Captain E. T. Barnette founded Fairbanks in August 1901 after the steamboat on which he was a passenger, the Lavelle Young, ran aground while attempting to negotiate shallow water. Barnette had intended to establish a trading post further downstream, but local prospectors convinced him of the potential of the area, so he set up a temporary trading post right there and later became the city's first mayor.

After a major gold discovery was made near Barnette's temporary location, he converted it into a permanent one. The gold caused a stampede of miners to the area, and gold production increased from $40,000 in 1903 to $6 million in 1905, with buildings springing up all around Barnette's trading post.

The settlement was named after Charles W. Fairbanks, a Republican senator from Indiana and later the twenty-sixth Vice President of the United States, serving under Theodore Roosevelt during his second term.

Fairbanks suffered from several floods in its first seven decades, whether from ice jams during spring breakup or heavy rainfall. One of the worst floods took place on August 14, 1967, after record rainfall upstream, when the Chena began to surge over its banks, flooding almost the entire town overnight. This disaster led to the creation of the Chena River Lakes Flood Control Project, which built the 50-foot-high (15 m) Moose Creek Dam to divert water upstream, bypassing the city.

Immediately north of the city is a chain of hills that rises gradually until it reaches the White Mountains, which were named by prospectors for their composition of white limestone.

One of the coldest cities in the United States, average low winter temperatures in Fairbanks range from -15 to -25 °F (-26 to -31 °C), but extreme weather can be much colder. The lowest recorded temperature was -66 °F (-54 °C) on January 14, 1934.

Fairbanks gets just 3 hours and 41 minutes of sunlight on December 21 or 22. At the summer solstice, about 182 days later, on June 20 or 21, Fairbanks receives 21 hours and 49 minutes of sunlight.

The northern lights are not visible in the summer months due to the constant sunlight of the midnight sun.

When the vast Prudhoe Bay Oil Field was discovered in Alaska's North Slope in 1968, a massive boom was sparked once again. As the closest city, Fairbanks became the supply point for the oil field and for construction of the Trans-Alaska Pipeline System, which brought tens of thousands of new workers into the city.

Chinook winds were responsible for the greatest 24-hour temperature change ever recorded, occurring on 15 January 1972, in Loma, Montana. The temperature rose from -54 to 49°F (-48 to 9°C), a difference of 103°F (57°C). The Blackfoot people term this wind "Snow Eater."