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McAdoo was in Marietta, Georgia, on Halloween of 1863. His father was attorney William Gibbs McAdoo, Sr. and his uncle, John David McAdoo, was a Confederate general and a justice on the Texas Supreme Court. McAdoo's family moved to Knoxville, Tennessee, in 1877, when his father became a professor at the University of Tennessee. McAdoo Jr. graduated from the University of Tennessee and was appointed deputy clerk of the United States District Court for the Eastern District of Tennessee in 1882. He married his first wife, Sarah Hazelhurst Fleming, on November 18, 1885 and the couple had seven children.
McAdoo was admitted to the bar in Tennessee in 1885 and set up a practice in Chattanooga, Tennessee. In the early 1890s, he lost most of his money in a failed venture that tried to electrify the Knoxville Street Railroad system. In 1892 he moved to New York City, where he formed a law firm with Francis R. Pemberton, son of the Confederate General John C. Pemberton. The firm was known as Pemberton and McAdoo. In 1895, he returned to Knoxville and bought back his old streetcar company in an auction. His attempt to win control of the city's streetcar system was unsuccessful and he returned to New York in 1897.
In 1900, McAdoo led a project to build a railway tunnel under the Hudson River to connect Manhattan with New Jersey. A tunnel had been partially constructed during the 1880s. McAdoo became president of the Hudson and Manhattan Railroad Company, and the company built two passenger tubes which were opened in 1908. The tunnels remain as part of the Port Authority Trans-Hudson (PATH) system.
McAdoo's first wife died in February 1912. By this time he had become active in the Democratic Party and in 1912 he served as vice chairman of the Democratic National Committee. He worked for Woodrow Wilson's presidential campaign in 1912. Wilson was impressed by McAdoo and appointed him secretary of the Treasury, a post McAdoo held from 1913 to 1918. Wilson was less impressed in 1914 when McAdoo married the president's daughter Eleanor Randolph Wilson. He was twenty-six years older than his second wife. The couple had had two daughters together. This marriage ended in divorce in July 1935, and McAdoo later married a third time, to Doris Isabel Cross, in September 1935.
McAdoo offered to resign after his wedding, but President Wilson wanted him to complete his work on the newly created Federal Reserve System, which had been created by Congress in December 1913. As Treasury Secretary, McAdoo confronted a number of financial issues arising out of the first world war, as British and French investors began to liquidate their American securities into U.S. currency. Many of these foreign investors converted their dollars into gold, creating pressure on American financial markets and on the American economy in general. At the time the nations of Europe and their financial institutions held far more in debt of the United States than the reverse. McAdoo kept the U.S. currency on the Gold Standard. He ordered the New York Stock Exchange to be closed for four months in 1914 to prevent Europeans from selling American securities and exchanging the proceeds for dollars, and to prevent the depletion of US gold reserves. This averted an immediate panic and collapse of the American financial and stock markets. It was the beginning of a shift in the global balance of economic power, from Europe to the United States, saving the American economy and its future allies from economic collapse in the early stages of the war.
As a result, the treasuries of those countries which held US securities exhausted all of their foreign exchange holdings as U.S. industry built itself up to meet the allied war needs. The managed liquidation of foreign holdings of U.S. assets moved the United States to a net creditor position internationally.
After the United States entered World War I in April 1917, the United States Railroad Administration was formed to run America's transportation system during the war. McAdoo was appointed Director General of Railroads, a position he held until the end of the war in November 1918.
In March 1919, McAdoo left the Wilson cabinet, and founded the law firm McAdoo, Cotton & Franklin. This law firm served as general counsel for the founders of United Artists. He left the firm in 1922 and moved to California to concentrate on his political career.
McAdoo ran twice for the Democratic nomination for president. In 1920 he lost to James M. Cox. Woodrow Wilson did not run for a third term, largely due to his poor health, though he would not have been nominated if he had done so. Vice-President Thomas R. Marshall wanted to succeed Wilson, his indecisive handling of the situation surrounding Wilson's illness and incapacity hurt his chances as a candidate, and in the end he did not formally put himself forward for the nomination.
McAdoo campaigned for such measures as injury compensation, unemployment insurance, an eight-hour workday, unemployment compensation and a minimum wage. He was viewed as the strongest candidate, but his chances were hurt by the lack of support from his father-in-law, who still hoped that a deadlocked convention would draft him to run for a third term. This was unrealistic, as Wilson was seriously ill, physically immobile, and in seclusion at the time. The Democrats held their convention in San Francisco between June 28 and July 6, the first time a major party held its nominating convention in an urban center on the Pacific coast. McAdoo led on the first ballot, but gradually lost support. In those days the successful candidate needed to win two-thirds of the votes of delegates to win the nomination. On the 44th ballot the party nominated Ohio Governor James M. Cox as their presidential candidate, and 38-year-old Assistant Secretary of the Navy Franklin D. Roosevelt, a fifth cousin of the late president Theodore Roosevelt, for vice-president.
Four years later, in 1924, McAdoo once again sought his party's nomination. Once again he was seen as the front-runner and once again he led on the first ballot. But in a marathon convention held in New York City from June 24 to July 9, 1924, it took a record 103 ballots to nominate a presidential candidate. McAdoo was supported by the Ku Klux Klan, something that cost him the support of a united party. The hotly contested race divided the party, but both McAdoo and his rival, New York Governor Al Smith, were too stubborn to compromise until the 103rd ballot when the party compromised and selected West Virginia lawyer John W. Davis as their candidate. Davis was trounced in the general election by Calvin Coolidge.
McAdoo never ran for president again, but he was a Senator for California from 1933–38. McAdoo filed for divorce from his wife Eleanor in 1934. Two months after their separation was finalized in July 1935, the 71 year old McAdoo married Doris Isabel Cross, a 26 year old nurse.
McAdoo died on February 1, 1941 of a heart attack while in Washington, D.C., having attended the third inauguration of Franklin D. Roosevelt. He is buried in Arlington National Cemetery.