The town was first settled in 1894 as part of a gold rush after a team of prospectors including Ernest Shillington first discovered gold about 20 km south of the present townsite. Following the influx of miners the local progress association requested that a townsite be declared in 1905. Correspondence of the time shows that the area was locally known as Hans Irvine's Find and that a large amount of money had been spent on building hotels, banks and other services required by the residents. The townsite was gazetted as Sandstone in 1906. Following the establishment of the town the majority of the population and buildings from the nearby townsite of Nunngarra relocated to Sandstone. By 1907 the population of the town had swelled to 6,000–8,000 and it boasted four hotels, four butchers, two banks, a staffed police station and many other stores. A brewery was also constructed in 1907 by an Irishman, I.V. Kearney, to satisfy the local demand. He built the brewery on a breakaway on top of a cliff about 35 feet high. Water was pumped to the top level for brewing and the beer was stored in the cellars below to keep it cool even in the hotter weather. In 1910 the railway was completed between Mount Magnet and Sandstone. The Jundoo Dam was completed in 1910 to provide water for the steam trains; the dam could hold of water and cost £5,000 to build. Most of the original dam works still exist today. The population of the town was approximately 2,000 adults at this time, and it boasted two schools. By 1912 Sandstone had a population of 8,000 and nearby Youanmi had a population of 300. The first pastoral leases including Youanmi Downs, Yuinmery and Lake Barlee Stations were being established in the Youanmi district at this time. A state-run battery operated from 1904 to 1982. Initially south of the town on the Menzies road, then from 1925 at a site metres to the east. The battery treated a total of 135,809 tons of ore, producing 115,787 ounces of gold. Locally London Bridge, south of Sandstone, is a natural bridge, part of the Sandstone Heritage Trail. Sandstone was the inspiration for the mining town in Randolph Stow's 1963 novelTourmaline. The smallest of the hotels built in town, the National, constructed in 1909 from locally made bricks, is the only one left remaining.
