In 1926, founder Elwood Hussey bought an 80-acre parcel he reckoned would be at the junction of the highway and spur. He built cabins and called the locale "Caves City" (officials later didn't allow "city" because it implied the small town was incorporated). The town was established in order to serve the tourists headed to the Oregon Caves.

On June 9, 1934, fires burned most of the town but the citizens rebuilt. The post office was established on May 29, 1936.