The Melbourne CBD was originally laid out by Robert Hoddle in 1837 as a rectangular grid of 8 x 4 city blocks, with open space reserved around the edges.

Like most of early Australian town layouts, it lacked any kind of civic or open space within the grid, but had reserved blocks or allotments for markets, public buildings, and churches.

[8] After the Regent Theatre closed in 1970, the Council bought it too, intending to demolish it for a larger square and a hotel tower to help fund the whole project, but the move was stopped by a union ban imposed in 1974.

[11] In 1976, an architectural competition was launched by Melbourne City Council to design a permanent square, which was won by Denton Corker Marshall architects.

[13] A large yellow steel sculpture titled Vault by Ron Robertson-Swann, which was commissioned as a centrepiece for the square, was immediately controversial, and Council soon voted to remove it, relocating it to Batman Park in July 1981.

[20][19] A cast bronze statue of a small dog created by Melbourne artist Pamela Irving and titled Larry La Trobe was located in the northwest corner in 1992.

In October 2011, Lord Mayor Robert Doyle ordered an eviction of about 100 Occupy Melbourne protesters from the City Square, which was enforced by up to 400 riot police.

[26] As part of the construction of the Town Hall station, the City Square precinct is set to be rebuilt as a public gathering and events space.

[28] The famous statue of ill-fated explorers Burke and Wills was removed from City Square in 2017 and is planned to return to the corner of Collins and Swanston Streets after the completion of the station.

[29] The John Mockridge Fountain water wall will also be returned and relocated to the northern edge of the City Square along Collins Street.