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Traditionally the land of the Cammerygal Aboriginal people, Willoughby was named after Sir James Willoughby Gordon, the senior officer of the town's surveyor Sir Thomas Livingston Mitchell. The first substantial settlement in the area occurred following the gold rush of the 1850s with the land subdivided into smaller lots which were used by settlers as orchards, cattle grazing and dairies as well as Chinese market gardens.
The large number of cattle farms in the area had James Forsyth establish what would be the first of many Tanneries in the region and continued to be a flourishing industry in the suburb until the last Tannery was closed in 1992. With these factories came an influx of residents to the suburb and a distinct village started to form with a post office opening in 1871 alongside the public school along with produce stores and several public inns.
Several notable figures would live in Willoughby over the course of their lives including American architect Walter Burley Griffin and poet Henry Lawson. Burley Griffin's influence on the town lives on in the Willoughby incinerator which was one of many incinerators designed by Burley Griffin and architect Eric Nicholls in 1929, aiming to bring architectural interest to an otherwise purely functional building. Although the incinerator was closed in 1967, the building survives and was incorporated into Willoughby's Bicentennial Reserve opened in 1988. Henry Lawson lived at times in Willoughby and its surrounding suburbs throughout his life, reportedly enchanted by its natural beauty and open spaces which had it starkly contrasted to Sydney suburbs on the other side of the harbour.
With the opening of the Harbour Bridge in 1932, accessibility to the area increased and the leafy largely undeveloped suburb became a favourite for residential development. Following the housing development boom of the 1950s and 1960s, this now quiet residential suburb remains one of the more affordable suburbs on the lower north shore.