The community was named in honor of W. Atlee James, an official who worked for the railway. During the early 20th century boom of track-laying across the Canadian prairies, it was common practice to name sidings, stations, and stopping points after railway executives, engineers, or officials. The Post office opened on November 1, 1914, and closed on Fenruary 2, 1963.

Like many small prairie stops, Atlee's existence was catalyzed by the promise of the rails, which allowed homesteaders and farmers in the dry belt of southeastern Alberta to ship their grain and cattle to market.

The region surrounding Atlee historically faced immense challenges during the droughts and economic depression of the 1920s and 1930s. As local agricultural efforts struggled and municipal governments faced bankruptcy, the Province of Alberta intervened. In the 1930s, the provincial government restructured these hard-hit lands into what are known today as the Special Areas (specifically Special Area No. 2), bringing the administration of the land directly under provincial management to ensure sustainable grazing and dryland farming.