Article 14 of the Covenant of the League of Nations, ratified as part of the Treaty of Versailles, authorised the new League to investigate setting up an international court. In June 1920 an Advisory Committee of jurists, meeting in The Hague, worked out the long-disputed question of how judges should be chosen: member states would nominate candidates, the League Council and Assembly would vote independently, and a candidate had to win a majority in both. The Statute of the Permanent Court of International Justice was accepted in Geneva on 13 December 1920. The first nine judges sat down to business in the Peace Palace on 30 January 1922. They elected Bernard Loder of the Netherlands as their president. Three deputy judges were unable to attend the opening, including Wang Ch'ung-hui of China, who was at the Washington Naval Conference. The Court delivered its first decision in June.

Between 1922 and 1940 the Permanent Court heard twenty-nine contentious cases and delivered twenty-seven advisory opinions. The court's vocabulary distinguished between 'cases', which produced binding judgments, and 'questions', which produced non-binding opinions. In practice states followed both, for fear that ignoring an opinion would undermine the moral authority of an institution still finding its feet. Some of its judgments still anchor textbooks. The S.S. Wimbledon case in 1923 tested whether neutrality could trump treaty obligations on the Kiel Canal. The Chorzow Factory judgments of 1927 established the modern law of reparations: a wrong, once committed, must as far as possible put the injured party back where it would have been. The 1927 Lotus case framed the basic permissive logic of international jurisdiction: states may do anything not prohibited. The 1933 Eastern Greenland case, often called the court's greatest triumph, awarded Denmark sovereignty over the contested territory.

The court was meant to be universal. The United States never joined. The leading opponent in the US Senate was William Borah of Idaho, who saw the court as too closely tied to the League of Nations that the Senate had already refused to join. President Warren Harding suggested American participation as early as 1923. Three court protocols were signed in 1929. Washington demanded a veto over cases involving the US, which other states rejected. Franklin Roosevelt offered only passive support when the question came up again in early 1935, declining to spend political capital on a treaty that needed a two-thirds Senate majority. A coordinated campaign by the radio priest Charles Coughlin and others flooded the Senate with telegrams. The treaty failed by seven votes on 29 January 1935. The US formally accepted the court's jurisdiction on 28 December 1935, but never ratified, and never sent a delegation.

Originally eleven judges and four deputies, expanded to fifteen judges in 1930, the court sat at the Peace Palace each year from 15 June for as long as its docket required. Hearings were in English and French. Judges served nine-year terms, all expiring at once, which meant the court was periodically reconstituted in a single set of elections. They received fifteen thousand Dutch florins a year, plus living and travel allowances; the president, required to live in The Hague, received another forty-five thousand. The drafting routine was distinctive. After hearings each judge wrote an anonymous summary of his views. These were circulated for two or three days. The president then prepared a draft judgment, which a four-person committee revised, and the entire court voted on the final text. Dissenting judges could publish their dissents. The Registrar, the first being Ake Hammarskjold, ran an efficient secretariat with a printing service operating out of a single press in Leiden.

The 1930s did not suit a court attached to the League of Nations. Japan announced its withdrawal from the League in 1933, Germany the same year. The court's docket thinned. Its 1940 output consisted entirely of a set of orders issued at a single February meeting. After Germany invaded the Netherlands that May, the court could not assemble. The president and registrar, granted diplomatic immunity, eventually moved to Switzerland after the other diplomatic missions had left The Hague on 16 July 1940. The court did not meet between 1941 and 1944. The Dumbarton Oaks Conference in 1944 sketched out a successor body attached to the new United Nations. In October 1945 the judges officially resigned. On 18 April 1946, a League of Nations resolution dissolved both the League and the Court. They were replaced by the United Nations and the International Court of Justice, which still sits in the same Peace Palace, applies a near-identical statute, and counts the PCIJ's judgments among its founding precedents.