The region was originally settled around 2,000 B.C. by the ancestors of the Micronesian peoples, with later interaction and intermarriage with Polynesians. Early ruling was according to a local chieftain system that later evolved to a more regionally-based structure.

Contact with Europeans is first recorded as occurring with Portuguese and then Spanish sea-farers and traders in the 16^th century. The Spanish soon established sovereignty and governed the territories from the Philippines until the end of the 19^th century. The Germans purchased the islands from Spain and governed them until 1919, and they were handed over to the Japanese at the end of World War I. Both the Japanese and Germans tried to inculcate a vigorous work ethic, as is commonplace in both these nationalities, but with limited success.

At the end of World War II, the region became known as the United Nations Trust Territories along with six other nations/regions administered by the U.S. In 1979, four of these combined to form a single confederation of states as the FSM, adopted a constitution and later proclaimed independence with the agreement to enter into a 20 year Compact of Free Association with the US. The US then declared the earlier Trust Territories agreements defunct. In 2004, the FSM and US entered into a further 20 year compact involving over $3 billion (U.S.) in aid, much of this being diverted into trust investments to consolidate the region’s finances for the period following the compact.