Water Valley grew up beside the Mississippi Central Railroad, which reached it in 1856, and was incorporated in 1858. The Civil War destroyed much of the town in 1862 and 1863, and in December 1862 Van Dorn's cavalry burned Grant's supply base at Holly Springs, which ended his advance down this line. The Illinois Central bought the railroad in 1882 and made Water Valley a regional headquarters with a large maintenance shop. The shop closed in 1927 and the headquarters moved to Tennessee in 1946.
Casey Jones, the engineer, worked out of Water Valley for most of the 1890s. On 30 April 1900 he died at Vaughan, Mississippi, when his southbound passenger train struck the rear of a stalled freight in fog. He slowed the train before impact and was the only person killed. The railroad blamed him for ignoring a flagman's signals; historians dispute that, and his fireman, Sim Webb, said no flagman or warning could be seen or heard. The ballad that carried Jones's name across the country began with Wallace Saunders, an African American engine wiper for the Illinois Central and Jones's friend.
The Casey Jones Railroad Museum occupies the old depot and displays an Illinois Central banana reefer and a caboose. A Mississippi Blues Trail marker out front notes the songs written about him. Main Street nearby is listed on the National Register of Historic Places.
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