The Post Office first showed an interest in using underground railways to transport mail beneath London in 1854 and in 1893 serious consideration was given to running an electric railway in the pneumatic tunnels. By the turn of the twentieth century, traffic congestion in London had reached the point that cross-London journeys by road took so long that an unnecessary number of vehicles had to be used to carry the ever growing volume of mails between sorting offices and main line termini. In 1905, the Metropolitan Pneumatic Despatch Co presented a bill to Parliament for the construction of a pneumatic line connecting the major railway termini and Post Offices. The Bill was rejected as being too ambitious. In September 1909 the Postmaster General appointed a Committee to examine the practicality of the transmission of mails in London by pneumatic tube or electric railway. The Committee reported in February 1911 in favour of an electric railway between Paddington Station (Great Western Railway) and the Eastern District Post Office in Whitechapel Road, a distance of six and a half miles.

The scheme was submitted by the Postmaster General to the Cabinet in 1912 and power to construct the railway was given to the Postmaster General by the Post Office (London) Railway Act, 1913. The Act made provision for compensation for damage and allowed the Post Office a budget of £1, 100, 00 to construct the line with stations at Paddington, Western District Office, Western Parcel Office, West Central District Office, Mount Pleasant Sorting Office, King Edward Building, Liverpool Street and East District Office. Tenders for the construction of the tunnel were invited on the 26 August 1914. John Mowland and Co won the tender to construct the tunnels and build eight stations. The work, although interrupted by the war was completed in 1917. In parallel with the building work, Post Office engineers built a test tract on Plumstead Marshes to experiment with the control systems and rolling stock. However, the war caused the testing to be brought to a premature halt. During the war the stations became a home for exhibits from museums. The cessation of the war enabled the Post Office to proceed with their plans, and in 1919 tenders were issued for the supply and installation of the electrical equipment. Prices proved too expensive for the post war budget and the scheme was held in abeyance until 1923 when tenders were reissued.

In May 1927, work was sufficiently advanced for half the system to be handed over for staff training and in December of that year the scheme received Parliamentary approval and the line became fully operational with parcels traffic running between Mount Pleasant and Paddington. Mount Pleasant to Liverpool Street opened for Christmas parcels from 19th-24th December and then for a full parcels service from 28 December. Liverpool Street to Eastern District Office opened for parcels on 2 January 1928. Letter traffic began on 13 February with the opening of West Central District Office station, followed by Western District Office on 12 March. The line proved an immense benefit to the Post Office in the first year of operation, however the high mileage gave the Post Office problems as the cars needed a lot of maintenance. In the early 1930s the rolling stock underwent a gradual change as the cars were replaced by three car trains. These trains were replaced by 34 new trains in 1981 in a £1 million development programme.

In a Press Release, issued by the Post Office PR team on 7 November 2002, Royal Mail announced that unless it could find a new backer, that the Post Office underground railway would close in the near future. The working operation finally ceased on 30 May 2003, but the system has in fact been 'mothballed' in the hope that an alternative use can be found for it.