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In 1839, a siteselection commission for the new Republic of Texas chose a settlement then known as Waterloo to serve as the nation's capital. The committee purchased 7,735 acres of land located on the Colorado River and hired Edwin Waller to plan and construct the new city. Waller laid out the city on a grid of 14 square blocks dominated by “Capitol Square.”

By the time the Texas Congress convened in November of 1839, temporary buildings served as government headquarters. The body incorporated Austin on December 27, and in January of 1840, Waller became its first mayor. The first 856 inhabitants included diplomatic representatives from France, England, and the United States, as well as 145 slaves.

In 1842, Mexican troops captured the nearby city of San Antonio and reopened debate over the safest location for the Texas capital. Former General and President Sam Houston wanted the capital to be in Houston, closer to the Gulf Coast and further from Mexico. In response to the Mexican threat, he ordered the Texas archives moved to Houston for safekeeping. Austinites refused to move the archives, but President Houston moved the capital anyway. The dispute became known as the Archive War when Houston sent an armed contingent to seize the General Land Office in Austin. Without its political base, Austin's growth stalled, until a constitutional convention in 1845 voted to bring the capital back. The United States annexed Texas in February of 1846, and in 1850, voters made Austin the permanent state capital. The new capitol building at the top of Congress Avenue opened in 1853, followed by the governor's mansion in 1856. By 1860, the population numbered 3,546, including 1,019 slaves and congregations of Presbyterians (who built the first church in 1839), Methodists, Catholics, Baptists, and Episcopalians.

Austinites voted against secession, but once the Civil War commenced at least 12 local volunteer companies joined the Confederacy. Union occupation at the end of the conflict brought immense numbers of emancipated slaves to Austin, increasing the city's black population by over 50 percent. By 1870, over a third of Austin's population was African American.

Postwar growth continued with a railroad connection on the Houston and Texas Central Railway. As the westernmost terminus for the railroad, Austin became a trading center for western Texas. In 5 years, with the addition of numerous residents from Europe and Mexico, the city's population doubled to 10,363 people. Austin took on a modern character with gas street lamps, a streetcar line, and an elevated bridge across the Colorado River. As the railroad industry spread to nearby towns, however, the city's economic boom ended.

Austin turned to politics and education to distinguish itself. In 1872, the city survived challenges to its seat as state capital and constructed a new capitol building, the “seventh largest building in the world.” The 1880s brought numerous educational institutions to the city, beginning with a public school system. In 1881, it became the home of the new University of Texas (UT) despite objections from parents that going to school so close to politicians would corrupt their children. The Tillotson Collegiate and Normal Institute provided education to the African American community.

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