The area that eventually became Clayton was called the Dividings because it sat at the intersection of three crucial Cherokee trails.

For hundreds of years, the homeland of the Cherokees, northeast Georgia, was crisscrossed with Indian trails.

The Dividings was the intersection of five major trails on the land that eventually became Rabun County.

In 1824, 67 acres (270,000 m2) were purchased from Solomon Beck for $150, and city representatives laid out a site for a courthouse and the surrounding streets.

In 1904, a significant development took place with the completion of the Tallulah Falls Railway to Clayton from Cornelia, Georgia.

This railway was extended to Franklin, North Carolina, by 1907, marking a significant step in Clayton's transportation infrastructure.

Initially, the water supply was sourced from two springs on nearby Buzzard Roost Mountain; today, it utilizes Lake Rabun as its water supply, showcasing the town's adaptability and resourcefulness.

In 1936, Clayton recorded 30.0 inches (760 mm) of snowfall, the highest annual total for anywhere in Georgia.

After release in May 1976, Grizzly became the most financially successful independent motion picture to date—a record it held for more than two years until John Carpenter's Halloween hit theaters in October 1978.

According to the United States Census Bureau, Clayton has a total area of 3.1 square miles (8.0 km2), all of it land.

As of 2021, the mayor is Jordan Green, and the councilmembers are Michele Duquette, Ara Joyce, David Cross, Woody Blalock, and John Bradshaw.