Federal land policy governing the expansion westward proceeded without clear direction throughout the late eighteenth and early nineteenth century. The Ordinance of 1785 initially laid out the orderly protocol by which the western territories were to be settled and incorporated into townships. Under the ordinance, each township was allotted 640 acres, in the expectation that no single farmer would be able to afford all 640 and that groups of farmers from the same region in the East would join together to form western townships. However, during the 1790s, the Federalist Party, in control of the national government, favored the sale of large parcels of land to wealthy speculators who bought the parcels in anticipation of their rising value, and then sold them in smaller pieces to farmers. To this end, the Federalists passed a law setting the minimum individual purchase at 640 acres and the minimum price at two dollars per acre.
Thomas Jefferson quickly set about reversing this trend once the Republicans came to power. Jefferson believed that small farmers should control the West. The Land Law of 1800 reduced the minimum individual purchase of land in the West to 320 acres. That minimum was slashed to 160 acres in 1804, and again in 1820 to 80 acres. By 1832, the minimum land purchase was set at 40 acres, and the minimum price per acre had steadily fallen off to about a dollar per acre.
Despite these efforts, speculation remained an influential aspect of westward expansion. Agricultural prices soared after 1815, and state banks were chartered for the express purpose of extending credit to speculators. The result was an explosion in speculation between 1815 and 1819. In 1819, sales of public land were over 1000 percent of what they had been on average between 1811 and 1814. A principle obstacle to speculation was the presence of squatters, who had settled on western lands without purchasing them. Squatters formed claims associations to oversee land auctions and prevent speculators from bidding up the price of land. They further pressured Congress to grant them the right to buy land that they had already settled on and improved at minimum price. Congress, mindful of the disadvantages of small farmers and squatters due to speculation, responded by passing special "preemption" laws that allowed squatters to pay minimum price for their land in some areas. Finally, in 1841, Congress passed a general preemption law.
Still, farmers suffered high prices and higher interest on credit at the hands of speculators, prompting many to enter the agricultural commodities market and neglect, to an extent, subsistence farming.
The land policy of the early expansion period was the clear result of political maneuvering. During the 1790s, the Federalists knew expansion was inevitable, but feared that it would dilute their support center in the Northeast. However, they saw that the West could be a great source of revenue. The plan under the Ordinance of 1785 was for groups of farmers to join together to purchase townships. This system threatened to draw many in the Northeast to the West and would not maximize government profits. To solve this problem, the Federalists encouraged the purchase of land by wealthy speculators, who not only would drive up prices, and thereby profits, but also would stem the flow of westward expansion from North and South.
The Republicans deeply disliked the Federalist policy. They chastised the Federalists for transferring the public domain to the nation's people too slowly and not cheaply enough. They believed that the United States, and especially the West, should belong to small farmers, who were the source of the nation's democratic purity. Jefferson had long imagined and spoke of an "empire of liberty" stretching across the entire continent, and took steps toward that goal most notably with the Louisiana Purchase. He desired that the American West be populated by small farmers, who would ensure democracy (and most likely support the Republican Party).
Even as the federal government liberalized its land policy, speculators were always a step ahead. Long before the minimum land parcel was set at 40 acres in 1832 speculators had been selling 40-acre packages to farmers. Small farmers preferred these small lots because the land they purchased was almost always covered with dense forest. A landowner could clear no more than ten to twelve acres per year. Since most farmers had to take out loans to purchase new land, they shied away from the prospect of spending more than four years simply clearing land until they could use all of it to grow cash crops and repay their loans, which charged hefty interest. Few farmers bought more than 160 acres.
The speculative boom was accompanied by the growing availability of credit specifically for land speculation. The chartering of the Second Bank of the United States in 1816 led to the increasing amount of money in circulation and to the chartering of many smaller state banks. In 1812, the circulation of all bank notes was $45 million. By 1817, this number had grown to $100 million. More often than not, these new state banks were chartered so that they could lend their own directors capital to invest in land speculation.
The land boom meant that farmers were forced into cash cropping in many cases. Unable to repay large loans any other way, farmers who had ventured west expecting to find land for conservative subsistence farming became entrepreneurs. Wanting land of their own, but forced to raise cash crops to take advantage of rising agricultural prices, many over farmed their lands in efforts to repay their loans, and were forced to move on to new western lands and repeat the pattern.