Manchester was first settled by Europeans in 1629 and was officially incorporated in 1645.
The community thrived primarily as a fishing community for over 200 years. Its economy shifted to that of a Boston area summer colony starting in 1845, when Richard Dana, a Boston-based poet, built a house in the town. Over the next fifty years, development of summer houses along the coastline established the community as Boston society's community of choice for summer residency. The trend continued with designs by other notable architects, such as Sunnywaters, designed by John Hubbard Sturgis for his older brother, Russell, in 1862. The most famous of these "summer cottages" was Kragsyde, built on Smith's Point in 1883 and demolished in 1929. Commissioned by George Nixon Black, the Peabody and Stearns-designed residence has been hailed as the zenith of the Shingle style substyle of the Queen Anne style of architecture.
The town was originally named "Jeffrey's Creek." In the mid-1800s, there were enough other Manchesters in New England (especially the fairly close Manchester, New Hampshire) that locals began following the lead of railroad conductors and referring to the town as "Manchester-by-the-Sea". The name of the town was officially changed in 1989 following a close town meeting vote that year and an act of the state legislature passed on September 25, 1989. This change was driven by Edward Corely, a longtime resident of Manchester. All town documents (and the town seal) now use the name "Manchester-by-the-Sea", as have (thanks to some minor resident activism) the majority of public and private lists of Massachusetts cities and towns, including that of the state government.