The origin of Rahway is connected to the 1664 purchase of the Elizabethtown tract, and the establishment of the first permanent English settlement in New Jersey. An association of Englishmen living on Long Island looked forward to colonizing New Jersey, a province granted by the king to the Duke of York. The associates asked the duke's deputy governor, Richard Nicolls, for permission to purchase a vast tract of land from the Lenni Lenape Indians. Nicolls agreed, and Chief Mattano signed the deed in return for cloth, coats, guns, kettles, lead and powder. Eventually known as the Elizabethtown Purchase, the tract stretched from the mouth of the Raritan River and included all of present-day Union County as well as parts of Somerset, Middlesex, Morris and Essex counties.

The first settlement was established at the mouth of the Elizabeth River. It was named Elizabethtown after Lady Elizabeth Carteret, wife of Sir George Carteret, to whom East Jersey had been granted by the Duke of York. The province governed by Phillip Carteret, Sir George's cousin, grew rapidly, and it was not long before a few colonists began to settle outlying areas all part of Elizabethtown. Rahway became one of the earliest due to the navigable Rahway River, which provided an ideal situation for the establishment of mills and maritime pursuits.