The name for the Spirit Lake community was derived from a Native American legend that explains the Salish name tesemini ("Lake of the Spirits"). It is said that an Indian chief's daughter eloped with a young brave. The father pursued them and out of fear of being separated, the brave took the girl into his arms and jumped into the lake. Their bodies were never found. The tribe believed that tesemini carried them away. Another version is that seven Indian braves were in a canoe that tipped. The bodies were never recovered and the accident was attributed to an evil spirit. The development of the Panhandle Lumber Company by Frederick Blackwell and Associates was the origin of the town of Spirit Lake. In 1907 the Spirit Lake Land Company formed to sell lots. Within two years the town had:
- A Business District
- Churches
- Concrete Walks
- Electric Lights
- Fraternal Organizations
- a Grade School
- a High School
- Organized Sports
- Telephones