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In 1864, Job Carr selected his claim on Puget Sound where he believed the Northern Pacific Railroad Company would establish its terminus. A few years later, Morton Matthew McCarver examined the area and concluded that the location of Carr's homestead could develop into a large city. McCarver purchased most of Carr's claim and started promoting Commencement City, but he soon changed its name to Tacoma. Town backers managed to convince the Hanson-Ackerson steam sawmill to relocate to Tacoma in 1868. Though the sawmill soon shipped lumber throughout the world, the Northern Pacific decided to locate the terminus at New Tacoma—two miles to the east of McCarver's Old Tacoma.

The Northern Pacific founded the Tacoma Land Company in 1873 to sell the land it obtained through grants or purchases on Commencement Bay. That same year, the company finished construction on a rail line from Kalama to Tacoma. At the same time, the brisk trade in lumber, fish, and coal encouraged the expansion of the dockyards. Despite these improvements, the Panic of 1873 impeded Tacoma's growth and delayed the completion of the transcontinental railroad. The Northern Pacific Railroad Company did not complete the railroad until 1887 because it took that long to construct the switchbacks over the Stampede Pass in the Cascades.

Tacoma saw significant growth in the 1880s. Old Tacoma and New Tacoma joined together as a single city. When the state legislature permitted the cities to merge, Old Tacoma had 400 residents while New Tacoma had 4,000. Apart from the commercial advantages of the city, boosters accelerated population growth by placing advertisements in newspapers throughout the United States. The Northern Pacific dispatched literature to northern Europe and Scandinavia, resulting in the arrival of significant numbers of Germans and Scandinavians. Germanic names were the second-most common next to Anglo-Saxon names. The large German population sustained a German Methodist church, a German choral society, and a German-language weekly. Though not as prevalent, southern and eastern Europeans also came to Tacoma. These immigrants helped the town grow from 7,000 in 1885 to 36,000 in 1890.

In 1885, the Tacoma-Seattle coastal strip contained 3,200 Chinese miners. Newspapers across the United States condemned Tacoma in November 1885, when a mob drove approximately 200 Chinese from the city. Though the leaders of the expulsion escaped punishment, the city eventually suffered for its actions. When the Northern Pacific went ahead with its plan to bore the Stampede Tunnel, the city boomed. Other cities competing for the Pacific trade used the incident against the city. Japanese began to fill the vacuum created by the departure of the Chinese. The Japanese population showed greater stability, as a fair number of the men either returned to Japan to find a wife or sent for a picture bride. Until 1917, the United States did not proxy marriages between Japanese immigrants working in America and Japanese women still in their home country. Consequently, a second ceremony had to be performed as soon as the woman arrived.

By 1890, Tacoma was one of the few cities of any size in the West, with 36,000 inhabitants. However, the city still remained smaller than Seattle, though Tacoma's supporters argued that Tacoma's rate of growth during the 1880s exceeded that of Seattle. By 1893, Tacoma claimed to have 52,329 residents, though the depression of that year slowed the dramatic growth of the previous decade. By 1900, the population had fallen to 37,714. The area continued to draw timber investment as many of the other areas that had previously been sources of timber became completely logged over. The timber found new markets in Australia, China, and South America. The city continued to demand more port facilities, leading to the expansion of docking areas to the south shore of Commencement Bay and to the City Waterway. After 1900, people came to Tacoma for jobs in the paper mills.

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