The British, too, were prepared to surrender Detroit. Britain was actively negotiating a new treaty with the United States to settle still outstanding matters from the treaty that had ended the Revolutionary War. Even more important, Britain needed to keep the United States neutral in the war it had begun with France in 1793. In Jay's Treaty, as the final agreement was called, Britain pledged in good faith to surrender Detroit and the other contested forts in the Northwest on June 1, 1796. On July 11, 1796, an advanced detachment of a regiment under the command of Colonel John Francis Hamtramck finally reached Detroit and assumed command of the outpost.

The United States' flag now flew over a city that had a most curious social and economic structure. The vast majority of the community's five hundred residents was French. These people had no particular affection for either Britain or the United States. A small group of British merchants who primarily sold furs to other dealers in Montreal dominated the community's economy. With the arrival of Hamtramck's troops, governance of the community now fell into the hands of the Americans. They had good reason to dislike the British and no understanding of the ways of the French. Indeed it appears that the French treated the newly arrived American garrison much as it had the departed British soldiers-as political masters who, the French believed, had little or no real impact on day-to-day life and social customs.

The British traders, who had been slowly abandoning the city since the mid-1780s, would eventually leave entirely, although not quickly. Jay's Treaty had granted to British traders the right to continue operating in Detroit and other posts in the American Northwest and to export their fur pelts. And although the British military had withdrawn from Detroit, it did not go very far. The British constructed Fort Malden on the Canadian side of the Detroit River, just a few miles south of Detroit. From there, the British continued their practice of annual gift giving to various Indian tribes, regardless of which side of the river they happened to live on. Thus the British retained significant influence over Indian residents in the United States.

In the first years of American rule Detroit became a small garrison town whose merchant elite was migrating across the river. Not surprisingly, the community declined. In 1805 Congress, wrestling with the implications of drawing boundaries for the territories that would eventually become states, created a Michigan Territory with Detroit as its capitol. Although Detroit had regained its status as a center of government, the economic consequences of the decision were minimal. A few civilian administrators joined the soldiers already at the fort. Whatever hopes the inhabitants may have had for better times based on the community's new status as a territorial capitol were likely laid low by a devastating fire on June 11, 1805, that destroyed virtually every building on the twenty acres or so of land that comprised the city. Only the fort and a few naval buildings near the river survived.

Territorial governor William Hull and Judge Augustus Woodward decided to take advantage of this disaster and build a planned community. Woodward created a street plan based on the design of the nation's new capitol, Washington, D.C. Woodward's plan featured grand avenues two hundred feet wide built upon a spoke and hub system. In 1817, Governor Lewis Cass streamlined the plan, narrowing the streets to sixty-six feet and revising some of the more unsatisfactory aspects of the spoke and hub system, including eliminating a proposed street that would have divided his own farm. Ultimately Woodward's plan was abandoned altogether, and the more traditional midwestern grid pattern of streets was used in Detroit. But components of the plan that had already been built, particularly Grand Circus and the streets to the south of this central point, remained.

The small settlement's French majority saw little need for and considerable nuisance in a complicated street plan that called for grand avenues two hundred feet wide. But Hull and Woodward simply ignored the French. This proved to be typical of how the territorial government would deal with the citizens of the capital city. Woodward drew up and Hull promulgated a complex legal code for the territory that imposed American notions of government on Detroit and ignored past French practice. When French social customs, particularly the longstanding French tradition of spending much of Sunday afternoon and evening in social gatherings that often involved considerable drinking and substantial gambling, came to trouble the American administration, it enacted two dozen laws to limit French behavior. Although the Americans did not necessarily connect the two, the French clearly linked these new laws with the $20,000 appropriated shortly thereafter for a new courthouse and jail.

The territorial government was no more respectful of traditional land-use patterns that conflicted with its notions of ownership. French land grants were made in a way that differed greatly from the pattern legislated by the American Congress. Instead of using the American grid pattern, the French had granted land in such a way as to ensure each settler a small place on the riverfront with a narrow plot of land extending several miles into the interior. In addition, from the settlement's founding, the French had enjoyed a common area outside the fort where food could be grown or animals grazed. In 1809 the territorial officers took it upon themselves to divide these common areas into lots and sell them at auction. The French protested vigorously. Despite the action's dubious legality, the territorial officers who ordered the sale saw no reason to reverse their decision. The distant federal government, to whom the French petitioned for relief, was not willing to intercede in such a local matter. The French residents of the city slowly came to realize that, unlike the British, who had generally administered Detroit as a military outpost and fur-trading center run along rules that imposed few real restraints on past French practice, the Americans meant to recast the city in their own image.