The area now known as Penola was first squatted on before 1840 by Solomon, Josiah and Thomas Austin at Yallum. The first settlers were Scottish born Alexander Cameron and his wife Margaret, nee Mackillop, in January 1844 after obtaining an occupation licence. In April 1850 Cameron obtained eighty acres of freehold land, his station was on a pastoral lease, and established the private town of Panoola, later known as Penola. He set aside several blocks for the use of the community, including a market square and blocks for churches to be built on at a later stage.
Alexander Cameron was born on 18 August 1810 and migrated to Sydney in 1839. From there he eventually became involved in the pastoral industry and overlanded his sheep to South Australia. He built Ulva Cottage for his daughter Margaret and her husband Doctor Bayton. Sadly Margaret did not enjoy it for long. She died in 1863 during the birth of her first child.
In 1848 Alexander was the original licensee of the Royal Oak Hotel. He did a roaring trade during the early 1850s when thousands of men from Adelaide travelled to the Victorian goldfields. Donald and Eliza MacDonald later managed the hotel from 1864-1880. It was rebuilt in 1872. The Prince of Wales Hotel started serving its customers in 1860. Four years later Penola also had a Temperance Hall.
Although a long way from Adelaide, Penola soon had most of the facilities available in any big town at that time. Its first residents were Christopher Sharam, a bootmaker and his wife Ellen Patching. Christopher was born in Devon, England in 1813 as the son of John Sharman & Mary Lake. Christopher and his wife Ellen were married in 1848 at Portland, Victoria. Christopher was employed by John Henty at Sandford Station by 1846 as a bootmaker & hut keeper before he married and established himself at Penola, They were to have fifteen children. Both parents and a number of their children are buried at the Old Penola Cemetery. One of the first shopkeepers was Andrew McAlpine who opened his 'South Australian Store' in the early 1850s. A post office was constructed in 1857.
In the early days religious services were held in the local courtroom. The Presbyterians were the first to make use of this facility. The Reverend Mark Dixon was the first to reside in Penola and stayed from 1856 until 1864. He was replaced by the Rev James Don. The Catholics started with the building of their wooden church in 1858 when Father Julian Tenison Woods laid the foundation stone of Saint Joseph's Church. Their first resident priest was Father Powell who also had established a school in 1855. A new stone church was completed in 1865 at a cost of one thousand Pounds. Most of this money had come from well to do Highland Scots. The Church of England's Saint Mary's was completed in 1873.
Shopping facilities became available during 1856 when Robert and Jane Balnaves opened their shop in Riddoch Street. After the death of her husband in 1861, Jane moved into new premises in the main street and continued the business. She would even travel to Robe and take the boat to Adelaide to buy the latest fashion for her shop. Something which was much appreciated by her customers. Other stores eventually opened up as well. Among them were Simon McKenzie in 1864, Andrew McKeand in 1865, George Gladstone in 1861 and the National Bank in 1865.
By the 1860s Rounsevell coaches left Penola twice a week for Naracoorte, Mount Gambier and Adelaide and Cobb and Co coaches three times a week for Melbourne. It had a population of over 600 people who were served by a local court, police station, two churches, an Institute, telegraph, school and several resident magistrates among them, J.M. Carter, E. Kirby, G. Riddoch, G.B. Scott, J.A. Wells and H.E. Wells. Penola also boasted the second largest library outside Adelaide as early as 1863. The Government town of Penola North was surveyed in 1867 but renamed Penola on 20 February 1941.
The first official school education in the south east became available in Penola during 1855 when Michael O'Grady opened his school and had charge of forty students. One of the best known schools though was opened in 1866 by Mary MacKillop. A government school was completed in 1879 and could accommodate 160 students.
The first twenty years of Penola's history were very much connected with Alexander Cameron whereas the next forty years seem to be those of Scottish born John Riddoch. Riddoch arrived in Australia in 1852, just in time to cash in on the gold rushes. He and his brothers made some excellent finds but before long John decided that to make even more money he had to provide badly needed services, rather than dig. He invested his money and bought Yallum Station from the Wells brothers in 1861 for thirty thousand Pounds. It was at Yallum Park that Lawrence Allen Wells was born on 30 April 1860. He is buried at the Mitcham Cemetery, while other members of the Wells family are buried at the Old Penola Cemetery.
It was Riddoch who planted the first grape vines and helped to diversify the pastoral economy of the area with an agricultural industry. In 1878 he built the Yallum homestead. It was completed in 1880. In 1890 he established the Penola Fruit Growing Colony which was renamed Coonawarra in 1897. Being a highly regarded personality, Riddoch was asked several times to lay foundation stones or to open new buildings or institutions.