The first European to explore the district was Dr Thomas Braidwood Wilson in 1829. A surgeon with the Royal Navy Wilson decided to explore the land to the west of Albany while his ship was laid up in King George III Sound. The Wilson Inlet was named after him by Governor Stirling and Wilson named Denmark after a colleague, Dr Alexander Denmark.
Wilson's report on the area was favourable. 'The surrounding hills are of very fine soil and may be easily turned to good account', he declared. In 1831 Captain Thomas Bannister gave a more realistic account when he noted that it would require 'great physical and moral courage' to farm the area. Bannister's assessment was obviously the one which prevailed. It wasn't until 1884 that Edwin and Charles Millar took out timber leases in the Denmark area. From 1884–1889 they worked in the Torbay area between Albany and Denmark.
Denmark really became established as a town in 1895 when the Millar brothers built a number of timber mills on the banks of the Denmark River to process the giant karri trees which were felled inland and exported to Britain, China, India, Africa and South America where they were used for everything from paving blocks to wharf piles and telegraph poles. The town grew rapidly to handle the large labour force required to run the mills which, at their peak, were employing 750 men and producing 90 000 super feet of timber a day. At that rate of consumption the timber industry was bound to be short-lived. The mills only lasted from 1895–1905.
A few mill workers (probably no more than two or three families from a population of over 2000) stayed on after the mill closed. In 1907 the Western Australian government bought out all Millars interests in the town - the buildings, the mills and the railway. By 1911 dairying had taken over as the major industry in the area and in 1922 Denmark became part of the Group Settlement Scheme. It was far from successful with some of struggling group settlers actually marching to Albany to protest at their poor conditions.
Today the town's economy is sustained by a combination of tourism, timber, dairying, beef cattle and fishing. Tourism has become increasingly important since World War II. During the war American soldiers stationed in Albany would often make day trips to Denmark and this encouraged the establishment of tea rooms and souvenir shops.