Laguna Beach was the site of a prehistoric paleoindian civilization. In 1933, the first fossilized skull of a paleoindian found in California was uncovered during construction on St. Ann's Drive. Known as "Laguna Woman", the skull originally was radiocarbon dated to more than 17,000 BP, but revised measurements suggest it originated during the Holocene era 11,700 years BP. Subsequent research has found several prehistoric encampment sites in the area.
The indigenous people of the Laguna Beach area were the Tongva. Aliso Creek served as a territorial boundary between Gabrieleno and Acjachemen groups, or Juanenos, named by Spanish missionaries who first encountered them in the 1500s. The area of Laguna Canyon was named on an 1841 Mexican land grant map as Cañada de las Lagunas (English: Glen of the Lagoons). After the Mexican–American War ended in 1848, the area of Alta California was ceded to the United States. The treaty provided that Mexican land grants be honored and Rancho San Joaquin, which included north Laguna Beach, was granted to José Antonio Andres Sepúlveda. Following a drought in 1864, Sepúlveda sold the property to James Irvine. The majority of Laguna Beach was one of the few parcels of coastal land in Southern California that never was included in any Mexican land grant.
Settlers arrived after the American Civil War. They were encouraged by the Homestead Act and Timber Culture Act, which granted up to 160 acres (65 ha) of land to a homesteader who would plant at least 40 acres (16 ha) of trees. In Laguna Beach, settlers planted groves of eucalyptus trees. In 1871, the first permanent homestead in the area was occupied by the George and Sarah Thurston family of Utah on 152 acres (62 ha) of Aliso Creek Canyon. In 1876, the brothers William and Lorenzo Nathan "Nate" Brooks purchased tracts of land in Bluebird Canyon at present-day Diamond Street. They subdivided their land, built homes and initiated the small community of Arch Beach. In his book, History of Orange County, California (1921), Samuel Armor cited the permanent homestead of Nate Brooks as the beginning of the modern day town and described Brooks as the "Father of Laguna Beach".
The community in Laguna Canyon and around the main beach expanded during the 1880s. The city officially founded a post office in 1887 under the name Lagona, but the postmaster in 1904, Nicholas Isch, successfully petitioned for a name correction to Laguna Beach. By then Laguna Beach already had developed into a tourist destination. Hubbard Goff built a large hotel at Arch Beach in 1886, which later was moved and added to Joseph Yoch's Laguna Beach Hotel built in 1888 on the main beach. Visitors from local cities pitched tents on the beaches for vacation during the warm summers.
The scenic beauty of the isolated coastline and hills attracted plein-air painters in the early 1900s. William Wendt, Frank Cuprien, and Edgar Payne among others settled there and formed the Laguna Beach Art Association. The first art gallery opened in 1918 and later became the Laguna Beach Art Museum.Precursors to The Festival of Arts and the Pageant of the Masters began in 1921, and eventually were established in their present-day form by Roy Ropp in 1936. Due to its proximity to Hollywood, Laguna also became a favorite filming location. Starting in 1913, dozens of silent films were made at local coves with Harold Lloyd, Mary Pickford, Douglas Fairbanks Jr., and others. Actors and film crews stayed during long production shoots at the Arch Beach Tavern on the hillside above Moss Street.
The arrival of painters, photographers, filmmakers, and writers established Laguna Beach as a noted artist community. Although there only were approximately 300 residents in 1920, a large proportion of them worked in creative fields. The small town remained isolated until 1926 because the long, winding Laguna Canyon road served as the only access. With the completion of the Pacific Coast Highway in 1926, a population boom was expected. To protect the small-town atmosphere of the art colony, residents who called themselves "Lagunatics" pushed for incorporation. The municipal government for Laguna Beach incorporated as a city on June 29, 1927. The city has experienced steady population growth since that time, rising from 1900 residents in 1927 to more than 10,000 in 1962, and becoming four times larger in area.
Many creative, bohemian, and wealthy people have made Laguna Beach their home. They have added to the local culture by providing a theme for the small town. Adventurer Richard Halliburton built his Hangover House on the slopes of South Laguna. Hildegarde Hawthorne, granddaughter of the novelist Nathaniel Hawthorne, described Laguna "as a child of that deathless search, particularly by persons who devote their lives to painting or writing, or for some place where beauty and cheapness and a trifle of remoteness hobnob together in a delightful companionship."
Laguna Beach was the Southern California epicenter of the 'alternative' hippie culture in the late 1960s and early 1970s. In early 1967, John Griggs and other founding members of the Brotherhood of Eternal Love relocated from Modjeska Canyon to the Woodland Drive neighborhood of Laguna Beach, which they later renamed "Dodge City". Timothy Leary lived in a beach house on Gaviota Drive. The Utsava Rajneesh Meditation Center was located on Laguna Canyon Road and was the last remaining commune in the United States for followers of the spiritual teacher and guru Osho, Bhagwan Shree Rajneesh.