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The village of Paraty was founded in 1597.[It was established formally as a town by Portuguese colonizers in 1667, in a region populated by the Guaianás Indians.

The Guaianás people who lived where the city now stands called the entire area “Paraty”. In the Tupi language “Paraty” means “river of fish”. Even today the Brazilian Mullet (Mugil brasiliensis) still come back to spawn in the rivers that spill into the Bay of Paraty. When the region was colonized by the Portuguese, they adopted the Guaianás name for their new town.

After the discovery of the world's richest gold mines in 1696 in the mountains of Minas Gerais, Paraty became an export port for gold to Rio de Janeiro and from there on to Portugal. The ensuing gold rush led to the construction of the "Caminho do Ouro" or "Gold Trail", a 1200 kilometer road, paved in steep areas with large stones, which connected Paraty to Diamantina via Ouro Preto and Tiradentes. Not only was it used to transport gold to Paraty, but it was also used to convey supplies, miners and African slaves by mule train over the mountains to and from the gold mining areas. Two substantial sections of the Caminho do Ouro have been excavated near Paraty and are now a popular tourist destination for hiking.

The Gold Trail fell into disuse because of attacks on the gold laden ships bound for Rio de Janeiro by pirates who frequented the islands and coves of the Bay of Angra dos Reis. Eventually a safer overland route from Minas Gerais to Rio de Janeiro was created because of these pirate raids. Finally, the gold itself began to run out in the late 18th century, and Paraty declined.

The Gold Trail was submitted for inclusion on the World Heritage List in August 2004.