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Railroad land grants
Even after 150 years, political opponents and commentators still vilify land grants made to railroads. If a century and a half is not sufficient time to remove objections, minds are not suddenly going to start changing now. In fact, Richard White's book, Railroaded (ISBN 978-0-393-06126-0) retraced the subject again in 2011. That year also saw the first season of Hell on Wheels (on the AMC cable channel), a gritty drama about building a transcontinental railroad in a manner to take advantage of the government's largess. As collectors, you might be curious what all the shouting is about.
The first large land grants originated 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 procured smaller land grants back in the 1850s. Small land grants were also offered in Ohio and Wisconsin in the late 1850s. The earliest land grant bonds in the database date from 1859. While those grants were helpful to the companies involved, they were small in scope, and very much unlike like the millions of acres of land given away for building transcontinental railroads.
The earliest grants offered ten square miles of Federal land for every mile of rail built.
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. Rather, land was purposely given away in a "checkerboard" pattern leaving Federal land in between. Let's go back in time a bit to understand how that was done.
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. 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.
While the Public Land Survey System (PLSS) can be found in most states west of the Appalachian mountain chain, notable exceptions can be found in Texas, Kentucky 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. Scattered areas in the mountainous parts of the Rocky Mountain states remain incompletely surveyed even to the present day, 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 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 gives you a rough idea of how the non-colonial majority of the United States is surveyed.
Within that area, the government gave two sections to states in order to help fund state colleges. Hence the term "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. Draw two parallel lines on each side of the railroad route, each ten miles to the left and right. Those lines become the land grant boundaries. Under the 1862 law, the Federal government gave railroads all odd-numbered sections within the boundaries.
Additional concessions and requirements
For the land grant system to work as planned, the government hoped railroads would sell their lands to help pay for the construction costs of laying rail lines. The problem was that very few people wanted to buy any land until after rail lines were constructed. Moreover, there were severe problems with Native Americans, obviously upset at having their lands stolen. In truth, 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.
When it was realized that land grants alone would never accomplish the building of transcontinental rail lines, the government decided to loan 30-year Federal bonds to railroad companies. The whole idea was that government bonds would be easier to sell than land. With an economic kickstart, companies would lay track across the continent, develop undeveloped areas and thereby sell land in the bargain. In the process, land grant laws intended that companies would ultimately repay the government loans with interest.
As originally designed, the Federal government loaned $16,000 per mile of track across flat land. In hilly terrain, the loans jumped to $32,000 per mile and then to $48,000 per mile for mountain construction. Government bonds were doled out in 40-mile units.
The government also 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 had to be built with American steel which created a serious hardship for the Central Pacific. Finally, the whole intercontinental line between Omaha and Sacramento had to be completed within fourteen years. If not completed in that time, all land, all track, all tunneling, and all labor would be forfeited!
Oh, yes. One other thing. The government initially gave the companies the rights to use the surface of the land, not the minerals underneath.
Even with those generous concessions, risks were still 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, neither railroad found much success in selling stock. There were too few buyers.
The truth is, it was virtually impossible for or UP 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 produce anything other than gold and silver. Normal investors simply considered the donated land as worthless. Had there been property taxes at the time, average investors would have considered land grants as liabilities, not assets.
Another little-understood problem was that the government required companies to use their railroad and lands as collateral for the government bond loans. In effect, the Federal government held the first mortgage on every inch of the transcontinental railroad. Contemporaneous writers suggest that the government's own first mortgage made it impossible for transcontinental railroads to sell their own corporate bonds like railroads elsewhere had done for almost 30 years.
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 typical land grant ownership in a "checkerboard" pattern.
This shows a portion of the original Union Pacific land grant, just north of Laramie, Wyoming. The small squares are one-square mile "sections." The larger square visible in the lower left corner is a 36 square mile township.
You might notice that the rail line appears slightly off-center between the Land Grant boundaries 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 shows ares where the company owned mineral rights only. Since that time, most of the mineral rights have also been sold.
While several railroad 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, companies could collect government bonds only 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 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 land grant's greatest rewards appeared with the energy boom of the 1980s. Nonetheless, if you adjust those energy profits back in time a hundred years or so, the real value of the land grants was often subdued except in very special locations.
As an exercise to get a grip on the value of money over such a long period, assume a 5.4% interest rate. (This is roughly the average interest rate of all surviving bonds known to have been issued by railroads.) "Time value of money" calculations show that a ten million dollar payday in 1980 would have been worth approximately $30,727 in 1870. Or to view it from the opposite direction, a person could have bought about 96 square miles of land in the great American West for $30,727 in 1870 (at 50 cents per acre). If some of that land was underlain by coal, oil, natural gas or uranium, that person's heirs could have leased that land for energy development in the 1980s. If royalty and lease income amounted to $10,000,000 per year, the original 110-yr investment would have netted a long-term rate of return of only 5.4%. That is not terribly impressive and, of course, does not count property or income taxes.
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, in fact, that substantial acreages from 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.
As of the date of writing, there are 57 distinct varieties (plus ten minor sub-variaties) of land grant bonds known, spread among 30 companies. If you are interested in collecting such bonds, check out these companies. Note that fewer than half operated west of the Mississippi.
|ATC‑785||Atchison Topeka & Santa Fe Railroad Co|
|ATL‑744||Atlantic & Pacific Railroad Co Central Division|
|AUG‑720||Augusta Tallahassee & Gulf Railroad Co|
|BLU‑762||Blue Spring Orange City & Atlantic RR|
|CAI‑353||Cairo & Fulton Rail Road Co of Arkansas|
|CHI‑440||Chicago Milwaukee & St Paul Railway Co|
|CHI‑547||Chicago Portage & Superior Railway Co|
|CHI‑724||Chicago St Paul & Minneapolis Railway Co|
|CIN‑655||Cincinnati Portsmouth & Ohio Rail Road Co|
|FLI‑430||The Flint & Pere Marquette Railway Co|
|FLI‑431||(The) Flint & Pere Marquette Railway Co|
|FLO‑410||(The) Florida Central & Peninsular Railroad Co|
|HOU‑924||The Houston & Texas Central Railway Co Waco & North Western Division|
|KAN‑855||Kansas & Gulf Short Line Railroad Co|
|LIT‑519||Litte Rock & Fort Smith Railway Co|
|NEW‑321||New Orleans Baton Rouge & Vicksburg Rail Road Co|
|NEW-385||New Orleans Pacific Railway Co|
|NOR‑787||(The) Northern Pacific Railroad Co|
|NOR‑790||Northern Pacific Railway Co|
|OHI‑925||The Ohio Valley Rail Road Co|
|ORE‑412||Oregon Pacific Railroad Co|
|PEN‑891||Pensacola & Atlantic Railroad Co|
|SIL‑650||The Silver Springs Ocala & Gulf Railroad Co|
|STC‑933||St Croix & Lake Superior Rail Road Co|
|STJ‑519||St Joseph & Denver City Rail Road Co|
|STL‑435||St Louis Iron Mountain & Southern Railway Co|
|TEX‑804||The Texas & St Louis Railway Co in Texas|
|UNI‑286a||Union Pacific Railroad Co|
|UNI‑286b||Union Pacific Railroad Co|
|VIC‑523||Vicksburg Shreveport & Pacific Railroad Co|
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.
I strongly recommend buying the Cox Catalog 3rd Edition from your favorite
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