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The area of Chelsea was first called Winnisimmet possibly meaning "good spring nearby" or "swamp hill" by the Naumkeag tribe, who lived there for thousands of years prior to European colonization in the 1600s. Samuel Maverick became the first European to settle permanently in Winnisimmet in 1624 and his palisaded trading post is considered the first permanent settlement by Boston Harbor.

In 1635, Maverick sold all of Winnisimmet, except for his house and farm, to Richard Bellingham. The community remained part of Boston until it was set off and incorporated in 1739, when it was named after Chelsea, a neighborhood in London, England. In 1775, the Battle of Chelsea Creek was fought in the area, the second battle of the Revolution, at which American forces made one of their first captures of a British ship.

Part of George Washington's army was stationed in Chelsea during the Siege of Boston. On February 22, 1841, part of Chelsea was annexed by Saugus, Massachusetts. On March 19, 1846, North Chelsea, which consists of present-day Revere and Winthrop, was established as a separate town. Reincorporated as a city in 1857, Chelsea developed as an industrial center and by mid-century had become a powerhouse in wooden sailing ship construction.

As the century wore on, steam power began to overtake the age of the sail and industry in the town began to shift toward manufacturing. Factories making rubber and elastic goods, boots and shoes, stoves, and adhesives began to appear along the banks of Boston Harbor. It became home to the Chelsea Naval Hospital designed by Alexander Parris and home for soldiers.According to local historical records, Nathan Morse, the first Jewish resident of Chelsea, arrived in 1864, and by 1890 there were only 82 Jews living in the city.

However, Chelsea was a major destination for the "great wave" of Russian and Eastern European immigrants, especially Russian Jews, who came to the United States after 1890. By 1910 the number of Jews had grown to 11,225, nearly one third of the entire population of the city. In the 1930s there were about 20,000 Jewish residents in Chelsea out of a total population of almost 46,000.

Given the area of the city, Chelsea may well have had the most Jewish residents per square mile of any city outside of New York City. On April 12, 1908, nearly half the city was destroyed in the first of two great fires that would devastate Chelsea in the 20th century. The fire left 18,000 people, 56 percent of the population, homeless.

Despite the magnitude of the destruction, it would only take the city about two and a half years to rebuild and five years to surpass the extent of 1908's infrastructure. The city was also laid out differently after the fire, with wider streets and more access for emergency vehicles. Many of the city's residents left and never returned, which opened the door for many immigrants living in Boston to "move up" to Chelsea.

To immigrants living in crowded tenements in Boston's West End, East and South Ends, Chelsea was the next stop on their path of economic upward mobility.By 1919 Chelsea's population had reached the record level of 52,662, with foreign-born residents comprising 46 percent of the population. Fully transitioned from a suburb to an industrial city, the waterfront flourished, with shipbuilding, lumberyards, metalworks and paint companies lined Marginal Street.Between 1940 and 1980, the population declined by 38 percent.

Chelsea lost more population than other urban areas after the 1950s because of the construction of the elevated Northeast Expressway built to connect the North Shore suburbs to Boston, via the Mystic River Bridge (later renamed for Boston Mayor Maurice J. Tobin). Hundreds of homes were lost to make way for the expressway as it cut the city in half.

The resulting out-migration took with it many small, local businesses. Historic homes were abandoned, along with industrial buildings, brownfields, salt piles and gas storage tanks dotting the cityscape.In 1973, disaster struck again when the Second Great Chelsea Fire burned 18 city blocks, leaving nearly a fifth of the city in ashes.

Both fires originated in Chelsea's "rag shop district," cluttered streets filled with junk shops hawking scraps, metal, and combustible items. Wood-frame buildings and three- to six-family houses were built tightly together, and quickly caught fire.By 1990, Chelsea had collapsed economically and socially.

Crime was rampant, even among the police and local government officials. The population drain made way for more immigrants, but depleted the city's tax base. The cost of running the city and maintaining its infrastructure did not decrease correspondingly so, in 1991, the city suffered fiscal collapse. The Commonwealth of Massachusetts enacted special legislation to place Chelsea into receivership.

For the first time since the Great Depression, a Massachusetts city surrendered home rule and allowed a state-appointed receiver to control all aspects of city government. Governor William Weld named James Carlin as the first receiver followed by Lewis "Harry" Spence. City Hall was eviscerated, the police and fire departments reorganized, management of the public schools given to Boston University, and indictments handed down.

Mayor John "Butchie" Brennan and two former mayors were found guilty of federal crimes. By the summer of 1995, when the state returned City Hall to the people of Chelsea, a new government had been born, brought to life by a panel of citizens charged with drafting a new city charter. The new charter eliminated the position of mayor, converting management of the city from a mayor to a council–manager government system, where a city manager is selected by City Council members.

As such, municipal government focused on improving the quality of services provided to residents and businesses, while establishing financial policies that have significantly improved the city's financial condition. With their leaders more accountable and efficient, Chelsea reversed its long decline and entered a period of population growth and economic development.