Negotiations between Britain and the United States had begun during the presidential administration of Andrew Johnson (1865-1869).  After Grant's election in November 1868, the president-elect informed Johnson's secretary of state, William Henry Seward, that he wanted to be consulted during the ongoing talks.  Seward, however, ignored Grant and reached a settlement with Britain, known as the Johnson-Clarendon Convention, which only provided financial restitution to private American citizens for specific damages, and did not cover general harm caused by the British-built Confederate warships against the Union military cause.  Grant opposed the unpopular treaty, and the Senate rejected it overwhelmingly, 54-1.

The treaty's failure added fuel to the fire of other problems between the two countries, most notably, Fenian (Irish nationalist) raids from New York into British Canada, and disputes between American and Canadian fishermen.  The most prominent anti-British voice in American politics belonged to Senator Charles Sumner of Massachusetts, the Republican chairman of the Senate Foreign Relations Committee.  In April 1869, Sumner delivered a speech on the Senate floor in which he insisted that the British government owed American taxpayers $2 billion in damages, and recommended the down payment be Britain's cession of Canada to the United States.  Grant initially shared Sumner's views and appointed a Sumner protégé, John Lothrop Motley, as U.S. minister to Great Britain.

However, by the end of 1869, Grant's secretary of state, Hamilton Fish, had convinced the president that Sumner's rhetoric and position were inappropriate.  In addition, the Massachusetts senator increasingly angered the president by blocking Grant's first nominee for treasury secretary and several diplomatic appointments, opposing repeal of the Tenure of Office Act, and remaining outspoken on the Alabama claims issue.  The last straw occurred when the senator sank the Grant administration's treaty to annex Santo Domingo (1870), after which the president orchestrated Sumner's removal as chairman of the Foreign Relations Committee, and replaced Motley as minister to Britain.

In Britain, the administration of Prime Minister William Gladstone (1868-1874) hoped to improve relations with the United States.  By late 1870, British officials were worried about the Franco-Prussian War and Russia's rejection of the neutralization of the Black Sea under the terms of the Treaty of Paris.  Not wanting to see ships of Britain's enemies built in ports of the neutral United States, Gladstone proposed that the Alabama claims and all other British-American disputes be arbitrated by a joint British-American commission.  On February 24, 1871, the Joint High Commission, composed of distinguished teams of negotiators from both nations, met in Washington, D.C., to forge an agreement.  The most valuable work was undertaken informally by the two commission leaders, Secretary Fish for the United States and George Robinson (Lord Ripon) for Britain.  

After little over two months, representatives of Britain and the United States signed the Treaty of Washington on May 8.  Under its terms, the Alabama claims were submitted to a five-member international tribunal; Britain expressed official regret at the damage done by the vessels; new guidelines were established for maritime neutrality (later accepted as international law at the second Hague Conference in 1907); American and Canadian fishermen were given ten-year access to the other's territorial waters, from which they could ship home fish duty-free; and the border dispute over the San Juan islands in the Pacific Northwest would be decided by Emperor Wilhelm of Germany (who ruled the next year in favor of the U.S.).  Gladstone generously agreed to waive Canadian claims against the United States for the Fenian Raids.

The Treaty of Washington was praised by the press, including Democratic newspapers like the New York World.  The U.S. Senate ratified the treaty 50-12 on May 24, 1871, with Senator Sumner voting in the affirmative.  Although troubles between British Canada and the United States flared up over the next few decades, the Treaty of Washington was a major turning point in improving British-American relations; never again would the two nations be enemies.  It also set a precedent for settling international disputes when the Geneva Court of Arbitration (or Tribunal) met the next year. On September 14, 1872, the Court announced that Britain would pay the United States $15.5 million for the Alabama claims (note the arrow Uncle Sam holds in the inset picture).