The town was initially named Prairie City in the late 1840s, then Prospect City by an Illinois Central Railroad official in 1855. However, as Wilbur W. Sauer points out in his study of the early history of Ford County, residents noted that the town was "all prospect and no city." In 1859, it was renamed for Sir Joseph Paxton, architect of the Crystal Palace, who was a major shareholder in the Illinois Central Railroad, which in 1856 was the longest span of railroad in the world (Chicago to Cairo). It was rumored that Paxton was interested in organizing an English settlement in Illinois. The colony never materialized, but the town kept the name. Founded in 1859, Paxton celebrated its sesquicentennial in 2009.
Augustana College was located in Paxton from 1863–1875, aided by a community effort led by recent Swedish immigrants to fund educational and cultural opportunities for citizens. An early public high school was established in 1872; it served the surrounding area for the next several decades, culminating in the formation of a community high school district in May 1920.