In 1609, King James I issued a second charter to the Virginia Company that defined new boundaries for the Virginia colony. The new claims extended north to what is now Maine, south to near the modern North-South Carolina border, and "from sea to sea, west and northwest" all the way to the Pacific Ocean - establishing Virginia's later claims to the northwestern Territory.
A third charter in 1612 expanded Virginia's claims eastward to include the recently-discovered island of Bermuda. King James 1 revoked the 1612 charter in 1624, converting Virginia into a royal colony rather than a private business. Despite subsequent legal confusion over the validity of outdated charterss - and perhaps in part because of it - Virginia officials cited the boundaries in the 1612 charter whenever there was an opportunity to assert control over western lands that are today part of western Pennsylvania, Ohio, Indiana, Illinois, Michigan, and Wisconsin.
Of course, what the king granteth to a few well-connected friends... the king can take away.
When English kings created other colonies such as Maryland and Carolina, they changed the northern and southern boundaries of Virginia. Much later, King George III defined new western boundary limits with the Proclamation of 1763. The 1774 Quebec Act transferred responsibility for lands west of the Appalachian Mountains to the new province of Quebec, which England obtained from the French in the 1763 treaty that ended the "Seven Years War."
During the fifth of the Virginia "conventions" held after the colonial government collapsed and before the General Assembly was created, Virginia leaders declared independence. In the first Virginia constitution adopted by that convention in June, 1776, the new Commonwealth of Virginia blatantly ignored King George III's restrictions and transfer of lands to Quebec, which stayed loyal to King George III during the American Revolution.
The Virginians were more accommodating to those other 12 states who joined the fight against Great Britain. In June, 1776, the Fifth Convention adopted a constitution that defined the new state's boundaries as:1
More colonies than just Virginia were constrained by the Proclamation of 1763. Thomas Jefferson listed a specific complaint about the Quebec Act in the Declaration of Independence, when he justified the 13 colony's break from King George III:2
After declaring independence, Virginia seized the unsettled, ungranted lands of the King of England and the disloyal Tories. By this act, the state claimed control over the vast territory west of Pennsylvania/New York and north of the 36o 30' parallel (the border with North Carolina). In 1778-79, Virginia troops led by George Rogers Clark captured British forts in the Illinois territory, adding another element to Virginia's authority over that land.
Control over the "northwest" between the Ohio River and the Great Lakes generated conflicts between colonies (and later, states) with competing land claims over who owned what. If Virginia was allowed to sell its western lands and pocket the revenue, plus control the elections and administer the area, then other colonies/states would see Virginia's economic and political power grow at their expense.
Over half of the states participating in the Continental Congress (MA, CT, NY, VA, NC, SC, and GA) had charters with no fixed boundary on their western edge, or cited other authorities to justify overlapping claims to the some of the same territory claimed by Virginia.
The other six states (NH, RI, NJ, PA, DE, and MD) had no justification to assert authority over western lands, but still had great interest regarding how that land would be sold, settled, and administered. Those six states feared that in the future, as population grew, the landlocked states would lose power and influence as the other states expanded.
George Rogers Clark captured Kaskaskia and Vincennes during the American Revolution, cementing Virginia's claims to the territory northwest of the Ohio River
Source: National Park Service, Fort Jefferson, 1780-1781: A Summary Of Its History
The compromise solution was to have the all the states establish a clear territorial line on their western borders, to give land claims west of those borders to the new national government, and to create new states from that public domain. That solution limited the future growth of the states with land claims, while income from land sales in the new national territory could be used to pay off the national government's debts from the Revolutionary War. The new public domain would also provide a way for the Congress to honor land grants promised as bounties for serving in the Continental Army.
Everyone understood that the land northwest of the Ohio River was too far away to be governed successfully from Williamsburg/Richmond. Congress encouraged Virginia's land cessions, to tighten the bonds between Virginia and the other 12 breakaway colonies and focus on winning independence from Great Britain. Affirming the claims of Maryland/Pennsylvania to boundaries defined in charters to Calvert/Penn, and agreeing to create new states from lands northwest of the Ohio River rather than insisting that Virginia would extend from sea to sea, reduced the internal tensions... but did not eliminate them.
In response, Virginia officials consciously gave away most of their state's territorial claims northwest of the Ohio River during the American Revolution, but bargained hard in the process. Arranging the land cession involved complicated politics, and resistance to Virginia's demands postponed adoption of the Articles of Confederation for three years. A "congress" of the colonies started meeting formally in 1774 and the rebellious colonies/states fought the American Revolution together starting in 1775, but the 13 separate governments did not formally unite until March 1781.
Part of the difficulty was created by Virginia's agressive efforts to sell land that Pennsylvania thought to be well within the boundaries of that state. Virginia opened its land office in 1779. It started to sell western lands to raise revenue during the war, and patented land based on old military warrants issued for service in the French and Indian War. In response, the Continental Congress called for land cessions to the national government on October 30, 1779:3
Virginia's General Assembly quickly objected to this interference of the national government in the state's internal affairs and issued a "remonstrance" on December 14, 1779:4
New York led by example on January 17 1780, abandoning its flimsy claim that treaties with the Iroquois had resulted (by right of conquest of the Iroquois over tributary tribes) in New York ownership of land southwest of Lake Ontario. New York authorized its delegates to the Continental Congress to transfer the state's rights (if any...) for lands outside of its established boundaries to the Congress. Congress then finessed the issue over national vs. state authority by simply asking the other states to mimic New York.
Virginia's legislature relinquished its land claims on January 2, 1781 - but with conditions that required the Congress to:5
Those conditions would validate property ownership of Virginia speculators - but eliminate the potential value of various land companies chartered outside of Virginia. In particular, it would block land claims of the Transylvania colony proposed by Judge Richard Henderson, and ensure Virginia's claim of authority over Kentucky.
The action by the Virginia General Assembly was enough compromise that Maryland finally signed the Articles of Confederation, after which the document became effective and the 13 colonies officially became one nation. (Virginia had prodded, by including in it's January 2, 1781 action that "the above cession of territory by Virginia to the United States shall be void and of none effect, unless all the states in the American Union shall ratify the articles of confederation heretofore transmitted by congress for the consideration of the said states...")
However, the national Congress chose not to accept the Virginia conditions. The treaty of Paris between the United States and England in 1783 established the Mississippi River as the western edge of the new nation, but debate regarding state land claims west of the Ohio River continued until 1784. In the two years of further discussion, the other states abandoned efforts to gain control of the Virginia lands between the Proclamation Line of 1763 and the Ohio River, except Connecticut managed to obtain a "Western Reserve" in what is now Ohio. Virginia renewed its cession offer on October 20, 1783, without requiring a guarantee of the states borders (i.e., finessing the requirement that the other states acknowledge Virginia's authority over Kentucky). Congress accepted Virginia's offer on March 1, 1784.6
In March 1784, Thomas Jefferson wrote to George Washington on the urgency of Virginia improving its transportation network westward from the Potomac River to the Ohio River, so Virginia rather than New York would capture the future trade between the "Northwest" and ports on the Atlantic coast. In that letter, he justified why Virginia should retain western lands to the Ohio River, especially the Kanwaha River watershed, but allow new states to be formed from lands beyond the Ohio River:7
Virginians played a major role in shaping the management of the new Northwest Territory. Through the Land Ordinance of 1785, Thomas Jefferson proposed the system by which lands would be surveyed before sale, using what evolved into the Public Land Survey System. He would play an even greater role in acquiring Federal territory west of the Mississippi River, through the Louisiana Purchase.
The Northwest Land Ordinance of 1785 defined how the new public domain of the national government would be sold, and protected one remaining claim of Virginia to lands northwest of the Ohio River. Virginia had set aside lands in Kentucky for soldiers and sailors who had served in the state or national forces during the American Revolution - one incentive to enlist or remain in the military was the potential value of the land grants. Virginia was concerned that the designated Kentucky lands on the Cumberland River, between the Green and Tennesse, would not be sufficient to redeem all bounties issued for enlisting.
Just in case, Virginia's cession to the Congress identified a 4.2 million acre8 Virginia Military Reserve in Ohio, where those who had served in Virginia's military forces during the American Revolution (and those who had purchased the land rights from the soldiers and officers...) could claim their property:9
1. Constitution of Virginia, June 29, 1776, from http://www.nhinet.org/ccs/docs/va-1776.htm (last checked August 15, 2009)
2. Declaration of Independence, 1776, http://www.archives.gov/exhibits/charters/declaration_transcript.html (last checked August 15, 2009)
3. "Journals of the Continental Congress" (Saturday, October 30, 1779) at the Library of Congress, http://memory.loc.gov/cgi-bin/lawpage.pl?dateString=c17791030 (last checked August 15, 2009)
4. Hening's Statutes at Large, "The Remonstrance of the General Assembly of Virginia, to the delegates of the United American States in Congress assembled," December 14, 1779 in Resolutions and State Papers, from 1782 to 1784, p. 557, http://vagenweb.org/hening/vol11-31.htm (last checked August 15, 2009)
5. Hening, "For a cession of the lands on the north west side of Ohio to the United States," p. 564 (last checked August 15, 2009)
6. Henin, p.571 http://vagenweb.org/hening/vol11-31.htm#page_571 (last checked August 15, 2009)
7. "Letter from Thomas Jefferson to George Washington," The Letters of Thomas Jefferson, March 15, 1784, posted online in The Avalon Project of Yale University, http://avalon.law.yale.edu/18th_century/let23.asp (last checked March 28, 2013)
8. Knepper, Dr. George W., Ohio Lands Book, p.19, Ohio State Auditor, 2002, http://www.auditor.state.oh.us/Publications/General/OhioLandsBook.pdf (last checked August 15, 2009)
9. Northwest Land Ordinance of 1785, in "Journals of the Continental Congress" (Friday, May 20, 1785) at the Library of Congress, http://memory.loc.gov/cgi-bin/lawpage.pl?dateString=c17850520 (last checked August 15, 2009)