The settlement Ahnapee which eventually became known as Algoma was founded in 1834 by Joseph McCormick of Manitowoc. In 1851, Irish and English pioneers moved to the area and called the place Wolf River. This was a loose translation from the Indian word An-Ne-Pe, meaning "land of the great gray wolf." The wolf was a legendary animal in stories told by the local Potawatomi Indians. (This animal eventually became the mascot of the Algoma High School Algoma School District.)
In the mid-19th century, immigrants from Germany, Bohemia, Scandinavia, and Belgium settled in the community. The earliest businesses consisted of a sawmill, a general store, and churches. In 1859, the name of the town was changed from Wolf to Ahnapee. The town which surrounds Algoma still bears this name.
In 1871, the town survived the Peshtigo Fire that swept from Green Bay and destroyed thousands of acres of land. Local residents were prepared to escape from the fire, but torrential rains extinguished it just before it reached Ahnapee.
Growth and development in Ahnapee was greatly advanced in 1892 with the arrival of the Ahnapee and Western Railway, which connected the coastal town with the Kewaunee Green Bay and Western Railroad at Casco Junction. The railroad would connect Algoma with the rest of the nation's rail system for the 94 years. Several factories were built in Ahnapee as a result of the railroad's arrival, including the Ahnapee Seating & Veneer Company. This industry would change owners and names through the years, but still operates in town as Algoma Hardwoods, Incorporated.
Ahnapee incorporated as a city on February 23, 1879. In 1897, the city was renamed Algoma, a name which may have come from an Indian term for "park of flowers." (See also Algoma (word)) At that time the commercial fishing fleet located in Algoma was the largest on Lake Michigan. Sport fishing is still a major tourist attraction today.