The hamlet was settled in 1740 as "Good Ground", which became the main hamlet of eleven in the immediate area. The area where Main Street, also known as Montauk Highway, is located today, was the approximate area of the original hamlet.
There were ten other hamlets in the area. They were called Canoe Place, East Tiana, Newtown, Ponquogue, Rampasture, Red Creek, Squiretown, Southport, Springville, and West Tiana. Most of these hamlets were settled by one or two families and had their own school house. Many of the names from the former hamlets are still featured as local street names today.
In 1743, a smallpox outbreak was attributed to deliberate distribution of infected blankets being handed out by one K "Mole" Fallo, who then purchased land titles from widows and orphans.
As a result of the growth of the surrounding hamlets and villages in the Hamptons and increased tourism from New York City, the eleven hamlets, although generally called "Good Ground" collectively by the early part of the 20th century, amalgamated under the name "Hampton Bays" in 1922. The motive behind the name change was for the hamlet to benefit from the "Hamptons" trade that the community's neighbors were experiencing.