The first project to build the line was proposed in 1873,[1] suggesting a 1,435 mm (4 ft 8+1⁄2 in) standard gauge and 25% maximal gradient. It was concluded that the project was not economically viable. Eduard Locher, an engineer with great practical experience, proposed an alternative project with the maximum grade increased to 48%, cutting the distance in half. Conventional systems at the time could not negotiate such gradients because the cogwheel that is pressed to the rack from above may, under higher gradients, jump out of engagement with the rack, eliminating the train's driving and braking power. Instead, Locher placed a horizontal double rack between the two rails with the rack teeth facing each side. This was engaged by two flanged cogwheels mounted on vertical shafts underneath the car.

This design eliminated the possibility of the cogwheels climbing out of the rack, and prevented the car from toppling over, even under severe crosswinds common in the area. The system was also capable of guiding the car without the need for flanges on the wheels. Indeed, the first cars on Pilatus had no flanges on running wheels, but they were later added to allow cars to be moved through tracks without rack rails during maintenance. Construction began in March 1886, and it took four hundred working days during the summer months of three years to accomplish the feat.[2] Six hundred laborers, mostly Italians were employed.[2] The line was opened on 4 June 1889, and was electrified in 1937,[2] using an overhead electric supply of 1,650 V DC. The first year the line counted 35,000 passengers, by 1901 a million had travelled on top of the Pilatus by rail.[2]

The government provided no subsidy for the construction of the line. Instead, Locher established his own company "Locher Systems" to build the railway. The railway was built entirely with private capital and has remained financially viable throughout its life. New energy-efficient trains built by Stadler Rail were introduced in 2023.

The Pilatus Railway was named a Historic Mechanical Engineering Landmark by the American Society of Mechanical Engineers in 2001.[3][4]