The town was originally known as Warraquil. It was renamed to Netherby in 1886 due to the towns first teacher getting confused and going to a town with a similar name (Warragul - 502 km away). The town takes its name from the Britishfull-rigged shipNetherby, 944 tons, which was wrecked on King Island in Bass Strait on 17 July 1866. The ship was carrying 52 crew and 452 emigrants to Brisbane, Queensland and all hands landed safely. After the castaways were rescued and taken to Melbourne, few elected to continue on to Queensland and many settled in the district of Victoria then being opened up that was named after their ship.
Netherby Post Office opened on 1 September 1886 and closed in 1975.