The Shire of Diamond Valley was formed in 1964 when Greensborough, Bundoora, Diamond Creek, Watsonia, St Helena, Plenty and Eltham North were severed from the northern section of the City of Heidelberg. The shire existed for 30 years until 1994 when it was divided between the suburban City of Banyule and the rural Shire of Nillumbik.
The region bounded by the Great Dividing Range in the north, the Yarra River in the south, the Plenty River in the west and the Christmas Hills ridge in the east had been known as the Diamond Valley since the 1880s, when various local railway leagues worked together as the Diamond Valley Railway League. The name derived from the Diamond Creek, which traverses the region from north to south. Two explanations are offered for the name. One legend recalls that a bullock named Diamond was lost in the creek in the very early days of settlement. The other suggests that an early surveying party bestowed the name because the water in the creek was so clear that crystals could be seen sparkling on the bottom.
The Diamond Valley was first explored by Joseph Tice Gellibrand as he roughly surveyed the land claimed by John Batman's Port Phillip Association in 1836. Although land on the west side of the valley, in the parishes of Nillumbik and Keelbundoora, was surveyed and offered for sale by the Crown in 1839 and 1840, there were few serious buyers. The stringy-bark forests, clay soil, numerous rivers and creeks and ridges made the Diamond Valley unattractive to would-be graziers and farmers, despite the fact that it was only about 20 km from the new settlement at Melbourne. Land at Kangaroo Ground, however, was purchased by a small number of Scots, who farmed very successfully in the 1840s. The discovery of the Caledonia goldfield in 1854 changed the pattern of settlement with goldmining settlements established at North Warrandyte, St Andrews, Panton Hill, Smiths Gully, Research, and later at Diamond Creek. The discoveries also encouraged the growth of Eltham and Greensborough as local commercial centres catering to the passing trade of miners. In the 1860s and 1870s many of the miners selected small blocks of land. Orchards spread across the Diamond Valley, with cool-stores situated at Diamond Creek and Hurstbridge. It remained an important fruit-growing centre for Victoria until the early decades of the 20th century and still has many hectares devoted to orchards, especially in northern districts.
It was orchardists, concerned to have appropriate transportation for their fruit, who were active in the movement to bring the railway to the Diamond Valley. Although they campaigned from the 1880s, it was not until 1902 that a metropolitan line was extended to Greensborough and Eltham. Ten years later it was extended to Diamond Creek and Hurstbridge. Train connections brought tourists to the area. The cheapness of land, the rural atmosphere and the proximity by rail to the city attracted permanent residents too, many of them battlers who sought to eke out a living by growing a few vegetables and keeping some cows and chickens.
From the late 19th century members of the Heidelberg School of painters had ventured out to Diamond Valley sketching grounds. In 1903 Walter Withers settled at Eltham, while Clara Southern built a house at North Warrandyte in 1908. Later painters and writers were also attracted to the area. In 1935 Justus Jörgensen began to build his Montsalvat Artists' Colony at Eltham using recycled building materials, local stone and mud brick. Others followed his lead and the Diamond Valley, especially around Eltham, was identified both with artists and with environmentally friendly buildings that blended with the natural bushland.
In the 1960s and 1970s residents were attracted to the area because it offered a natural environment close to the city and the planning schemes of local councils sought to maintain these values. Although Melbourne's northern suburbs reached out to enclose the southern districts of the Diamond Valley in the 1990s, much of it was still semi-rural. The reservation of public land in many districts, such as along the Diamond Creek, has ensured that it retains a rural feel in the early 21st century.