In 1900 Benjamin Franklin Yoakum, manager of the Frisco railroad system, developed a plan to extend the St. Louis, Brownsville and Mexico Railway from Houston to Brownsville. He recognized the agricultural potential of the area and soon collected a group of St. Louis capitalists to form the American Rio Grande Land and Irrigation Company with a capital stock of $1.25 million. A charter for the corporation was granted by the state of Texas on September 30, 1905. The main accomplishment of the American Company was integrating the development of irrigation, the coming of the railroad, the sale of farmland, and the establishment of the town of Mercedes. The developers were fully aware that irrigation would be unprofitable if there was no way to get the produce to distant markets; hence the railroad. Production required producers; hence the intensive recruitment of land buyers from the Midwest. Coordination of the operation required central facilities; hence the town.
The land was purchased from the heirs of the original grantees, Juan José Hinojosa and Rosa Hinojosa de Ballí, in the Llano Grande and La Feria grants. The first office of the company was a boxcar on a railroad siding; the second was a two-story building in Mercedes. W. F. Shaw served as chief engineer, vice president, and general manager from 1907 to 1930. He planned and developed the irrigation and drainage system for the project. A settling basin, a pumping plant on the river, a canal, and an electrical plant were built in Mercedes in 1906–07. The canals and river pump station began operation in 1908. By 1920 the system consisted of three large canals, five pumping plants, reservoirs and settling basins, and extensive drainage works.
On January 27, 1922, controlling stock in the company was bought by Harry L. Seay and Charles Linz of Dallas. In 1927 Hidalgo and Cameron Counties Water and Control District No. 9 was formed by the farmers who owned land in the district, and in 1929 they purchased the irrigation portion of the company.