Canalou began as a sawmill town in 1902. Several sawmills operated in the vicinity of Canalou and the population of the community began to grow during that time. Little River would flood often in the spring making travel problematic. Many times only cattle were able to get the logs out because the ground was too soft for wagons.
On July 29th and 30th, the town was first plotted by civil engineer and surveyor, Joel Dunn. Since the plot was located on Himmelberger & Harrison company land, they added additions to the original 52 plots as needed.
D. S. Kreps opened the first store in Canalou in 1903 and later a post office. During certain times of the year it was not unusual to have to travel by small boat in order to get supplies or visit neighbors.
Once the community had a post office, it needed a name. Louis Houck named a nearby switch of his railroad, "Canalou," Spanish for, "where's the channel." Locals felt the name described their often drenched community well. Often times Little River was up high enough that it was hard to tell where the actual channel was located.