Born in Grand Valley, Colorado, Libby was educated at the University of California at Berkeley where he obtained his PhD in 1933 and began teaching. In 1941, he moved to Columbia, New York, to work on the development of the atom bomb. After World War II he was appointed professor of chemistry at the Institute for Nuclear Studies at the University of Chicago before returning to the University of California (1959) as director of the Institute of Geophysics.

Libby was responsible for considerably improving dating techniques. In 1939 Serge Korff discovered the existence of the radioactive isotope, carbon–14. This is different from the common stable isotope carbon–12 in that it contains an extra two neutrons in its nucleus. It is absorbed by all carbon users, such as animals and plants, during their lifetimes. It was established that the ratio of carbon–12 to carbon–14 in living organisms was constant and that on death the carbon–14 in the organism began to decay into nitrogen at a constant and measurable rate – carbon–14 has a half-life of 5730 years.

In 1947 Libby and his students at the University of Chicago's Institute for Nuclear Studies developed the radiocarbon dating technique using a highly sensitive geiger counter. He tested the process on objects of known age, such as timbers from Egyptian tombs. The test proved the technique to be reliable for the past 5000 years and it was assumed from this to be accurate as far back as radiocarbon could be measured, about 50,000 years. A later improvement extended the range to about 70,000 years.

The radiocarbon dating technique proved of immense value to the earth sciences, archaeology, and anthropology, and for its development Libby was awarded the 1960 Nobel Prize for chemistry. His published works included Radiocarbon Dating (1952).