In 1938 the Hydro-Electric Commission decided to move their construction headquarters from Tarraleah to Butlers Gorge. The building of houses for construction workers and their families soon followed. In 1940, Butlers Gorge was a dynamic settlement with a small village centred around a hospital and a retail store. School was conducted in the town hall until 1942 when the permanent school was completed. In the same year a wet canteen was opened, the first in the Hydro Electric towns, thus ending the total alcohol ban in the area.

Due to the war work was slow, and the arrival of immigrants in 1943 sparked strikes, as those that had jobs wanted to ensure that they kept them, and they did not like the threat that an increased population posed. Ultimately, the immigrants were forced to leave the area for a number of years. The construction of the Clark Dam was very slow. By 1947 there was such a population in the town that a kindergarten was established to cater for 50 children, and more immigrants arrived to supplement the labour force.

The following year there were 500 men in the town, and the Dam was finally completed in 1949. That year the Polish workers were involved in one of the largest naturalisation ceremonies ever seen in Australia. By 1951 the power station was also completed and was officially opened in the following year. 1953 saw the first of the houses dismantled and transferred to Wayatinah, and work begin on another canal and two tunnels to Tarraleah. Meanwhile more buildings were being transferred to Wayatinah on an on-going basis.

On 16 September, 1955, Butlers Gorge was closed down with only the staff house and 2 separate houses remaining on site. The police station and school had closed in June of the same year. By the following year the village had been cleared and the staff house was being run as a private guesthouse.

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