The settlement in the Landgraviate of Thuringia was first mentioned in a 1269 deed as Ludwichsdorf, probably named after a local Vogt official of the Counts of Weimar-Orlamünde.

In 1427 the area around historic Lauenstein Castle was acquired by the Hohenzollern Elector Frederick I of Brandenburg, who added it as a northern exclave to his Franconian Principality of Kulmbach.

Ludwigsstadt received town privileges in 1490, which it again lost in 1525, as the citizens joined a rebellion against the landlords during the German Peasants' War.

When his descendant Margrave Charles Alexander resigned in 1791, he sold his possessions to his Hohenzollern relatives in the Kingdom of Prussia.

After German Reunification, the railway was restored and since 2000 is part of the Intercity Express (ICE) network with hourly trains linking Berlin and Munich.