For almost 140 years, political opponents and commentators have vilified land grants made to railroads. No one is going to change anyone's mind after all these years. But, as collectors, maybe you might like to know what all the shouting was about.

The first large land grants came about with the Pacific Railroad Act of 1862

As best I can tell, the first major railroad land grants originated with the 1862 legislation that enabled the transcontinental railroad. At that time, the Union Pacific and Central Pacific railroads were granted 400-foot right-of-ways plus ten square miles of land for every mile of track built.

The Illinois Central had tried to procure large land grants back in the 1850s. And small land grants were offered in Ohio and Wisconsin in the late 1850s. The earliest land grant bonds in the database date from 1859. While those grants were immensely helpful, they were small in scope, and very much unlike like the millions of acres of land given away for the transcontinental railroad.

On the surface, ten square miles seems like a HUGE amount of land for the government to give away. And it was. But we first need to consider that the land was NOT ten contiguous square miles of land. In fact, the land was purposely given away in a "checkerboard" pattern leaving Federal land in between. So let's back up ever so slightly.

The Township and Range system of land survey

Much of the U.S. is laid out in a rectangular survey system that, at least according to some historians (see Huebner, 2006, United States Public Land Survey) originated with Thomas Jefferson. As formalized by 1785 legislation and then later modified by the Land Act of 1796, much of the land west of the Appalachians was divided into square townships of land, six miles on a side. The townships were each subdivided into sections, each one mile square. That means that each township encompasses 36 square miles. For ease of use, sections are numbered in predictable manner from 1 to 36.

The most notable exceptions to the Public Land Survey System (PLSS) are Texas and most of Ohio. Parts of several other states, notably California and Louisiana, include both PLSS lands plus older French and Spanish survey systems that had existed prior to statehood. A few parts of mountainous parts of the Rocky Mountain states remain incompletely surveyed even to the present day, but they are fairly distant from land grant concerns.

It is beyond the scope of this discussion to explain the PLSS system, but townships are numbered in specific manners, called townships and ranges. By knowing the township, range, and section, anyone with knowledge of the survey system can locate land within any state in a matter of minutes. (See NationalAtlas.gov for a discussion of how the naming and numbering system works.)

Imagine a checkerboard, six squares on a side, with each square being one mile on a side. Now imagine that you numbered the black squares with even numbers (2, 4, 6...) and the red squares with odd numbers (1, 3, 5...). That is how townships work in real life. Next, imagine townships lined up edge-to-edge, from the Ohio River Valley to the Pacific Ocean, and from the Mexican border to the Canadian border. That is a rough idea of how the non-colonial majority of the United States is surveyed.

How do you get "ten square miles of land" for every mile of track?

The final step in understanding a land grant is to imagine a rail line snaking across the checkerboard in a curving, twisting manner. If you draw two lines parallel to the rail line and ten miles to the left and right, you have the outline of the typical land grant created by the 1862 law.

The Federal government gave railroads all odd-numbered sections within the two outer boundaries of the land grant. In a 20-mile wide land grant, the companies ended up with 10 square miles of land on each side of the track. The federal government generally retained most of the rest. (Actually, the Federal government granted one to two square miles of land per 36-sq mile township to the states on the next day, the purpose of which was to fund state colleges. Hence the term "land grant colleges.")

Additional concessions – and requirements

For the land grant system to work as planned, the government wanted railroads to sell their land to help pay for the construction of rail lines. The problem was that seldom did anyone want to buy any of that land until after the rail lines were constructed. Moreover, there were severe problems with Indians who were obviously upset at having their land stolen. Indian problems aside, vast areas of land grants were located in barren and "worthless" parts of western states where it was nearly impossible to grow or ranch anything.

To further help with construction, the government loaned 30-year bonds to the companies which they were required to repay with interest. The government set up a scheme where the companies would be loaned $16,000 per mile for construction across flat land, $32,000 per mile for hilly terrain, and $48,000 per mile for mountain construction.

The government also required that railroad companies could not build curves sharper than 10 degrees, nor steeper than 116 feet per mile. Additionally, rail lines had to be built with American steel which was created a serious hardship for the Central Pacific. Finally, the whole line between Omaha and Sacramento had to be completed within fourteen years or the land, and all the track, tunneling, and labor would be forfeited!

Oh, yes. One other thing. The government was only giving the companies the rights to use the surface of the land, not the minerals underneath.

Still, the risks were too high.

Rail historians know that both the Central Pacific and the Union Pacific were controlled by only a handful of stockholders. While that arrangement greatly benefitted those few people, it was not for their lack of trying to sell stock. There were just very few buyers.

The truth is, it was virtually impossible for the UP or CP officers to sell any stock except to themselves. Never mind that the transcontinental railroad was crucial to the country, typical investors considered the project too risky. They considered construction problems insurmountable, or nearly so. They considered hostile Indians would never allow settlement. Few ever thought the intermountain West would ever produce anything other than gold and silver. They simply considered the donated land as worthless. Had there been property taxes at the time, they probably would have considered the land grants as liabilities.

Another problem was that the government required the companies to use their railroad and lands as collateral for the government bond loans. In effect, the government held the first mortgage on every bit of the transcontinental railroad. It was that, in all probability, that made it impossible for the railroads to sell any of their own bonds like other railroads.

The Pacific Railroad Act of 1864

It became apparent almost immediately that parts of the 1862 law needed reworking. Because the railroad was so absolutely crucial to the United States, Congress somehow revised the law in the middle of the Civil War.

The Act of 1864 revised several problematic issues, the land grants among them. The 1864 act enlarged land grants from ten to twenty miles of alternating sections on either side of the tracks. Next, it granted full rights to all the minerals underneath all that land.

Example of land grant ownership in a "checkerboard" pattern. This shows a portion of the original Union Pacific land grant, just north of Laramie, Wyoming. It is quite typical of other railroad land grants. The small squares are one-square mile "sections." The rail line appears slightly off-center, because the modern track alignment was improved over the original. By the time this map was made in the late 1970s, almost all the surface had been sold to ranchers. The red color showed that the company only owned mineral rights. Since that time, most of the mineral rights have also been sold.

While the land grants became quite important by the early 20th century, we must still remember the perception of that land in the 1860s was quite poor. With the exception of land near Omaha, Sacramento, and Ogden, the Union Pacific and Central Pacific land grants held little value.

Even with the revisions, the UP and CP may not have been built had the 1864 act not allowed companies to sell bonds in amounts equal to the government loans. In effect, this removed the government from its first mortgage position.

Given the risky nature of the railroads, another important provision of the new act was one that allowed the companies to collect government loans more quickly. Previously, the companies could only collect government bonds after each 40-mile section of road was fully completed and inspected. The new law said they could collect twice as fast. And, in mountainous terrain, the companies could collect two-thirds of their loans after the grading had been finished. (At the time, the Central Pacific was spending well over $100,000 per mile on the grading alone!)

The ultimate value of the land grants

We need to be careful in talking about the "value" of the land grants. Over time, parts of most of the land grants became immensely valuable. As western Nebraska was settled, and as the Sierras were developed, both the UP and the CP benefited enormously from selling their land grants. And the Union Pacific benefited dramatically from the huge coal reserves it acquired in Wyoming. Until dieselization in the mid-1950s, the UP mined large tonnages of coal for use in its own steam engines.

That is not to say that the Northern Pacific, the Southern Pacific, and the Santa Fe did not also benefit from their own immense land grants. While some of those companies may disagree, I suggest that their greatest rewards did not actually appear until the energy boom of the 1980s. But still, if you adjust those energy profits back in time a hundred years or so, the real value of the land grants was minimal except in very special locations.

So how to get money for the land grants before they were worth anything?

Obviously, the US government planned for the railroads to raise money by selling their land grants. And don't forget that as the railroads sold their land grants, the intermixed federal and state lands became equally valuable.

Once railroads were laid across good farming, ranching, and timbering country, it became easy to sell sections from land grants. Out in the middle of deserts, or out in the middle of the upper Great Plains, selling land was hard. So hard that substantial acreages from those original land grants remain unsold today.

To get money from their lands, railroads turned instead to borrowing. Their rail lines were already mortgaged. Why not mortgage their land grants?

Thus originated the "land grant" bonds that collectors see today. The idea was to borrow money and to secure the loans using land grants as collateral.

Currently, there are 46 distinct varieties of land grant bonds known, spread among 26 companies. If you are interested in collecting such bonds, check out these companies. While most of these companies operated west of the Mississippi, note how many land grant bonds are known from Florida companies.

For a deeper understanding...

To understand more about the origin of the land grant system within the backdrop of the transcontinental railroad, please read Stephen Ambrose's excellent book:

Nothing Like it in the World: The men who built the transcontinental railroad, 1863-1869.

This is a wonderfully written book that I recommend to anyone interested in this fascinating period of American history, even if your specialty lies elsewhere. The perspective is insightful, and the book is so exciting that you will find it hard to put down.