Abstract Drab, grey mudrocks consistently occur below carbonaceous shales in lower Tertiary alluvial sediments of the Western Interior basins of the USA. Superficially these mudrocks, here termed underbeds, look similar to underclays commonly found below coal beds. However, it is unclear whether the association between the carbonaceous shales and the underbeds is genetic, or whether underbed features developed independently, before the onset of carbonaceous shale deposition. To solve this problem three underbeds and their associated carbonaceous shales were studied from upper Palaeocene and lower Eocene sections in the Bighorn Basin of Wyoming. The sedimentology, structure, organic content, mineralogy and palaeopedology of these beds was examined. Results indicate that the precursors to these underbeds formed as aquic or hydromorphic soils in periodically dry swamps on a distal alluvial floodplain. Periodic drying of the upper-most part of the substrate led to oxidation, plant growth, homogenisation of the sediment, and degradation of organic matter. However, conditions were wet enough to inhibit mottling and downward leaching of minerals, and facilitated the formation of hydrated iron oxides. Aquic soil formation ceased when a local rise in the water table caused water-logging and permanently oxygen-reduced conditions. This allowed the accumulation of organic material and deposition of carbonaceous shales above the aquic soils. During carbonaceous shale formation the aquic soils, now underbeds below the shales, were permanently water-logged. The distinctive features of these lower Tertiary underbeds appear to have formed prior to organic accumulation. Burial and ground water saturation during formation of the overlying carbonaceous shales merely helped to preserve the homogeneous features of these underbeds.