The history of Bilby began when tracks were laid for the Canadian Northern Railway (CNR). The location was established as a railway stop complete with a water and coal station to service steam locomotives, alongside a local general store.

The hamlet was originally intended to be named "Wilby" after a railway company engineer. However, a clerical spelling error on official documentation permanently recorded the name as "Bilby".

Around the railway stop, a small community took root. A one-room schoolhouse was built to serve local children, and kids' summer camps with cabins were established nearby, which relied on the railway for passenger transport. The Post Office opened December 16, 1918.

As road networks improved and the railway industry modernized away from steam locomotives, the need for Bilby as a service stop dwindled. The local school closed its doors in 1952, and the train station officially ceased service in 1961.