The area around Powell River is the traditional territory of the Sliammon First Nation who have a reerve just north of the townsite. Captain George Vancouver passed along this part of the coast and described it in 1792. Beginning in the 1880s Europeans began to take interest in the land and set up logging camps. However the Town of Powell River dates from 1910 when houses were constructed around the paper mill that was then under construction.

The river and town were named after Israel Wood Powell. Powell was born in Ontario (then Upper Canada) and came to BC in 1862 during the Caribbo Gold Rush, but settled in Victoria. He had studied medicine at McGill University and was the first graduate from there to practise in BC. He entered politics as an advocate of responsible government and free education and was a strong advocate of BC joining Canada in 1871. After Confederation, he declined to become Lieutenant Governor of BC, but instead took on the more active role of Superintendent of Indian Affairs. Later he became the first president of the BC Medical Council. In 1890 he was named first Chancellor of the University of BC, then only a dream.

Powell River and Powell Lake were name in his honour in 1881. The major industry of the town has remained the paper mill. Incorporated in 1909, the Powell River Paper Co. was owned by the Brooks-Scanlon Lumber Company of Minnesota. The mill's first newsprint was produced in 1912 and its original capacity was roughly 75,000 tons a year. Eventually it grew into the largest pulp mill in the world under the ownership of MacMillan Bleodel and Powell River Company. Production is now diminished and it now produces specialty paper. The historic townsite was designated a National Historic District by the Historic Sites and Monuments Board of Canada in 1995, recognizing the exceptionally well preserved early twentieth century planned community which embodies the ideals of the Garden City Design Movement and the Arts and Crafts Movement.