[Break from the usual programming. The 10engines lab is almost spitting distance from the below landmark, Prospect Hill, thus the interest... info cobbled together from a variety of sources, crosschecked, but please feel free to jump in. Photo via nsub1's flickr.]
This Grand Union Flag (aka The Cambridge Flag or Continental Colors) is commonly accepted as the first American flag. The flag design wasn't sanctioned by the Continental Congress, but was a design that George Washington and others liked. It combined the British crosses of St. Andrew and St. George with 13 red and white stripes (to represent the 13 colonies). At that time, most Americans were fighting for respect and representation, thus the continued sign of loyalty to the crown.
The Grand Union was first flown by ships of the Colonial Fleet on the Delaware River, but on January 1, 1776, George Washington ordered that the flag be raised on a schooner mast (sometimes referred to as the liberty pole) placed on Prospect Hill (then called Mount Pisgah... can't imagine why they changed it) in what is now called Union Square (get it) in Somerville, MA. On that new year's day the Continental Army was laying siege to Boston which had been taken over by the British Army. Washington ordered the Grand Union flag hoisted above his base at Prospect Hill "in compliment of the United Colonies."
Meanwhile in Boston, the Loyalists (supporters of Britain) had been circulating a recent King George speech, offering the Continental Army favorable terms if they laid down their arms. These Loyalists were convinced that the King's speech had impressed the Continentals into surrendering —the Loyalists mistook the flying of the Grand Union flag over Prospect Hill as a show of surrender to King George. In fact, the Continentals knew nothing of the speech until later; Washington wrote in a letter dated January 4, 1776, "By this time, I presume, they begin to think it strange we have not made a formal surrender of our lines."
A new flag was needed... The Grand Union Flag remained the de facto national flag and ensign of the Navy until June 14, 1777 when the Continental Congress authorized the Stars and Stripes.