The late Cenozoic was a time of global cooling, increased aridity, and expansion of grasslands. In the last two decades numerous records of oxygen isotopes have been collected to assess plant ecological changes, understand terrestrial paleoclimate, and to determine the surface history of mountain belts. The δ¹⁸(O) values of these records, in general, increase from the mid-Miocene to the Recent. We suggest that these records record an increase in aridity and expansion of grasslands in midlatitude continental regions. We use a nondimensional isotopic vapor transport model coupled with a soil water isotope model to evaluate the role of vapor recycling and transpiration by different plant functional types. This analysis shows that increased vapor recycling associated with grassland expansion along with biomechanistic changes in transpiration by grasses themselves conspires to lower the horizontal gradient in the δ¹⁸(O) of atmospheric vapor as an air mass moves into continental interiors. The resulting signal at a given inland site is an increase in δ¹⁸(O) of precipitation with the expansion of grasslands and increasing aridity, matching the general observed trend in terrestrial Cenozoic δ¹⁸(O) records. There are limits to the isotopic effect that are induced by vapor recycling, which we refer to here as a “hydrostat.” In the modern climate, this hydrostatic limit occurs at approximately the boundary between forest and grassland ecosystems.