The archipielago of Chiloé was inhabited by natives belonging to the tribe of the Huiliches (people from the South), who lived in the southern region of Valdivia.
They were pacific and hard-working, and maintained a friendly relationship with the Araucanian, with whom they sometimes allied, unlike the Fueguinos or Tehuelche who lived in other regions of Patagonia.
Those who lived by the sea were good fishermen, and the rest were agriculturers.
One branch of the Huiliches formed the Payos (thickly bearded men), who lived in certain spots on the southern part of Isla Grande and the adjacent islands; another group were the Chonos, a tough, semi-wild race who travelled around the archipielagos farthest south.
Don Alonso de Camargo saw the coast of Chiloé for the first time in February, 1540, but made no recognition. In 1553 the General Governor of Chile, Mr. Pedro de Valdivia, in an attempt to widen their territory, sent Captain Francisco de Ulloa to go over the coast of Chiloé and some islands inhabited by the Chonos.
On 12th November, 1567, Captain Martín Ruiz de Gamboa founded the city of Santiago de Castro, one of the oldest cities in Chile, and one of the farthest south of the continent in the XVI century.
In November 1568 arrived the Franciscan who founded the community of Castro, and were missionaires and school teachers.
In 1575 an earthquake and tidal wave shook the village. The population suffered the effects of changes operated by conquerors, and left no historical record of such a foundation.
In the year 1600, a peculiar episode alternated with the history of Castro: the occupation of the city during two months by the Dutch corsair Baltazar de Cordes, and then by another Dutch almiral, Enrique Brower.
In the XVIII century, Castro looked barren and solitary, people emigrated to farms and returned only for festive days. In 1786 and 1787 there were new earthquakes and the population decreased.
By the end of the XVIII century there were 150 families and 250 houses.
Charles Darwin visited Castro in 1832, and described it as "sad and deserted".
Castro was capital of the Spanish province until 1788 when Ancud took the primacy.
In 1907 there were around 1.250 inhabitants.
After that, the lumbering activity at the end of the XIX century brought a new prosperity to the area, and with the Railroad in 1912 it regained importance as core of the archipielago, to develop an important shipping activity during the twenties.
By the thirties, potatoes were being exported to different ports both in the North and the South of the country, what brought an economic development of the town, and the arising of boarding houses, hotels, storehouses, shops, and big wooden two and three-storied houses along the main street, Lillo street.
By 1958 the route from Castro to Ancud was built.
In the year 1960, an earthquake destroyed the port, the railway, the town hall, and some palafittes. By then the population was 7.000 inhabitants. After this episode, the city extended to the higher sector and was designated capital of the province again in 1982.