What is now the Sherwood area was originally inhabited by the Atfalati band of the Kalapuya nation. The first significant wave of United States emigrants arrived in 1842. Native Americans were relocated to reservations after the Donation Land Claim Act of 1850–55 gave American citizens exclusive ownership of these lands. The relocation process took place under the guidance of a series of federal employees, most notably Superintendent of Indian Affairs Joel Palmer, who was severely criticized for his humane treatment of the tribes.

The California Gold Rush of 1849 caused a dramatic shift in the area’s economy. Oregon City, Oregon is along a stretch of the Willamette River that had always been attractive to trade since prehistoric times, when trading activity was dominated by the Chinookan tribe. When settlers of European extraction began arriving in large numbers, Oregon City became (arguably) the “End of the Oregon Trail”. After the Gold Rush, however, Portland, Oregon, replaced Oregon City as the area’s most important center of trade and commerce. Sherwood is within 20 miles (32 km) of both cities.

The name “Sherwood” arose from a declination of naming the town “Smock Ville” after its co-founders James Christopher and Mary Ellen Smock.[citation needed] In 1885, the Smocks gave a right-of-way on their property to the Portland and Willamette Valley Railway. The Smocks platted the town in 1889, the same year rail service began. Tradition has it that no one, not even the town’s founders, liked the name “Smock Ville,” and so a public meeting was held to rename the town. Robert Alexander, who was both a local resident and prominent businessman, suggested the name “Sherwood.” According to post office records, Alexander was from Sherwood, Michigan, and also said the forest which surrounded the city was like Sherwood Forest in England. The U.S. Postal Department began sending mail to the Town of Sherwood, Oregon on July 5, 1891. Smock was the first postmaster. The Town of Sherwood was incorporated under Oregon Senate Bill 36 in 1893.

The main industry in the 1890s was a pressed brick yard which closed in 1896, a victim of the deep recession of 1893. The Klondike Gold Rush of 1897 revived Sherwood’s economy. In 2013, Money ranked Sherwood fifth among the top fifty best places to live in the United States. In August 2009, Family Circle named the city one of America’s most “family friendly” small towns.

Sherwood has four elementary schools (J. Clyde Hopkins, Middleton, Archer Glen, Edy Ridge), two middle schools (Sherwood Middle School, Laurel Ridge), and one high school, Sherwood High School, in the Sherwood School District. Each elementary school holds around 600 students, Laurel Ridge has about 450 students, Sherwood Middle School has about 1000 students, and the high school has an enrollment of approximately 1300 students. The Sherwood School District also sponsors a program for at-risk youth in high school, and has an alternative school for teens having problems with the abuse of drugs or alcohol, and also caters to students in trouble with law enforcement. Within the confines of the city, there is also a private grade-school, a public charter k-8 school (Sherwood Charter School) as well as a private religious school (St. Francis Catholic School).