The town's history dates to 1900, when Thomas Bordeaux became president of the newly incorporated Potlatch Commercial and Terminal Company. The company acquired timber lands and began construction of a logging railway to access them. Potlatch was built as a company town. The hydroelectric dam at Lake Cushman and the Potlatch Powerhouse began producing electricity in 1926. The second dam at Lake Kokanee was finished in 1930. The water is conveyed to Potlatch through huge pipes, visible for miles.
Potlatch borders the Skokomish Indian Tribal lands to the south. During shrimp, crab, and salmon harvesting seasons, tribal fishing operations sell their fresh catch.