The village was established in the 1830s when the Whitby to Pickering Railway was built, and grew as a result of industrial iron ore extraction, and in the 1860s the development of an ironworks led to further growth.

The River Esk at Grosmont, west of the priory, was the crossing place of the ancient structure known as Wade's Causeway.

Before the industrial period there is evidence of iron ore extraction and iron working in the parish: a 15th/16th century ironworking site has been identified on the banks of the Esk close to the priory;[4][map 1] and a late or post-medieval iron forge existed in Smithy Holme Wood less than 0.3 miles (0.5 km) south-east of the present village;[5][map 2] and a post-medieval pit for ironstone extraction was located less than 0.6 miles (1 km) east of the village;[6][map 3] alum extraction and refining is known to have taken place near to the site of St Matthews church.

[note 1] It was established around 1200 when Joan Fossard and her husband gifted about 200 acres (80 ha) of land in the Forest of Egton (Eskdale) to the order.

At the time of dissolution the priory had four priors and a net income of £12 2s 8d per year; its buildings included a church with a bell tower, chapter house, kitchen and lodgings.

[11][12][map 6] A canal was surveyed in 1793 from Ruswarp near Whitby passing through Grosmont, Beck Hole and Newton Dale to Pickering, but was not pursued.

[14] In May 1835 a daily service began on the partially completed line between Whitby and the Tunnel Inn in Grosmont.

[23] Growth of Grosmont around the railway, river bridge and the 'Tunnel Inn' was observed by Henry Belcher in 1836: Near Growmond Abbey farm the railway crosses the river Esk for the last time by a bridge, which in point of romantic character is surpassed by none of the preceding ones, and approaches the Tunnel Inn, which is so situated as to command much beautiful scenery, and to possess numerous advantages in the way of business, arising from its contiguity both to the railway and a public road.—Besides this Inn, several cottages, workshops, and a warehouse have been erected within the last two years, and limekilns are at this time being built at no great distance, the whole bidding fair to form the nucleus of a village, that from the great facilities which the situation affords for speculation in a variety of ways, will most probably spring up in the neighbourhood.The village was known as "Tunnel" early in its history.

[28] The area became an important supplier of iron stone; supplying one third of the ironworks in northern eastern England by 1848.

[29][30] Henry Belcher raised funds to construct St Matthew's Church, Grosmont which was established in 1842 at a cost of £1,260.

[47] Excluding the building of Ings Terrace in the post second world war period, there has been no urban expansion of the village since the 19th century.

[54] Several railway-related buildings and structures are listed, including the Station Tavern public house and outbuildings;[16][17] the Post Office (c. 1835);[18] and the former horse tramway tunnel, now a pedestrian route;[55][56] all built for the Whitby and Pickering Railway in the 1830s.

[59] Actor Ian Carmichael lived in the village for many years with his wife, novelist Kate Fenton.