The community was founded in 1734. The legend of the naming of Bird-in-Hand concerns the time when the Old Philadelphia Pike was surveyed between Lancaster and Philadelphia. According to legend two road surveyors discussed whether they should stay at their present location or go on to the town of Lancaster. One of them supposedly said, "A bird in the hand is worth two in the bush," and so they stayed. By 1734, road surveyors were making McNabb’s hotel their headquarters rather than returning to Lancaster every day. The sign in front of the inn is known to have once "portrayed a man with a bird in his hand and a bush nearby, in which two birds were perched," and was known as the Bird-in-Hand Inn. Variations of this sign appear throughout the town today.
In 1834 construction began on the 86-mile Pennsylvania Railroad line between Philadelphia and Columbia. Bird-in-Hand, featuring tanneries, feed mills, coal and lumber yards, was the most important stop on the Lancaster to Coatesville section.
In 1836 the village post office was established as the Enterprise Post Office, as the village was then officially called, until the name officially changed to Bird-in-Hand in 1873.
The town remained relatively unknown until a musical called Plain and Fancy opened in New York in 1955. The play was set in the village of Bird-in-Hand and is often credited as a catalyst for the boom in Pennsylvania Dutch Country tourism in the mid-twentieth century. The Plain & Fancy Restaurant opened in 1960, and is the oldest "family-style restaurant" in the area.
In 1968 the Smucker family opened a small 30-room motel called the Bird-in-Hand Motor Inn, with an adjacent coffee shop, in hopes of capitalizing on the growing tourist trade in the area. The coffee shop was turned into a larger 145 seat restaurant in 1970 and renamed the Bird-in-Hand Family Restaurant. A larger, additional building with an indoor swimming pool was built in the early 1980s and the motel changed its name to the Bird-in-Hand Family Inn. In the 1990s a buffet was added to the restaurant. In 2005 the restaurant was expanded further and a larger buffet was added and the name was changed to the Bird-in-Hand Family Restaurant and Smorgasbord.
In 1976 the Bird-in-Hand Farmers Market opened adjacent to the Bird-in-Hand Motor Inn.