The district's transformation from a New South Wales rural area to a built-up national capital began during political debates over Federation in the early 20th century. At the time, Melbourne was Australia's largest city and the obvious place for the capital. The western colonies Western Australia, South Australia and Victoria supported Melbourne. However, New South Wales (the largest colony) and (to a lesser extent) Queensland, favoured Sydney which was older than Melbourne and the only other large city in Australia. Perhaps one or another of the two colonial capitals might have eventually been acceptable to the smaller states, but the Sydney-Melbourne rivalry was such that neither city would ever agree to the other one becoming the capital.
Eventually, a compromise was reached: Melbourne would be the capital on a temporary basis while a new capital was built somewhere between Sydney and Melbourne. Section 125 of the Constitution specified that the capital must be placed in a Commonwealth territory within New South Wales but at least 100 miles from Sydney.
After an extensive search, the present site, about 300 kilometres south-west of Sydney, in the foothills of the Australian Alps, was chosen in 1908 as a result of survey work done by the government surveyor Charles Scrivener in that year. Two people who campaigned strongly for the Federal capital to be in the Canberra area were John Gale, the publisher of The Queanbeyan Age and Federal politician King O'Malley. The choice of site was a disputed one, and narrowly beat Dalgety, a small town near the NSW/Victoria border.
The NSW government ceded the new Australian Capital Territory to the Commonwealth Government on 1 January 1910. In that same year, the ACT became an alcohol-free area as a result of legislation that the Minister for Home Affairs, King O'Malley, steered through the Federal Parliament in Melbourne. (Ironically, a pub named after O'Malley was established in the city centre of Canberra during the 1990s.)