In 1881, the Gulf, Colorado and Santa Fe Railway laid tracks a mile south of the community, across the Bosque River. Merchants, hoping to benefit from the railroad, began moving their stores across the river, to the tracks.
On February 17, 1882, a cyclone (tornado) hit the new townsite, destroying a large number of buildings. Nevertheless, the remaining residents from the community's original site moved across the river and rebuilt their homes. Thus, by the end of 1882 Valley Mills had extended into McLennan County.
Dairy farming and stock raising were the principal industries of the community. By 1900, however, the railroad and the nearby Chisholm Trail had made Valley Mills a prosperous retail and trading center for Bosque and McLennan counties. The community's population reached 855 by 1905. Like many rural Texas communities, Valley Mills declined during the 1930s. Following World War II, however, as farm prices increased and ranching prospered, the economy grew, and the population, which had declined to 803 by 1937, increased to 1,037 by the mid-1950s. During the next three decades Valley Mills maintained its position as a leading retail market and shipping point for Bosque and McLennan counties.
The town was hit by an F-5 tornado in 1973.
In 1984, it had a newspaper, a municipal airport, more than 25 businesses, several dairy farms and ranches, and a population of 1,236. A new school was opened in 1988; it and four churches were the social centers of the community. In 1990, the population was 1,085. In 2010, the population was 1,203.