The town and river are presumed to be named after Margaret Wyche, cousin of John Garrett Bussell (founder of Busselton) in 1831. The name is first shown on a map of the region published in 1839. European migrants lived in the area as early as 1850, with timber logging commencing in around 1870. By 1910, the town had a hostel also operating as a post office.
After World War I, an attempt by the government of Western Australia to attract migrants to Western Australia and establish farms in the region attracted settlers to the town. In 1922 over 100 settlers moved into the district.
The 2001 Australian census records that Margaret River's population is approximately 10,000 people, and draws approximately 500,000 visitors every year.
Beaches near the mouth of the river are known for their excellent big-wave surf. The relatively isolated region nevertheless attracts many surfers around the world who enjoy the surf and the beautiful coastline.
Inland along the Margaret River valley, high-quality table wine grapes are grown by a variety of commercial vineyards. Grapes perform very well in the Mediterranean climate of the region. The shift in emphasis to the wine industry in the late 1980s-early 1990s sharply reversed the slow decline in the region's economy, and since 1996 the region has been one of the fastest growing economic areas in Australia. Margaret River wines are now exported to most parts of the world.
The multi-chambered Mammoth Cave lies 21 kilometres south of the town and contains fossils dating back over 35000 years. The cave was first discovered by European settlers in 1850 and has been open to the public since 1904.
Archeological evidence suggests that Australian Aborigines have lived in the Margaret River region for more than 55,000 years.