The village began in the early 18th century as a mill town along the Wallkill River. One miller, Jacob Walden, was so successful the village that incorporated in the mid-19th century took its name from him. Later on, it would be the three separate knife manufacturers based in the village that brought it growth and prosperity. They are gone today, but other industrial concerns remain. Walden is best known in the Hudson Valley as the home of the Thruway Markets hypermarket complex.

The area around present-day Walden was purchased in 1736 by Alexander Kidd, and settlers of Scots-Irish, English and German descent started arriving not long afterwards. It was the first settlement west of the Wallkill River, known at the time as Kidd's Town.

In the 1820s, a successful New York shipper named Jacob Walden convinced some of his business partners to finance the construction of woolen mills on the river, attracted by the Great Falls as a source of power and the railroad connections at nearby Maybrook. He dammed the Wallkill above the falls, creating a power station that remains in use today, and his mill was a success.

Other wool-makers followed as the Industrial Revolution picked up steam and the growing population center became known instead as Walden's Mills. Most of them failed a few decades later, but their influence was such that the village incorporated in 1855 as Walden.

The village fathers needed to replace the mills as a source of employment, and began encouraging knife manufacturers to relocate from nearby Dutchess County to the vacant buildings, where the New York Knife Company made much of the cutlery employed by the Union Army during the U.S. Civil War.

After the war, other knifemakers came to Walden, too, and the village became colloquially known as Knifetown. Other industrial concerns, making products as diverse as engines and women's underwear, also set up shop.

In the early 1890s, President Grover Cleveland lowered tariffs on many imported goods, including knives. Competitively priced German cutlery began to flood the American market, and together with the Panic of 1893 and the economic slowdown that followed for several years, the knife companies and their owners went heavily into debt and it looked for a while as if they might not survive.

But in 1897 President William McKinley, a personal friend of Thomas Wilson Bradley of the U.S. Knife Company, pushed through the Dingley Tariff that restored the status quo ante. The knifemakers returned to profitability and were able to pay off their debts; and in gratitude Bradley had a statue of McKinley erected that remains in Walden today.

In the 1910s the facilities at the dam began to be primarily used for power and less for industry.

Walden's Main Street was the site of an active retail trade which included Millspaugh's Furniture as well as Roosa's Jewelers, both still in business. Lustig's Department Store, established by Carl Lustig in 1883, was the mainstay of Main Street until its closing in 1986.

In the late 1920s, one of the largest Ku Klux Klan gatherings outside the South in that era took place outside Walden.

The Depression was hard on many of the village's economic concerns, but the knife makers persisted. However, after World War II they gradually became less prominent and moved as the rail connections they had depended on were replaced by trucking on the growing Interstate Highways. The last company making knives in the village, Imperial Schrade, closed down its factory after a 1957 fire and moved to nearby Ellenville afterwards, where it lasted until 2004. The ruins of the factory still stand behind Walden's most visible economic giant, the Thruway Markets hypermarket.

Today, Walden retains some light industry and much of its working-class feel, enough for the village to have gotten into a spat with WPDH-FM disc jockey The Wolf in the late 1990s over his constant joking on- and off-air joking about Walden as a redneck town.