The year of the Portuguese discovery of this island is uncertain. It is believed that it was spotted some time between 1449 and 1451, after the discovery of the island of Terceira, in a similar fashion to the other islands that make up the central group. The official and continud settlement of the island started in approximately 1470. At that time, or even before that, Vasco Gil Sodré was one of the first settlers of Carapacho, which was the very first place to be populated. However, to this day, it is still uncertain the role that he played on the administration of the island. In those days, the Donatory Captains, for a part or the totality of the island, were Duarte Barreto do Couto and Pedro Correia da Cunha.
The development of the island received a new impetus with the arrival of new settlers from Mainland Portugal and from Flanders. From the south to the north, the fertile soil planes of the interior were consecutively occupied. New settlements were built, such as that of Santa Cruz, which rapidly received a town charter from the king in 1486. In 1546, the locality of Praia, also known as São Mateus, was also upgraded to town. The local economy was based on agriculture. Wheat and barley, the last one almost exceptional within the archipelago, were the main productions of the 16th century. Besides the harvest of orchil, wine production was also very important, and the locally produced wines and spirits were appreciated and consumed inside and outside the island. Trade was limited to the island of Terceira, which was then the central harbour of the Archipelago. And, just as its neighbouring island, the island of Graciosa was also attacked and pillaged by pirates during the 16th and 17th centuries.
Graciosa has suffered from drought and natural disasters throughout its history, which have caused a generalised impoverishment. As it happened on other islands, during the 19th century, the number of vineyards was remarkably reduced given the spread of oidium and phylloxera, grapevine pests that affected most production. Between the 1950s and 70s, the large number of emigrants that left the island for the United States substantially reduced the island’s social and economic activities. The farmers joined forces to create a cooperative in order to partly recover the local wine tradition, with the Demarcated Region of Graciosa being established in 1994. Currently, the most important activities for the economy of the island are the dairy and meat productions. The minutely divided fields also give shelter to corn, vegetables and fruit trees.
During the 1980s, the construction of the airport and of the harbour of Praia opened new business opportunities, thus placing Graciosa on route to a sustainable tourism.