Heading west in 1867, while Palmer helped build the Kansas Pacific Railway he met a young English doctor, Dr. William Abraham Bell who became his friend and partner in most of his business ventures in which we would generally find Palmer as president with Bell as vice president. The two men are best known as co-founders of the Denver and Rio Grande Western Railroad (Rio Grande). The Rio Grande and its successors eventually operated the largest network of narrow gauge railroad in the United States, and ultimately became part of the 21st century Union Pacific Railroad.
Palmer and Bell are notable for helping introduce to the United States the practices of burning coal (rather than wood) and the use of narrow gauge railroading. He helped develop rail-related industries in Colorado, such as a large steel mill near Pueblo. He founded the city of Colorado Springs, in 1871, as well as several other communities. Palmer settled down in Colorado Springs, where he continued his philanthropic efforts by funding educational institutions of higher education and helping found a hospital for tuberculosis. Public schools in Colorado Springs were named for both him and his wife, Mary (née Mellen) Palmer, who was known by her nickname of "Queen". A statue of Palmer also exists in downtown Colorado Springs, across from the school named in his honor.