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On February 23, 1863, Abraham Lincoln signed the bill that separated Arizona from New Mexico. Prescott was titled the first capital of territorial Arizona; it beat out the long-established Tucson, which contained many Southern sympathizers. Although the honor of becoming the capital did go to Tucson, the title returned to Prescott eventually before finally settling at Phoenix.

General James H. Carleton heard of gold strikes in central Arizona in the 1840s which made him urge the federal government in Washington, DC, to explore the region near the San Francisco Mountains and what would become Fort Whipple, a fort which is still present today. The route explored across northern Arizona was along the 35th parallel, surveyed by Lieutenant, later Brigadier General, Amiel Whipple. This route was the foundation for future train and wagon routes. These served usefully for developing Prescott. In 1863 General Carleton sent Joe Walker to explore for gold near the Bradshaw Mountains, and Prescott was founded in that year, along Granite Creek. Thumb Butte, Granite Mountain, and the Bradshaws all had gold deposits. Granite City was established and renamed Prescott after the American historian William Hickling Prescott who wrote on Mexico, though Atzlan was also a potential name. This city was started in the hope that it would become an abundant source of income for the North during the Civil War.

Early Prescott focused around its greatest resources, mining and cattle ranching. Since Prescott was located in an area abundant with both silver and gold deposits, mining drove most of the early economy. Exporting gold and importing supplies proved tough in early Prescott with rampant Indian attacks in the beginning. Routes to Wickenburg were cut off and trouble persisted until the arrival of General George Cook in 1873. Gold was important to early Prescott, but then importance shifted to silver, sustaining its existence for a period.

Morris Andrew Ruffner, a Virginian, arrived in Arizona in 1867 with his wife. They had moved to the new territory having lost their family farm during the Civil War. Ruffner stayed for a time in the Maricopa area, but returned to Prescott with his brothers. Prescott, the territorial capital, served as a business and communication center, where it is likely Andrew registered his claim located in Jerome. Ruffner invited his siblings to help him extract ore deposits that he found in Jerome. The Jerome deposits were first found by Ruffner in 1878 in the Black Hills 30 miles northeast of Prescott. James Douglas, for whom the city of Douglas, Arizona, was named, told Ruffner the two rich sites at Jerome were worthless without transportation for the ore because it was 180 miles from the mine to the railhead. The deposits were not extracted to a great extent, but they became the source of ore for mines that would sustain Jerome in copper mining for many years. Ruffner discovered the Verde claim and the Wade Hampton. The arrival of rails allowed for Jerome to connect to the emerging commerce center of Prescott, designating the beginning of the modern area for these northern Arizona cities.

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