In 1885, Matthews was founded and named in honor of then-governor of Indiana Claude Matthews. Founders located the town near the center of the Trenton gas field, and it was hoped that this geographically central location could become the future capital of Indiana. The plan was abandoned in 1903 when the gas field was depleted, leaving the town with a main street unusually wide for its size.

The population of Matthews at its peak has been estimated at approximately 100,000 to 120,000 people. This included its 18 suburbs, including Gaston, Wheeling, Fowlerton, and Tent City.

Matthews was placed near an older village called New Cumberland, founded in 1833. Now the "old town" of Matthews, the village has a wooden covered bridge, the Cumberland Covered Bridge, built in 1877 which crosses the Mississinewa River. This bridge is the centerpiece of the town's annual festival and draws thousands of people every year.

In 1901, the Matthews School was built to meet the needs of the influx of people coming to Matthews. But, in 1973, the school was closed and shortly after torn down. A new building was built northwest and on the outskirts of town. Currently, the Town of Matthews and the Chamber are seeking uses for the building.

Today, Matthews is the home to over 50 businesses and many other town organizations. The Matthews Town Board runs the community and recently a new town organization called the Matthews Area Chamber has been formed to help in the development of the area.