In 1847 James B. Gay, a native of Indiana, built a dam and a sawmill on the Kickapoo River, which proved to be a flourishing success. When his health started to fail, James convinced his brothers John and Thomas to move to the area. In 1865 John Gay built the first flour mill south of the saw mill. In 1872 Thomas Gay and family organized the First Congregational Church, the first church in Gays Mills and in 1898 the church building itself was finished. In the years between 1848 and 1865, many families moved into the community, which came to be known as Gays Mills in honor of the founder and his brothers.
Gays Mills was also the home of the Twining apple-growing family. One of the Twinings took his apples to the World's Fair, where they were a great success, generating mild fame for Gays Mills. Twining and his companions are honored with a historical marker on a hill overlooking the village. Consequently, apples are grown heavily in Crawford County, with numerous commercial orchards surrounding the village.
Almost 60 homes were substantially damaged by flooding on the Kickapoo River in 2007 and 2008. In 2008, a meeting was held to discuss moving the village to higher ground because of repeated flooding, which damaged the local economy. In October 2008, the Federal Emergency Management Agency (FEMA) released a 72-page report asking residents and businesses to relocate from the Kickapoo River flood plain. Relocation is estimated to cost $1.7 million to purchase north of the existing location. About 150 of the village's 230 houses lie in the flood plain. As of October 2008, village leaders were considering what course to take.
In March 2010, a grant of $4.31 million was awarded by the Economic Development Administration to the Village of Gays Mills and the Redevelopment Authority of Gays Mills to develop a strategy for relocating the Village’s commercial district outside of the floodplain.