On June 20, 1905, The Chaffee Real Estate Company of St. Louis, Missouri purchased of land from a local farmer, John Witt of Sikeston, Missouri, for $140,000. The Chaffee Real Estate Company soon transferred ownership of to the St. Louis-San Francisco Railway for the purposes of building a large switching yard and began surveying the area for a town for the railroad employees.
The Chaffee Real Estate Company gave public notice for the sale of lots within the soon to be established town to local individuals and companies, and began clearing the land for construction on August 15, 1905. The company attached an unusual clause to the deed stating that the property would not be used for "the dispensation of intoxicating liquors."
The residents of the new town petitioned the Clerk of the County Court of Scott County, Missouri to incorporate the area into the fourth-class city of Chaffee on August 6, 1906 and the petition was granted on December 8, 1909. Popular opinion states that the city was named for the Spanish-American War hero, General Adna Chaffee, but in all likelihood it was simply named for the real estate company that owned the land.
For many years, the town's economy was centered around textile manufacturing. Because large amounts of cotton are produced locally by Southeast Missouri farmers, and owing to the town's location near the Mississippi River it only made sense to process the cotton locally. However in the year 2000, the town's economy was devastated by factory closings. The Columbia Sportswear factory, Florsheim Shoe Company, and Thorngate Clothing Company all announced that they were idling their plants and laying off workers. Nearly 600 jobs were lost in a period of six months. Out of a population of just 3000 people, this amounted to losing over 60% of the town's employment base.
In 1911, The First National Bank of Chaffee issued $392,320 in "National Currency" with the permission of the United States Department of the Treasury, giving Chaffee the distinction of being a city with its own currency.