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The site of Murphy, along the Hiwassee River, was known to the Cherokee as Tlanusi-yi (the Leech Place), because of a legend about a giant leech named Tlanusi that lived in the river there.
 
The Trading Path (later called the "Unicoi Turnpike") passed by the future site of Murphy, connecting the Cherokee lands east of the mountains with the "Overhill Towns" of Tennessee.
 
In 1836, during the Cherokee removal known as the Trail of Tears, the United States army built Fort Butler in what is today known as Murphy. Fort Butler acted as the main collection point for Cherokee east of the mountains. From Fort Butler the Cherokee were taken over the mountains on the Unicoi Turnpike to the main internment camps at Fort Cass (today Charleston, Tennessee). Today the Unicoi Turnpike is known as Joe Brown Highway. The Cherokee County Historical Museum located in Murphy provides information about the Trail of Tears.
 
Murphy was once the terminus of the Murphy Branch rail line built in the late 1800s, although the branch no longer reaches Murphy.
 
Murphy was also the home of the once well-known crafts manufacturer Margaret Studios, which operated a nationwide chain of gift stores for its woodcraft products and housewares, such as lazy susans and gift trays.