Cottonwood began in 1862 as a series of way station shelters for prospectors and mining suppliers on their way south to Florence andWarrens. It was named for the dense growth of trees that formerly lined Cottonwood Creek.
West of the city is the Monastery of St. Gertrude, begun in the early 1900s and completed in 1924, with a brick addition in 1949. The community of Benedictine sisters traces their history to twelfth-century Switzerland. The chapel at St. Gertrude's is among the most ornate in the state and is on the National Register of Historic Places. The sisters ran St. Gertrude's Academy, a co-ed Catholic high school, until May 1970.
The Cottonwood Butte ski area is also west of the city, on the east face of the mountain of the same name. During the Cold War, the mountain was the site of Cottonwood Air Force Station, an early warning radar installation of the U.S. Air Force. Construction of the station began in 1956 and it went operational in early 1959. The radar tower was at the summit and the cantonment of the station was at 4,400 feet (1,300 m), about a mile (1.6 km) below the present base of the ski area on Radar Road. The 27-unit family housing area was built in the city of Cottonwood, on Butte Drive in the north end. The radar was significantly upgraded with a new tower in 1962, but the station was obsolete within three years and was deactivated. The cantonment buildings became a Job Corps center in 1965, supervised by the U.S. Forest Service. It was transferred to the state of Idaho in 1974, and was converted to the minimum-security North Idaho Correctional Institution (NICI)