The area was first settled before the American Civil War, and it became a gathering point for English-speaking settlers in Gillespie County, mostly inhabited by German speaking settlers around and after the War. Named simply "Willow" in 1877 when ta post office was established, the growing community became "Willow City" ten years later. At the turn of the century, Willow City was home to 132 inhabitants, but this number dropped steadily since then, going as low as 17 in 1964 before settling around 75 since the 1970s. 
Willow City was home to the Alfred Pfeil Gin, in which a boiler exploded September 2, 1924, killing two people. The walls of one end of the building were blown out, and one end of the boiler was found more than a hundred yards away. Farmer Edgar P. Smith was killed instantly and hurled about 50 yards. His nude body, missing his legs, was found in the creek. Walter M. Icke was found near the original site of the boiler and died shortly after medical assistance arrived.
Although it is unincorporated, Willow has a post office, with the ZIP code of 78675
On December 15, 1847, a petition was submitted to create Gillespie County. In 1848, the legislature formed Gillespie County from Bexar and Travis counties.