Strategically located on the Potomac River, the Baltimore & Ohio (B&O) Railroad, and the Chesapeake & Ohio (C&O) Canal, Paw Paw was named for the banana-like pawpaw fruit that grows in the area. It is the westernmost settlement in Morgan County, incorporated as a town on April 8, 1891.

Travelers heading west often crossed the gap in the mountains here, some settling to farm along the river. Gen. Edward Braddock's army camped on a hill just east of town during the French and Indian War. The site became Camp Chase, a federal camp during the Civil War where more than 16,000 Union soldiers were stationed to guard the railroad. Today, it is Camp Hill Cemetery.

In 1836, the C&O Canal Company began to carve a 3,118-foot tunnel through Sorrel Ridge about a half-mile north of town, across the Potomac in Maryland. The Paw Paw Tunnel was completed in 1850. At 24 feet high, it is the largest man-made structure on the C&O Canal. Mules and canal boats transported manufactured goods through it until 1924.

The B&O arrived in 1838 and the Western Maryland Railway in 1905. Once six trains per day stopped at Paw Paw. Passenger service ceased in 1961, and the railroads are no longer a major employer. Industry has come and gone, including tanneries, apple orchards, railroads, and canals. The town’s population peaked at 990 in 1940 but has declined steadily ever since. In 2020, the population was 410.

In 1982, Paw Paw was the site of the first branch bank in West Virginia. Each year, Paw Paw celebrates its homecoming with a parade and festivities on Memorial Day weekend. Paw Paw serves as the westernmost entry to the Washington Heritage Trail, a National Scenic Byway.