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When Maori chief Tamatea-arikinui first visited this area, his footsteps reverberated, making him think the ground was hollow and causing him to dub it Tapuaeharuru (Resounding Footsteps). The modern name originates from the story of Tia, who discovered the lake and slept beside it, draped in his cloak, so it became known as Taupo Nui a Tia (The Great Cloak of Tia).

Europeans settled here in force during the East Coast Land War (1868–72), when it was a strategic military base: Colonel JM Roberts built a redoubt in 1869, and a garrison of mounted police remained until the defeat of Te Kooti later that year.

In the 1870s the government bought the land from Maori. In the 20th century the mass ownership of the motorcar saw Taupo grow from a lakeside village of about 750 people to a large resort town that could be driven to from most points in the North Island. Today the population still grows considerably at peak holiday times, when New Zealanders and international visitors alike flock to the lakeshore.