The legend of Billy the Kid has acquired iconic status in American folklore. More has been written about Billy the Kid than any other gunslinger in the history of the American Old West, while hundreds of books, films, plays, and radio and television programs have been inspired by his legend. Despite his enduring reputation, the outlaw himself, also known as William Bonney, had minimal impact on historical events in New Mexico Territory of the late 19th century.

When he was still alive, "Billy the Kid" had already become a nationally known figure whose exploits, real and imaginary, were reported in the National Police Gazette and the large newspapers of the eastern United States. After his death on July 14, 1881, every newspaper in New York City published his obituary, and within days newspapers around the United States were printing exaggerated and romanticized accounts of Billy the Kid's short career. In the fifteen or so dime novels about his criminal career published between 1881 and 1906, the Kid was portrayed as an outlaw antihero, customarily depicted as a badman with superior gunslinging skills, or even as a demonic agent of Satan who delighted in murder.

Within six weeks of Bonney's death there appeared the first complete narrative of his life, The True Life of Billy the Kid. Written by dime novelist John Woodruff Lewis under the pen name "Don Jenardo", this pulp novel depicted Billy the Kid as a sadistic psychopath.

Pat Garrett, smarting from local outrage over his shooting of the Kid, wanted to present his side of the story and hoped to turn a profit as well on the American public's fascination with the notorious outlaw. Consequently, he published his account of Bonney's life, The Authentic Life of Billy, the Kid, in 1882. It was credited to Garrett, but the first fifteen chapters were a concoction of factual material mixed with fabrications, written by Roswell's postmaster, Ash Upson, an itinerant journalist. The remaining chapters, written in a more restrained style, are generally accurate, and were likely composed by Garrett himself. The book failed to find a wide audience and sold just a few copies; nevertheless, although filled with many errors of fact, The Authentic Life served afterwards as the main source for most books written about the Kid until the 1960s. Thus was established the mythic stature of Pat Garrett as the heroic lawman in pursuit of the villainous but romantic desperado, Billy the Kid.

The lawman and former ranch hand Charlie Siringo first told his version of the Kid's story in a chapter of his book, "A Texas Cowboy" (1885). During his youth, Siringo had ridden the range in eastern New Mexico and the Texas Panhandle, the familiar haunts of William Bonney and Pat Garrett, and knew both of them. In 1920, he published a sympathetic biography, History of Billy the Kid, in which he described the daily life of a cowboy realistically, but romanticized his account of Bonney with fantasies and exaggerations—its title page claimed "His six years of daring outlawry has never been equalled in the annals of criminal history."

Three governors of New Mexico wrote accounts of their dealings with Billy the Kid. Miguel Antonio Otero, the first governor of the territory, knew William Bonney, and was the first Mexican-American author to write about him. Otero's book, The Real Billy the Kid: With New Light on the Lincoln County War, was published in 1936. In it, he wrote admiringly of Bonney and described events of the time and place from the perspective of native New Mexicans. The Kid spoke Spanish fluently and was well-liked by the Hispanos of the Pecos River Valley, who told many stories about el Chivato, their colloquial Spanish for a young goat or kid.

The modern legend of Billy the Kid as an immortal figure of the Old West first developed within a larger cultural context of social upheaval in the late 19th and early 20th century United States. Between 1897 and 1909, during the Progressive Era of political activism and reform, the popular American novelist Emerson Hough wrote magazine articles, novels and informal histories that reintroduced Billy the Kid to a national audience, albeit in works that often relied more on fantasy than on actual events. Hough embellished the Kid's reputation with lurid descriptions of his exceptional villainy in an article called "Billy the Kid: The True Story of a Western 'Bad Man' ", written in 1901 for the literary publication, Everybody's Magazine, using language such as "the soul of some fierce and far-off carnivore got into the body of this little man, this boy, this fiend in tight boots and a broad hat." Hough further developed this image of the Kid in his book about western desperados, The Story of the Outlaw (1907), though not in such excessive language.

By the mid-1920s, however, Bonney's place in the general awareness of the American public had diminished to the point that in 1925 Harvey Fergusson asked in the American Mercury magazine, "Who remembers Billy the Kid?". His reputation was revitalized the next year when Walter Noble Burns's book, The Saga of Billy the Kid, appeared as the Book-of-the-Month Club selection for December 1926, and became a bestseller. This success, and the fact that people who had actually known William Bonney were beginning to talk to reporters and write their memoirs, allowed stories of his exploits to regain a nationwide audience. Publication of "The Saga", in spite of its dubious facts and fabricated events, subsequently led to a proliferation of other books, magazines and newspaper articles, and then to movies, about the life of Billy the Kid.