The area was first explored by the Surveyor General J. S. Roe in October 1836 when, in his travels beyond the Avon Valley he travelled through the area naming the granite outcrop to the south of the town (after which the shire is named) Mount Marshall in honour of his friend Captain Marshall MacDermott, the first manager of the Western Australian branch of the Bank of Australasia.
Captain Marshall MacDermott was one of those quixotic adventurers who make the early history of Australia so interesting. He was a well to do Army Officer who resigned his commission, bought a 500 ton ship in Sweden and sailed to the Swan River Colony. Upon his arrival in 1803 he purchased 5000 acres on the Swan River near Governor Stirling's summer residence. Three years later he imported some Saxony sheep to the colony. He was active in public life establishing, with some friends, his own bank which he ran until he was persuaded to take over the management of the Bank of Australasia.
By the 1840s there were shepherds and sandalwood cutters in the area although there was no permanent settlement until the 1860s. The agricultural potential of the area was recognised in the 1890s but the first permanent settlement in the shire didn't occur until 1908. The Mount Marshall Roads Board was established in 1923. It is said that the town's name comes from the Aboriginal word 'Gnylburngobbing' which is rather amusing as J. S. Roe named the nearby Mount Marshall after an Englishman precisely because he despised Aboriginal names believing them to be unpronouncable.