Clayton was born in Delaware County, Pennsylvania. He attended a private military academy in Bristol, Pennsylvania and later attended engineering school at Wilmington, Delaware.
Clayton moved to Kansas in 1855 and served as an engineer at Leavenworth, Kansas. On 29 April 1861 he is recorded as having a company of militia at Fort Leavenworth. By May of 1861 he was formally mustered into the United States Army as a Captain of the 1st Kansas Infantry.
In December of 1861, he was promoted to Lieutenant Colonel of the 5th Kansas Cavalry and later to Colonel in March of 1862. He was made a Brigadier General of U.S. Volunteers on 1 August 1864.
During the American Civil War he served primarily in Arkansas and Missouri and fought in several battles in those States. He was assigned as commander of occupation forces in Pine Bluff, Arkansas and successfully defended the city from Confederate attacks.
In 1868 he was elected the second Reconstruction governor of Arkansas and the first under the Congressional reconstruction plan. He succeeded Isaac Murphy who had lead Arkansas under Abraham Lincoln's more conciliatory policy.
Clayton remained the Republican boss of Arkansas until he was defeated in the election of 1876 by re-enfranchised ex-Confederates. With his absence the carpetbagger government was soon replaced by a redeemer government.
Clayton returned to Arkansas and in 1882 established a home at Eureka Springs, Arkansas where he managed hotels and railroads and worked for development of the area. A memorial to Clayton is still in place in downtown Eureka Springs.
Clayton's administration made progress in getting the University of Arkansas on its feet, establishing a system of education, and bringing railroads into the State. However his administration was also accused of corruption, was personally accused of criminal conduct and was the target of numerous attacks on his character. During his term he declared martial law and organized a State Militia and conducted military operations against the Ku Klux Klan.
His brother, John Middleton Clayton was assassinated in 1889 at Plumerville, Arkansas in Conway County, Arkansas while attempting to dispute the outcome of his failed Congressional candidacy.
Powell Clayton was appointed as Ambassador to Mexico in 1897 by President William McKinley and served in that position until 1905. In 1912 he moved to Washington, D.C.
Clayton died in Washington is buried at Arlington National Cemetery.