The prehistory of Morro Bay relates to Chumash settlement, particularly near the mouth of Morro Creek. At least as early as the Millingstone Horizon thousands of years before present, there was an extensive settlement along the banks and terraces above Morro Creek.
Morro Rock was named in 1542 by Portuguese navigator Juan Rodríguez Cabrillo, who explored the Pacific Coast for Spain. Cabrillo called the rock El Moro because it resembled the head of a Moor, the people from North Africa known for the turbans they wore. However, the dictionary definition for the Spanish word "morro" ("pebble") is also consistent with the butte-like shape of the rock, and so the term morro is frequently used wherever such a distinctive rock-like mountain is found within the Spanish speaking world.
While governed by Mexico, large land grants split the surrounding area into cattle and dairy ranchos. These ranchos needed shipping to bring in dry goods and to carry their crops, animals, and other farm products to cities. Thus, Morro Bay grew.
The town of Morro Bay was founded by Franklin Riley in 1870 as a port for the export of dairy and ranch products. He was instrumental in the building of a wharf which has now become the Embarcadero. During the 1870s, schooners could often be seen at the Embarcadero picking up wool, potatoes, barley, and dairy products.
Since the beginning of the 20th century, the town has been a center for beach holidays. Tourism is the city's largest industry. The most popular beach is on the north side of Morro Rock, north of the harbor. There are also excellent beaches north and south of the town which are now owned by the State of California.
In the 1940s, Morro Bay developed an abalone fishing industry. Having peaked in 1957, stocks of abalone have now declined signicantly due to overfishing, it remains a fishing port for halibut, sole, rockfish, albacore, and many other species for both commercial and sport vessels. The town now combines the fishing industry with coastal tourism. In addition, oysters are farmed artificially in the shallow back bay.
A portion of Morro Bay is also designated as a state and national bird sanctuary. This means it is illegal to kill or harm a bird in that portion of Morro Bay. It is also a state and national estuary. Much of Morro Bay is a state wildlife refuge where waterfowl hunting is conducted during the season and is one of the few areas in California where Pacific Brant are pursued. Recently, Morro Bay was also declared a California Marine Reserve by the California Fish and Game Commission.