Elfreth's Alley is named after Jeremiah Elfreth, an 18th-century blacksmith and property owner. Among the alley's residents were tradesmen and their families, including shipwrights, silver and pewter smiths, glassblowers, and furniture builders. In the 1770s, one-third of the households were headed by women. The Georgian and Federal-style houses and cobblestone pavement of the alley were common in Philadelphia during this time.

In the late 19th and early 20th centuries, industry began to change the street. Perhaps the first change was a stove factory that took its place in a row of residential houses in 1868. Eventually, factories surrounded Elfreth's Alley. The city's waterfront was only a few blocks away. Industry changed more than the architecture; successive waves of immigrants, lured by the nearby jobs, moved onto the street. In 1900, the neighborhood was overwhelmingly Irish.

In 1934, the Elfreth's Alley Association (EAA) was founded to preserve the alley's historic structures while interpreting the street's 300-year history. The EAA helped save the street from demolition, and also lobbied the city to restore the alley's name to "Elfreth's Alley"; it had been designated as the 100 block of Cherry Street years before as part of a street-name simplification program.

Present-day Elfreth's Alley is the product of cycles of urban renewal and decay as well as historic preservation efforts. The alley is a tourist attraction and a rare surviving example of 18th-century working-class housing stock. The site stands in sharp contrast to the more frequently preserved grand mansion houses of Philadelphia's Society Hill neighborhood.