Arrowtown literally sprung up overnight with the discovery of gold in the Arrow River in 1862. The town started out as "Fox’s" or "Fox’s Rush" after William Fox who together with John O’Callaghan and a small group of unknown miners discovered gold in the Arrow River. By keeping the discovery to themselves they managed to recover some 230lbs of gold from the Arrow before their secret got out several weeks after they had begun working the diggings.

However once the word was out, miners in their thousands rushed to stake a claim and within six months of gold being discovered, there were some 1500 miners at the diggings. The Arrow River became famed as one of the richest sources of alluvial gold in the world and many miners made their fortunes working the diggings.

The early miners lived a nomadic life with often a canvas tent affording the only shelter from the harsh Central Otago winter. Living conditions were extremely difficult with many suffering from scurvy due to an inadequate diet which consisted of damper, bacon and tea. Dysentery was rife due to the lack of sanitation and large numbers of people living cheek by jowl. Long hours working in the icy Arrow River took their toll with miners often experiencing rheumatism, and an early death. Many miners lost their lives in 1863 as a result of the Arrow River flooding.

At the height of the rush, the population of the town rose to over 7,000 people and businesses such as hotels, saloons, gambling dens and dance halls flourished alongside Buckingham Street, which to this day remains the main street of Arrowtown.

The hoteliers and merchants utilised local stone to construct many of the buildings in Arrowtown as there was a shortage of large timber in the region. By the end of 1864 there were 20 shops and 10 hotels along with several private dwellings. Today several stone buildings in Buckingham Street dating back to 1862 or 1863 remain standing.

Like other mining towns, Arrowtown had a reputation as being lawless. Fights over claims and water rights were the norm, which were fuelled by the greed of gold, harsh living conditions and more often than not by whisky. The arrival of pistol wielding Sergeant Major H W Bracken of the Otago Mounted Police was a timely arrival, however the town gaol remained a busy place.

Smaller settlements sprung up alongside the Arrow River as miners tramped their way upstream through the narrow gorge in search of new fields and to avoid the fierce competition of the diggings at Arrowtown. Macetown located 18km from Arrowtown being the most notable and although much smaller than Arrowtown in its heyday it boasted four hotels, four stores, a post office, a school and a public hall.