In 1854, territorial governor Isaac Stevens recommended the establishment of a university in the Washington Territory. Prominent Seattle-area residents, including Methodist preacher Daniel Bagley, saw this as a chance to add to the city's potential and prestige. Bagley learned of a law that allowed United States territories to sell land to raise money in support of public schools. At the time, Arthur A.

Denny, one of the founders of Seattle and a member of the territorial legislature, aimed to increase the city's importance by moving the territory's capital from Olympia to Seattle. However, Bagley eventually convinced Denny that the establishment of a university would assist more in the development of Seattle's economy. Two universities were initially chartered, but later the decision was repealed in favor of a single university in Lewis County provided that locally donated land was available. When no site emerged, Denny successfully petitioned the legislature to reconsider Seattle as a location in 1858.

In 1861, scouting began for an appropriate 10 acres (4 ha) site in Seattle to serve as a new university campus. Arthur and Mary Denny donated eight acres, while fellow pioneers Edward Lander, and Charlie and Mary Terry, donated two acres on Denny's Knoll in downtown Seattle. More specifically, this tract was bounded by 4th Avenue to the west, 6th Avenue to the east, Union Street to the north, and Seneca Streets to the south.

John Pike, for whom Pike Street is named, was the university's architect and builder. It was opened on November 4, 1861, as the Territorial University of Washington. The legislature passed articles incorporating the university and established its Board of Regents in 1862. The school initially struggled, closing three times: in 1863 for low enrollment, and again in 1867 and 1876 due to funds shortage. Washington awarded its first graduate Clara Antoinette McCarty Wilt in 1876, with a bachelor's degree in science.