Westerly was named for the settlement's location respective to Rhode Island's geography, being the westernmost town in the Colony of Rhode Island and Providence Plantations. The English village was the home of Elder John Crandall ( c. 1612–1676), one of Westerly's founding fathers.

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Westerly grew as a shipbuilding center, and U.S. naval officer Oliver Perry built gunboats here before the War of 1812. Westerly has had textile and other light manufacturing industries and much of the granite used for Civil War monuments across the county was mined here.

Though Westerly is known for its abundance of shorelines, the beaches are just the beginning. Rhode Island's southernmost town is also home to a thriving downtown scene brimming with local shops and trendy bars and restaurants.

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Before the War of 1812, Oliver Hazard Perry, the American naval hero, built gunboats there for the government. The present economy depends on tourism, the manufacture of textiles, and granite quarrying. A U.S. Coast Guard lighthouse is at Watch Hill.