Rackham was one of twelve children and smuggled pencils into bed to draw under the covers. When his parents confiscated the paper, he drew on his pillowcase. At seventeen his health was poor enough that he was sent on an ocean voyage to Australia with two aunts. He drew the entire way. The trip settled two things: his health recovered, and he knew he would be an artist.

He came back to London and got a job as an insurance clerk at the Westminster Fire Office, studying part-time at the Lambeth School of Art. In 1892 he left insurance for the Westminster Budget, where he worked as a reporter and illustrator. The illustration work took over. His watercolour of Winchelsea had already been accepted by the Royal Academy and sold for two guineas when he was twenty-one.

He met the painter Edyth Starkie over a garden fence. She encouraged him to stop imitating other illustrators and follow his own instinct, which ran toward twisted trees, gnarled roots and creatures that lived in the gaps between the real and the imagined. They married in 1903. That same year he illustrated The Fairy Tales of the Brothers Grimm, which was reprinted twice and made his name.

His style fused northern European line drawing (Durer, Altdorfer) with Japanese woodblock composition. The trees have faces. The roots have fingers. Peter Pan in Kensington Gardens and Rip Van Winkle followed, the latter a turning point in book production: its fifty-one colour plates demonstrated that colour-separated printing could accurately reproduce original artwork.

Guillermo del Toro cited Rackham as an influence on the Faun in Pan's Labyrinth. Brian Froud credited him with sparking an interest in fairy illustration. He worked until the end: his final commission, The Wind in the Willows, was completed in 1939 shortly before his death at seventy-one.