to organize as a true opposition party in Congress: they formed caucuses, selected party leaders, and outlined a platform. They also challenged Federalists for the office of Speaker of the House, which previously had been a nonpartisan position.

This growing opposition only made the Federalists angrier and even more determined to ruin their opponents. Not surprisingly, the growing power struggle in Congress produced heated debates and even a few fistfights. In the most notorious fight, two Congressmen attacked each other with a cane and a hot fire poker.

The Virginia and Kentucky Resolutions

Vice President Jefferson and James Madison, even bolder in their opposition to the Alien and Sedition Acts, anonymously drafted the Virginia and Kentucky Resolutions, which proclaimed the Alien and Sedition Acts null and void in those states. The Resolutions argued that the Constitution was a contract among states and that when Congress violated that contract by passing unconstitutional legislation, the individual states reserved the right to nullify it.

The Resolutions were two of the most influential American political works prior to the Civil War. Arguing that member states had the authority to nullify unconstitutional acts of Congress, the resolutions effectively claimed the power of judicial review for the states, not the Supreme Court. The resolutions also sparked the first debate over whether the states or the federal government had the final authority.

Future Democrats—the political descendents of the Democratic-Republicans—would continue this line of reasoning later in U.S. history. One example was John C. Calhoun, whose “South Carolina Exposition” essay sparked the Nullification Crisis of 1832–1833, which contributed toward support for southern secession and the Civil War.

The Federalist Legacy

In the years between the ratification of the Constitution and James Madison's presidency, the system of two-party politics in the United States began, with political loyalties split between the Democratic-Republicans and Federalists. The Adams presidency marked the peak of the Federalist Party. John Adams was the first and only Federalist president, and the party largely dissipated by the end of the War of 1812.

Even though Federalism was short-lived, it had a profound impact on American history. Federalism helped create a strong Union, strengthened the office of the presidency, put the nation on solid financial footing, and established the authority of the Supreme Court.

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