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 came about 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.

(Large land grants had been promoted for the Illinois Central 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. By comparison, while those grants were immensely helpful, they were small in scope, and nothing like the millions of acres that were going to be given away for the transcontinental railroad.)

On the surface, ten square miles seems like a LOT of land for the government to give away. And it was. But we first need to consider how that land was parceled. And that the land was NOT contiguous. So let's back up ever so slightly.

The Township and Range system of land survey

After Jefferson's administration bought the Northwest Territories from France, the U.S. instituted a system of land surveying still used in most of the US today. (The original colonies, parts of Appalachia, and Texas are notable exceptions.)

Those surveys divided land into square sections of land, one mile on a side. The sections were then grouped into square townships of 36 square miles. Within each township, sections are numbered in a precise and predictable manner from 1 to 36.

(It is beyond the scope of this discussion to explain the system, but townships are numbered in specific manners, called townships and ranges. That allows surveyors, taxing agencies, and anyone with specific knowledge to find a particular section of land within any state in a matter of minutes.)

Imagine a checkerboard, six squares on a side, with each square being one mile long and one mile wide. 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. You now have a rough idea of how 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 some twisting manner. If you draw two similar lines, parallel to the railroad, but ten miles to the left and ten miles to the right, you have the outline of a land grant created by the 1862 law.

The railroads were given the odd-numbered sections on each side of the railroad right-of-way. Therefore, the companies would get five square miles of land on each side of the track. And, of course, the federal government would retain most of the rest. (Actually, one to two square miles of land were granted to the states on the next day, which formed the basis of financing for the state colleges.)

Additional concessions – and requirements

Theoretically, the Union Pacific and the Central Pacific would sell the land to help pay for the construction of the rail line. But, obviously, no one wanted to buy any of that land until after the rail lines were constructed. Moreover, there were severe problems with Indians. And even more problematically, tremendously huge areas of land were located in barren and "worthless" parts of Wyoming, Utah, and Nevada where it was virtually impossible to grow or ranch anything.

To further help with construction, the companies were loaned 30-year government bonds that the companies 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.

But...the railroads could not build any curves sharper than 10 degrees, nor steeper than 116 feet per mile. Additionally, the line had to be built with American steel which was 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 eventually worked out great for those few people, it was not for their lack of trying to sell company stock.

The truth is, it was virtually impossible for the companies to sell any stock except to themselves. As critical as the transcontinental railroad was to the country, typical investors considered the project far too risky. They considered problems of construction as insurmountable, or nearly so. The considered that hostile Indians would never allow settlement. They never thought the intermountain West would ever produce anything other than gold and silver. And they 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 all the transcontinental railroad. And that, in turn, made it impossible for the railroads to sell any of their own bonds like railroads elsewhere in the US

The Pacific Railroad Act of 1864

It quickly became apparent that parts of the 1862 law needed reworking. And because the railroad was so absolutely critical to the United States, Congress 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 ultimately became quite important by the dawn of the 20th century, we must still remember the perception of that land in the 1860s was not very good. With the exception of land near Omaha, Sacramento, and Ogden, the land grants held very little value.

More important was the fact that the 1864 act was changed to allow the companies to sell bonds in amounts equal to the government loans. In effect, this moved the government from its first mortgage position.

Given the risky nature of the railroads, the most important provision of the new act was one that allowed the companies to collect government loans much 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

Let's not get confused 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, it 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 subsequent land grants. While some of those companies may disagree, I suggest that many of their greatest rewards did not actually appear until the energy boom of the 1980s. But still, if you adjust those windfall profits back in time a hundred years or so, the real value of the land grants was not all that great 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 land became equally valuable.

In good farming, ranching, and timbering country, it was easy to sell sections from land grants. But out in the middle of deserts, or out in the middle of the upper Great Plains, selling land was hard. So hard that substantial amounts of land 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 with the 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.