According to the official account, Manuel Ricardo Palma y Carrillo was born on February 7, 1833, in Lima, inscribed as the son of Pedro Ramón Palma and Guillerma Carrillo y Pardos, possibly his grandmother. On April 6, 1837, his father married Dominga Soriano y Carrillo, Guillerma’s daughter. However, the documentary evidence shows many contradictions that was pointed out by Monsignor Salvador Herrera Pinto who relying on oral traditions collected and written testimonies directed to him (a catholic bishop) concludes that Ricardo Palma was born in the town of Talavera, province of Andahuaylas, Apurímac Region.

During his early years, Ricardo Palma composed romantic dramas (which he later repudiated) and poetry. His first book of verse, Poesías (Poems), appeared in 1855. He gained an early reputation as a historian with his book on the activities of the Spanish Inquisition during the period of the Viceroyalty of Peru (Anales De La Inquisicion De Lima: Estudio Historico, 1863).

From a young age, he dabbled in politics as a member of the liberal camp. In 1860 he was believed to have participated in a failed plot against president Ramón Castilla which resulted in an exile to Chile from which he returned in October 1862. He made a trip to Europe in 1864–1865 and when he returned to Lima in 1865 he became involved again in political affairs and public service until 1876. He held the positions of Consul of Peru in Pará, Brazil, Senator for the Loreto and official in the Ministry of War and Navy.

With his lover Clemencia Ramírez in 1872, he had his son Clemente Palma, who became a prominent writer of fantastic tales, usually horror stories, that were influenced by Edgar Allan Poe. In 1876, he married Cristina Román y Olivier with whom he had seven children: Félix Vital, Angélica, Ricardo, Peregrina Augusta, Cristina, Cristián and Renée Cristina. His daughter Angélica Palma was also a writer and a member of the early feminist movement in Peru.

The War of the Pacific (1879–1883) between Chile and Peru disrupted Palma’s life and resulted in the virtually complete destruction of his own library as well as that housed in the National Library of Peru. After the war, Palma was named the director of the National Library, a post he held until his retirement in 1912. Palma successfully took on the task of rebuilding the National Library that was ransacked by the occupation forces of the Chilean army in 1881 following the battle of Lima during the War of the Pacific. Palma was able to bring the National Library back from the ashes so that it regained its previous stature and became recognized once again as one of the top libraries in South America. It was through his personal friendship with the then Chilean president Domingo Santa María that Palma was able to recover an estimated 10,000 books from Chilean hands, as well as many other works which were recovered through his own personal efforts.

In 1999, a well-known London auction house announced the sale of a batch of 50 letters that Ricardo Palma had written to an Argentinian friend. The Ministry of Foreign Affairs of Peru persuaded the National Library of Peru to participate in the auction. It had been more than 50 years since Peru had bought cultural heritage abroad. Today these letters are kept at the National Library of Peru. Ricardo Palma University has recently published the letters of Palma in three volumes (2005–2007).