Molalla was named after the Molalla River, which in turn was named for the Molala, a Native American tribe that inhabited the area. William H. Vaughan took up a donation land claim in the area in 1844. Molalla post office was established in 1850, near the site of Liberal, and was discontinued in 1851. The post office was reestablished in 1868 and it ran until 1874, then was reestablished in 1876, which is when it was probably placed at the present location of Molalla.
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