How did the Federalists and the Democratic-Republicans differ from one another?
The primary difference between the two was the power they were willing to accede to the Federal Government based on their particular interpretation of the Constitution. The dispute arose when Alexander Hamilton proposed a Bank of the United States which would be a depository for government funds, and could also issue bank notes (currency) based on bonds which it had held. Thomas Jefferson and James Madison objected, arguing that the Constitution did not give Congress power to create a bank. They believed in a very strict interpretation of the constitution, particularly the 10th Amendment:
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
Hamilton countered that since Congress had the power to regulate commerce and collect taxes in the name of the U.S., the bank was "necessary and proper" under Article I Section 8 of the Constitution:
To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.
The end result of the dispute was the creation of separate political parties for the first time in the history of the U.S.: the Federalists supported by Hamilton and comprised primarily of bankers and wealthy eastern businessmen who supported a strong government and a liberal interpretation of the Constitution; and the Democratic Republicans formed by Jefferson and Madison to counter the Federalists. It was comprised primarily of supporters of an agrarian America who believed the states were more important than the central government and that the federal government should be kept weak by a strict interpretation of the constitution. Although both parties have long since been relegated to the historical background, the dispute over constitutional interpretation is still alive and well.