The Grande Ronde River once flowed around this community, creating an island some eight miles in length by one-and-one-half miles wide. The town began in 1872 as a business center dedicated to flour production. Eventually, the course of the river was redirected, eliminating the little island but not the name. Island City was incorporated in February 1904, and the document of incorporation was signed by Ulysses S. Grant.
Island City has attracted many businesses that serve eastern Oregon, including several large chain stores and a Boise Cascade particle board facility and RV manufacturing plant. Island City's growth has extended west, merging its commerce district with La Grande's along Island Avenue.