Downieville was founded at the beginning of the California gold rush, when prospectors roamed northern California. In the autumn of 1849, a Scotsman by the name of William Downie led an expedition of nine miners up the North Fork of the Yuba River. They found rich gold at the present site of the town and settled for the winter. William Downie became the town's first mayor.

A few years later, the town had 15 hotels, 4 bakeries, 4 butcher shops, and numerous saloons.