The Capel River was visited by Frederick Ludlow in 1834, but it was not given an English name until the Bussell family settled in the area soon afterwards.

In the 1830s a number of settlers followed the Bussells into the area, and both James Stirling and John Hutt, (the first two Governors of Western Australia) took up land in the region.

In recent times, Capel has become popular for hobby farms, and a number of innovative agricultural pursuits have been introduced, including alpacas, viticulture, aquaculture and growing of blue gums.

Westralian Sands was established in 1954 but commenced operations in 1959 when it started mining and processing the Yoganup deposit just north of the town.

In 1998 both companies merged to form Iluka Resources which continues to operate ilmenite mines around the area and produce synthetic rutile at the processing facility to the north of the town along the Bussell Highway.