Railroad land grants

It has been over 170 years since the United States government first granted Federal land to promote development. That event had been preceded by fifteen years of Congressional bickering over the wisdom and fairness of giving land to private companies. Debates over the issue had started in 1835, but it took fifteen years before the government awarded land to promote development, settlement, and consequently tax receipts. After that, land grants to states and ultimately to railroads became fairly common. That did not stop debates, though. In fact, arguments about land grants continue today!

The logic

The underpinning logic of granting land to railroads was simple. The Federal government owned all the land in frontier areas. Land was its only asset. Neither the Federal government nor territories, states, counties, cities, or towns were going to gain additional assets (money) without growth. Without population, even controlling those lands was impossible. Yes, people readily populated areas along rivers and tributaries, but cross country movement of goods and passengers was limited to coaches and wagons. Ground travel was slow and highly inefficient. Rail transportation was the obvious answer, but laying rail and building bridges was horribly expensive. Raising money for infrastructure ventures was highly challenging because profits were highly uncertain and the risk of failure was enormous.

What if the government helped by donating land? If the government gave railroads a sufficient amount of land, then railroads could sell that land and thereby raise sufficient money to lay rail. People would settle the lands surrounding rail lines, towns would appear, population would increase and counties, states, and territories would benefit from new commerce and industry.

The idea was not new. Gifts of land to loyal private citizens dated back to Roman times. Pennsylvania would not exist in its present form had King Charles II not granted almost 29 million acres of land to William Penn in 1681. Admittedly, the "grant" paid off a debt owed to Penn's father, but it was still a handover of public land to private ownership. Up until the 1850s, the Spanish and Mexican governments granted vasat areas of land across what is now the southern U.S., from Florida to California. Historical records of the non-Native general public objecting to Spain, Mexico, and the United States giving land to private individuals do not seem to have survived to any great extent.

Nor does the historic record disclose loud outcries against land given to private companies to develop early canals and turnpike systems in the eastern United States. After all, those early grants were small and highly instrumental in opening transportation corridors through previously inaccessible areas. Private companies may have benefited directly, but states and the general public were seen as the ultimate beneficiaries from the growth that resulted.

Many politicians, especially those in frontier areas of the late 1830s, predicted that gifts of Federal land to railroad companies would have the same long-lasting effect.

Early efforts to secure land grants

The earliest railroad land grant proposals appeared in 1835. Michigan gained statehood in 1837 and petitioned Congress to grant land to help build a railway westward across the state from Detroit. Compelling arguments were made that states were set up to oversee companies while the Federal government was not. Consequently, if any land were to be granted, states had to do the granting. Therefore, Congress would need to give land to states which could then grant land to companies under their oversights.

That is where problems arose. if the Federal government were going to give away land to frontier states and territories, Eastern and Southern states wanted a piece of the pie.

The Michigan proposal failed as did many others over the next fifteen years. It was not until 1850 that Congressional votes finally balanced interests between populated and industrialized East and the larger but sparsely populated West. That year, a Federal act granted land to Alabama, Illinois, and Mississippi. Those states, in turn granted land to the Illinois Central and Mobile & Ohio railroads. In those cases and many that followed, the planned concept was to let companies sell granted land to to farmers and settlers and use those funds for construction. The Illinois Central wanted to lay track along the north-south length of Illinois while the Mobile & Ohio wanted to build from Montgomery, Alabama westward across Mississippi into Louisiana and then north to the junction of the Ohio and Mississippi Rivers.

The Illinois Central grant amounted to 2,595,053 acres of previously untaxed land. The concept was for the railroad to benefit short-term and many counties throughout Illinois to benefit long term. The Mobile & Ohio grant of 1,156,659 acres was meant to bolster counties in Alabama and Mississippi, most of which were badly in need of cultivation, development, and, of course, taxation.

Beyond those three states, the Federal government had tremendous acreages of empty land that produced little beyond animal pelts. There were tremendous amounts of gold being mined in California, but getting that commodity into banks and commerce in the East took months of treacherous ocean travel. Why not build railroads into the West and open the area to farming, ranching and mining, all of which would benefit the entire country?

Obviously, state tax rolls grew as more land got into private hands. States with large areas of empty Federal land wanted in on the action. After the election of 1850, interest in granting more land to railroads cooled. States with little public land took a "wait and see" attitude. They questioned how granting land to other states would help them. Of course, that did not keep seven states (AL, AR, FL, IA, MI, MO, and WI) from making land grant applications to Congress in 1852, amounting in total to 13,901,657 acres

All the while Southern states were making their own appeals for land, Eastern and Southern states ramped up their opposition to more land grants elsewhere. Why give land to corporations and let them sell it? Why not sell the land directly to settlers? Were railroads going to profit at the expense of companies involved in river trade? What about states that had no Federal land? Why not give title to land elsewhere to those states lacking in Federal land? 1851 and 1852 saw many schemes, lots of plans, heated sectional arguments, and only one grant to Iowa.

Arguments in Congress continued in 1853, including proposed grants to homesteaders. Expansion into unpopulated states was the obvious issue, but there was also an undercurrent of concern about expanding slavery into those developing areas. Never mind that Native Americans were none too keen on Anglo expansion and were willing to fight for their lands. Consequently, only a few small railroad land grant applications made it into Congress, totaling only 8,000 acres. Only one hotly contested land grant proposal passed for a rail project in the Minnesota Territory. Congress passed no more railroad grants during 1854 and 1855.

1856 seems to have been the turning point with respect to railroad land grants. Congress awarded numerous grants to states and territories (AL, FL, IA, LA, MI, MN, MS, WI), totaling over 19,000,000 acres. The only real opposition in Congress had come from Southern states, even though half of the beneficiary states that year were located in the deep South, There was remarkably little opposition from Eastern and north-eastern states. History suggests the expansion of slavery was becoming a more pressing concern than the transfer of Federal land.

The Financial Panic of 1857 created a still greater concern for Congress and the country. That panic is a confusing subject, ostensibly precipitated by the coincidence of numerous factors and much too complicated to discuss here. It took until 1859 for the resulting recession to level off and the economy to begin to recover. During that time, railroads had been hit hard and there had been several important railroad bankruptcies. Congress was greatly more concerned about the economy, banking, and monetary stability than the issue of more railroad land grants. Those issues persisted into the runup to the 1860 election, confounded greatly by the issue of slavery and its likely westward expansion.

Land grants for transcontinental railroads

Abraham Lincoln and his family moved into the White House in January, 1861 and Southern states quickly seceded. A devastating civil war resulted with its high inflation and tremendous war debts for both the North and South. Northern politicians, bankers and industrialists looked even harder at Western gold fields for financial salvation, Wouldn't it be nice to have a railroad that linked California with the rest of the country?

The pipe dream of transcontinental railroads across the West had been around for a while. Politicians and the general public largely judged the project impossible. Lincoln, faced with probable breakup of the Union, huge war costs, westward expansion of slavery, and getting gold from California was convinced that a cross-continent rail line was not only possible but necessary. Sectional opposition from the South was gone, so Congress passed and Lincoln signed into law the first Pacific Railroad Act on May 20, 1862. That law enabled the creation of the Union Pacific Railroad (UP), Central Pacific Railroad (CP) and the transcontinental railroad project. Grants to many states were subsequently signed into law with little opposition.

The Pacific Railroad Act allowed the direct funding of companies by the Federal government. Up to that time, grants had been made to the states who then chose recipient companies and enacted and enforced compliance laws. (i.e. The amount of track that had to be laid within a specified period, from one specific point to another specific destination. No compliance; no land.) The Act and its successor revisions allowed the government to lend Treasury bonds to the UP and CP, who in turn were to sell them to investors for cash. The companies had to repay the bonds, but not for thirty years. In effect, Treasury bonds functioned as long term loans to railroads.

From 1862 forward, railroad land grants became larger and more frequent as did questions amongst the public. Were grants too large? Was there too much abuse and corruption? Were land sales helping local, state, and Federal governments as planned? Were they merely putting money into the pockets of promoters and stock holders? Even after 170 years, questions remain about whether Federal land grants were good ideas or not. It is clear from publications and websites, that railroad land grants still stir emotions.

As a group, certificate collectors are old enough to realize that emotions and rational thought do not mix particularly well. Perhaps the greatest hindrance to understanding railroad land grants in the United States and Canada is the truly staggering lack of solid and verifiable information about the grants themselves. It is difficult to make fully rational arguments when there is so little confirmed fact. For instance, Ross Robertson and Gary Walton in History of the American Economy, 4th Edition say that the Federal government granted 131,000,000 acres to 79 railroad companies. I find the acreage believable, but I have never found verifiable confirmation of the number of companies involved, let alone their names.

How much land did Congress give to railroads?

Some of the confusion arises because the United States government gave semi-specific areas of land to states. Much of that land had not been surveyed, so acreages were approximate. States then gave land to companies which usually pledged to lay track along specified routes to distant destinations. Routes were not always followed and recipient companies frequently went bankrupt, to raise sufficient funds through selling stocks, bonds, and lands. Successor companies often merged with other companies and created still more successors. Some lines were finished completely, some partially and some not at all. In the latter case, granted lands were supposed to have been returned to states. To my knowledge, no one has ever risen to the task of identifying and researching the disposition of every land grant. The most reliable source I have found is an 1899 PhD thesis by John Bell Sanborn titled Congressional Grants of Land in Aid of Railways (published as Bulletin of the University of Wisconsin, No. 30.) That reference is readily available online at HathiTrust Digital Library.

Most early recipients received ten square miles of land for every mile of track laid. At first blush, that seems like a lot of land for relatively small amounts of work. However, we first must consider that land granted to railroads was land that the Federal governments had been unable to sell. Moreover, even in ideal situations of good, salable, and flat farm land, lands were NOT contiguous blocks. Rather, land was purposely given away in "checkerboard" fashion, leaving Federal land in between.

Let's go back in time a bit to understand how the government surveyed and deeded land.

The Township and Range system of land survey

Much of the U.S. is laid out in a rectangular survey system that originated with a 1784 committee chaired by Thomas Jefferson. The committee's recommendations were altered a bit by the Continental Congress and formalized a year later as the Land Ordinance of (May 3) 1785. As formalized by that legislation and 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. Those townships were each subdivided into sections, each one mile square. That means that each township encompasses 36 square miles. For ease of reference, sections are numbered in predictable manner from 1 to 36. (See detailed explanation in Public Land Surveys of the United States, 1894 at HathiTrust.org.)

With the exception of Texas, Kentucky, Hawaii, and the original thirteen states, most of the land in the remaining thirty four states has been surveyed under the Public Land Survey System (PLSS). Parts of several other states, particularly California and Louisiana, include both PLSS lands plus older French and Spanish survey systems that existed prior to statehood. Scattered areas in mountainous parts of Rocky Mountain states remain incompletely surveyed, but all are 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 township, range, and section of any tract of land, anyone with knowledge of the survey system can locate land within any state in a matter of minutes. See Understanding Township and Range for a discussion of how the naming and numbering system works. (Search the web for these same terms if any links become broken.)

As shown in the image above, townships resemble checkerboards, six squares on a side, with each square being one mile on a side. Odd- and even-numbered sections touch each other on all sides. Townships are lined up in a similar fashion from the Ohio River Valley to the Pacific Ocean, and from the Mexican border to the Canadian border. That gives you a rough idea of how the majority of the United States is surveyed. Within that area, the Federal government usually deeded two sections of land (usually sections 16 and 36) to states in order to help fund state colleges which are still known as "land grant colleges."

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 a giant checkerboard. Simply draw parallel lines five miles left and right of the railroad route. Those lines become the land grant boundaries. Under the 1862 law, the Federal government gave railroads all odd-numbered sections between the boundaries. Sections that would up on the land grant boundary were sub-divided into quarter-sections of 160 aces or quarter-quarter parcel. If more than half of those areas were inside the boundary, it became part of the railroad land grant. If beyond the boundary, land remained under Federal control.

Additional concessions and requirements

For the land grant system to work as planned, the government hoped railroads would sell their lands to help pay the costs of laying rail lines. It is somewhat curious that the government did not accept the reality that extremely few people were going to buy any land until after rail lines were constructed and trains were moving. Vast areas of land grants were located in barren and "worthless" parts of western states where it was nearly impossible to grow anything and where ranching required many acres per animal. Much of the land was desert, so selling land in those areas was going to be difficult , if not impossible.

It did not take long for the government to realize that land grants alone were insufficient impetus to build or fund transcontinental rail lines. The government decided to loan 30-year Federal bonds to railroad companies in addition to gifts of land. The whole idea was that railroads would be able to sell Treasury bonds easier than land. With an economic kickstart, companies would lay track across the continent, develop frontier areas and thereby sell land in the bargain. Land grant laws intended that companies would ultimately repay the government loans with interest.

As originally designed, the Federal government loaned bonds based on the ease or difficulty of grading and track laying. The base rate was $16,000 worth of bonds for every mile of track laid across flat land, $32,000 per mile in hilly country and $48,000 per mile for mountainous terrain. In order to entice faster track laying, the government gave out bonds in units of 40 miles of completed and usable track.

Everyone knew the definition of usable track could be construed in various ways, so the government further required that railroad companies could not build curves sharper than 10 degrees, nor grades steeper than 116 feet per mile (a little over 2%.) Additionally, rail lines were to be built with American iron, a supply condition that created serious hardships for the Central Pacific. Finally, the whole intercontinental line between Omaha and Sacramento had to be completed within fourteen years. If not completed within that period, all land, grading, track, tunneling, and bridging would be forfeited. Finally, the government gave the companies the rights to use the surface of the land, but not the minerals underneath.

Even with those concessions, risks were still too high

Rail historians know that only a handful of stockholders controlled both the Central Pacific and the Union Pacific. That arrangement greatly benefitted those few people, but neither railroad found much success in selling stock. Even with the understanding of the importance of the transcontinental line to the country, it was still nearly impossible for Central Pacific or Union Pacific officers to sell stock except to themselves. Typical investors considered the project too risky. They considered construction problems nearly, if not entirely, insurmountable, They argued that hostile Native Americans would never allow settlement. Few investors thought the intermountain West would ever produce anything other than gold and silver. Normal investors considered the donated land almost worthless. Had there been significant property taxes at the time, investors would have considered most land grants as liabilities rather than as assets.

Another little-understood financial wrinkle was that the government required companies to use their railroads and lands as collateral for the bonds that it had loaned. That meant the Federal government held the first mortgage on every inch of the transcontinental railroad. Although railroads in the East had successfully borrowed money through corporate bonds since the 1830s, contemporaneous writers suggested that the government's own first mortgage made it impossible for the Central Pacific and Union Pacific to raise money through bonding. Consequently, government requirements rendered normal railroad funding moot.

The Pacific Railroad Act of 1864

It did not take long for legislators to understand that parts of the 1862 law needed reworking. The transcontinental railroad had become absolutely crucial to the northern United States, In spite of vicious fighting on battlefields, Congress managed to revise the law in the middle of the Civil War.

The Act of 1864 revised several problematic issues, 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 minerals underneath all that land.

Oil, gas, trona, uranium, and coal made several railroad land grants economically important by the 20th century. Never mind that much of that same land had been considered worthless in the 1860s. With the exception of farmable lands within wagon distance of population centers, large western land grants held little value to Americans before ties and rails touched the ground.

Had it not been for the 1864 revisions, many western rail lines might not have been completed for many more years. It was the that act that allowed companies to sell corporate bonds in amounts equal to the government loans. In effect, the 1864 act removed the government from its first mortgage position.

Given the risky nature of building railroads into virgin territory, another important provision of the 1864 act was one that allowed the companies to collect government loans more quickly. Previously, companies could collect government bonds only after each 40-mile section of road was fully completed and inspected. The new law allowed them to collect after every twenty miles. In mountainous terrain, the companies could collect two-thirds of their loans after grading had been finished. (At the time, the Central Pacific was spending well over $100,000 per mile on grading alone!)

The ultimate value of the land grants

We need to be careful in discussing issues involving the values of railroad land grants. I don't think there can be any disagreement that current values of granted lands would be absolutely staggering if granted in today's real estate market. However, little except human nature has stayed constant in the United States since the mid-1800s. We can hope that business ethics have improved over time, but they are hard to measure. Thankfully, it is easier to compare number-based issues. The U.S. population has grown from 23.2 million people in 1850 to an estimated 340 million at the end of 2023. The spending power of today's dollar has fallen to about 2.9¢ compared to the purchasing power of a dollar in 1850. We cannot make simple comparisons of today's monetary values in a vacuum, so we need to look backwards for values at the time land grants were made.

Take the value of average Nebraska farm land for instance. The University of Nebraska-Lincoln (Farm Real Estate Market Survey) estimated that an acre of farm land there was worth $2,895 in 2021. Based on the value of the dollar, an acre of the same land would have been worth $139 in 1870. However, the area was lightly-settled frontier at the time and the Union Pacific was selling land for about $0.50 to $4.00 per acre, depending on location. Even then, sales were sluggish. Between 1870 and 2023, the population of Nebraska had increased by 16 times (~1,978,447 vs.122,993), but land values had increased 46 times! Clearly, demand for farm land in Nebraska increased over that period dramatically.

Simply put, it is misleading to make direct comparisons of any values – ethical, moral, or monetary – between today and the past without considering values on both sides of the equation.

It is most emphatically true that the 204,688 square miles given away in land grants to railroads have become immensely valuable. Not every acre, of course, but calculated overall. As immigrants settled and developed the areas, practically every railroad benefited from selling their land grants. Obviously, companies with greater financial wherewithal were able to wait longer to sell their lands and thus benefitted more. Some companies benefited from coal reserves found under their lands. Until dieselization in the mid-1950s, those companies decreased their rail-related operating costs by mining large tonnages of coal for use in their own steam engines. Note, however, that Section 2(c) of the 1872 Mining Law allowed railroad to mine their own coal, but they were forbidden to sell coal to power plants or other companies.

Not all land grant railroads received mineral-rich lands, but essentially all would have received some mineral deposits, even if those deposits were only sand and gravel. Mineral royalties always helped railroad profitability, of course, but mineral deposits are diminishing assets. Once mined, mineral wealth is irreplaceable except by purchasing more land elsewhere. While some companies were left out, many of the Western land grants' greatest rewards appeared with the energy boom of the 1980s. Even then, waiting fifty or a hundred years before cashing in on energy royalties would not have been considered a particularly good business strategy. On the other hand, banking and re-investing profits from freight haulage over long periods should have been adequately profitable in the absence of external forces such as taxes, laws, wars, depressions, earthquakes, hurricanes, etc.

Generating cash from land grants before they were worth anything

As explained, the U.S. government planned for the railroads to raise money by selling their land grants. And don't forget that the government planned to profit from land sales, too. Its lands became more valuable as railroads sold adjacent parcels. Once railroads were laid across good farming, ranching, and timbering country, it became easy to sell land secured from grants. Out in the middle of deserts, or the western Great Plains, selling dry land was nearly impossible.

To get money from their lands, some 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 those loans using their land grants as collateral.

As of the date of writing, 85 varieties and sub-varieties of land grant bonds have been identified, spread among 30 companies. If you are interested in collecting land grant bonds, check out these companies.

For a deeper understanding...

To understand more about the origin of the land grant system within the backdrop of the first transcontinental railroad, I suggest 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 interests lie elsewhere. Ambrose's perspective is insightful, and his book is exciting, so some will find it hard to put down.