Arkham Asylum is named after Elizabeth Arkham, mother of founder Amadeus Arkham. Its dark history began in the early 1900s when Arkham's mother, having suffered from mental illness most of her life, commits suicide. (Later revealed to have actually been mercy killed by her son to free her from her torment, an act Arkham's mind repressed.) Amadeus Arkham decided, then, as the sole heir to the Arkham estate, to remodel his family home in order to properly treat those with mental illness, so others might not go untreated and suffer as Arkham's mother had. Prior to the period of the hospital's remodeling Arkham treated patients at the State Psychiatric Hospital in Metropolis, where he and his wife, Constance, and child, Harriet, had been living for quite some time.

Upon telling his family of his plans, they move back to his family home to oversee the remodeling. While there, Arkham receives a call from the police notifying him Martin "Mad Dog" Hawkins -- a patient referred to Arkham by Metropolis Penitentiary while at State Psychiatric Hospital -- had escaped from prison, and sought his considered opinion on his state of mind.

On April 1st, 1921, Arkham returned to his home to find his front door wide open. Inside, he discovered the raped and indescribably mutilated bodies of his wife and daughter in an upstairs room, Hawkins having carved his nickname on Harriet's body.

In spite of everything, the Elisabeth Arkham Asylum for the Criminally Insane officially opened in November of 1921. One of its first patients was Martin Hawkins, and Arkham is praised for his courage and compassion in dealing with his family's murderer. On April 1st, 1922, after treating Hawkins for six months, Arkham straps him to the electroshock couch and purposely electrocutes Hawkins. The death is treated as an accident, but contributes to the continued loss of Arkham's mental stability, which Arkham begins to believe is his birthright.

Arkham Asylum has been demolished or destroyed several times in its history. It was seriously damaged at the beginning of Knightfall, when Bane used stolen munitions to blow up the facility and release all the inmates. After these events, the asylum was relocated to a large mansion known as "mercy house", where it remains to this day. At the beginning of the No Man's Land, the asylum was closed down and all its inmates set free. With the sole exception of the Riddler, the inmates elected to remain in the cut-off Gotham City.