Terrell returned to Texas in 1866 and resumed the practice of law in Houston, but the following year, disgusted with the turmoil of Reconstruction politics, he temporarily retreated to his plantation in Robertson County. Here, for four years, he experimented with scientific agriculture and studied. In 1871 he and Judge A. S. Walker formed a partnership in Austin, and five years later he entered the Texas Senate, where he served four terms (1876-84). Later he served four years in the state House of Representatives (1891-92, 1903-05). During his years in the legislature, he authored several acts: a bill requiring jurors to be literate; the enabling legislation for the Railroad Commission; the Terrell Election Law, which required candidates for public office to be nominated by direct primaries instead of by state or local conventions; and the measure which pledged the resources of three million acres in the Panhandle to the Chicago-based Capitol Syndicate to construct the Capitol. Terrell's reputation as an advocate of the small farmer and consumer spread beyond the state. At the invitation of the University of Missouri, he returned to the campus of his alma mater in June 1885 to address a social problem of his choice. In a notable speech, he criticized private corporations that had too much power in politics and threatened independent labor. Two years later he failed to secure legislative nomination for a seat in the United States Senate. In 1893 President Grover Cleveland appointed Terrell minister plenipotentiary to the Ottoman Empire, a post he held for four years. In 1897 he returned to Austin to reenter private practice and state politics. After Governor Thomas Campbell appointed Terrell a regent of the University of Texas in 1909, Terrell led the campaign to raise funds for a new library building and helped design it.
With his partner Judge Walker, Terrell reported and annotated thirteen volumes of Texas Supreme Court decisions (vols. 38-51); subsequently he alone reported eleven more volumes (52-62). He also published several articles in the Southwestern Historical Quarterly and in 1912 served as president of the Texas State Historical Association. His memoir, From Texas to Mexico and the Court of Maximilian in 1865, appeared in 1933. Terrell was married three times. His first wife, Ann Elizabeth Boulding of Howard County, Missouri, bore him five children before her death in 1860. By his second wife, Sarah D. Mitchell of Robertson County, Texas, who died in 1871, he had three children. He married his third wife, Mrs. Ann Eloise Holliday Anderson Jones, in 1883. Terrell died in Mineral Wells, Texas, on September 8 or 9, 1912, while on the way home from visiting family in Virginia. He was buried in the State Cemetery in Austin. Terrell County is named in his honor.
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Texas State Cemetery