[4] The town began in the late 1850s, when farmers moved into the area to take advantage of the rich soil.

Two prominent residents competed to have the town named after themselves: Doctors Josiah S. Bailey and A. J. Ray owned land that was to become the townsite.

The dispute ended in 1885, when the St. Louis Southwestern Railway used the land donated by Bailey for its right-of-way.

Texas State Highway 78 crosses Highway 11 south of the center of Bailey, leading north 10 miles (16 km) to Bonham, the Fannin County seat, and southwest 6 miles (10 km) to Leonard.

According to the United States Census Bureau, Bailey has a total area of 0.40 square miles (1.03 km2), all land.