Although Alutiiq, Russians, and an American-Native family had lived at the head of Resurrection Bay earlier, the town of Seward was founded in 1903. John and Frank Ballaine selected the site for the terminus of the railway they planned to build to interior Alaska. They named the town for William H. Seward, the Secretary of State who negotiated the Alaska Treaty of Cession with Russia. After several private companies failed to build the railroad, the federal government completed it from Seward to Fairbanks in 1923.

Much of the land around Seward became part of Chugach National Forest when it was created in 1907. Some land, however, was open for homesteading and islands could be leased from the Forest Service for fox farms. Seward also became the supply center for Kenai Peninsula gold miners and home port for fishermen. Trails, the best known being the Iditarod, between mines and the town developed. Seward incorporated in 1912. Artist Rockwell Kent and his son spent the winter of 1918-19 on Fox Island near town. In 1926 the Methodist Church moved its Jesse Lee Home for Children from Unalaska to Seward. John "Benny" Benson, a 13-year old living at the home, won the contest in 1926 to design Alaska's flag.

Lowell Creek, at the west end of town, plagued Seward from its early years until the Corps of Engineers constructed a diversion tunnel in 1939. The town also suffered from fires. In 1941 a fire destroyed 19 businesses on the east side of Fourth Avenue and left 450 people homeless. A fire in 1942 burned the lower west side of the street and left 100 people homeless.

In 1941 the U.S. Army established Forts Raymond and McGilvery at Seward for harbor and coastal defense fearing a Japanese attack. The posts closed in 1944. Alaska's war on tuberculosis used some of the post buildings for a sanatorium between 1946 and the mid-1950s. The Seward Highway connecting Seward with other communities on the Kenai Peninsula and Anchorage opened in 1951. With stable employment opportunities, Seward was the largest town on the Kenai Peninsula in 1960. The 1964 earthquake, particularly the tsunami it generated, destroyed much of the town and permanently altered the waterfront. Seward rebuilt. It became part of the Kenai Peninsula Borough in 1964.

The state opened the Alaska Vocational Technical School (AVTEC) in 1969 in Seward, and later built a prison outside of town. In 1980 the new Kenai Fjords National Park opened its headquarters in Seward. The 1989 Exxon Valdez oil spill seriously impacted Resurrection Bay. Settlement funds helped construct the Alaska SeaLife Center, a marine research and public education center, that opened in 1998. Tourism and recreation are major contributors to Seward's economy today. Primarily a non-Native community, Qutekcak Tribe and Chugach Alaska Native Corporation are a presence in the town.