The Talyllyn Railway Preservation Society was founded in 1950 and took control of the failing Talyllyn slate line in February 1951. It was the first voluntary society anywhere in the world to take over and operate a public passenger-carrying railway. Within months, the news had spread through Britain's railway enthusiast circles, and items from other narrow gauge lines that were being closed and scrapped began to arrive at Tywyn. Wagons, signals, locomotive nameplates, ticket stocks, tools - the detritus of a dying industrial subculture. A small committee was formed to collect and preserve what they could. The first exhibit, donated in 1952 by Guinness from their St James's Gate Brewery railway, was a small locomotive. The displays began in the old Gunpowder Store at Wharf station, expanded into a coal yard in 1964, and never really stopped growing.

The collection now holds more than a thousand items from over eighty narrow gauge railways spread across Wales, England, the Isle of Man, Ireland, and Scotland. Six locomotives are on display, with more in store. Eleven wagons inside, another eleven outside. Track sections from early plateways through to modern narrow gauge. Signal frames from the Manx Northern Railway, the Isle of Man Railway, the County Donegal Railways - lines that mostly no longer exist. The original Talyllyn weighbridge from 1865 has been restored and given a new shelter built to match the rest of Wharf yard. Whole categories of industrial railway are represented: military narrow gauge from the Western Front, peat railways, brewery shunting lines, slate quarry tramways. The museum is what you build when an entire branch of engineering history is dying and you want some of it to survive.

By the late 1990s the building had reached the end of what it could do. It was damp in winter, hot in summer, and the collection was deteriorating in conditions the curators could no longer accept. With the golden jubilee of the Preservation Society approaching in 2000, an appeal was launched. The Heritage Lottery Fund came in with the largest share; trusts, foundations, and individual donors made up the rest. Work started in 2001. The new building rose alongside an extended booking office, providing the museum, a refreshment room, and an education room on two floors. On 13 July 2005 the Prince of Wales and the Duchess of Cornwall (now King Charles III and Queen Camilla) opened the complete facility. In 2010 the museum gained Accredited status under the national museums scheme, recognising it as one of the small but properly curated specialist museums of Britain.

Wilbert Awdry came to the Talyllyn in 1952, two years after he had published The Three Railway Engines and a year after Thomas the Tank Engine. He volunteered as a guard, signalman, and station master at various points, and he based much of the Skarloey Railway, the small narrow gauge line of his later books, on the Talyllyn. Sir Handel, Peter Sam, Skarloey himself - these characters were thinly veiled portraits of Talyllyn locomotives. After Awdry died in 1997, his family donated his study furniture to the museum. It is reassembled now in a side room, complete with his typewriter, the lamp he wrote by, and the books on his shelves. Children stand in the doorway and look in. The desk does not seem large enough to have produced a global cultural phenomenon. Most desks do not.