Born August 28, 1898 in Western Pennsylvania, Cowley grew up in Pittsburgh, where his father William was a homeopathic doctor. He graduated from Peabody High School where his friend Kenneth Burke was also a student. He obtained a B.A. from Harvard University in 1920.

He interrupted his undergraduate studies to join the American Field Service in France during World War I. From the Western Front he reported on the war for The Pittsburgh Gazette (today's Pittsburgh Post-Gazette).

Upon returning to the USA, Cowley married artist Peggy Baird; they were divorced in 1931. His second wife was Muriel Maurer. Together they had one son, Robert William Cowley, who is an editor and military historian.

As one of the dozens of creative literary and artistic figures who migrated during the 1920s to Paris, France and congregated in Montparnasse, Cowley returned to live in France for three years, where he worked with Ernest Hemingway, F. Scott Fitzgerald, John Dos Passos, Ezra Pound, E. E. Cummings, Gerald and Sara Murphy, Edmund Wilson, Erskine Caldwell, Harry Crosby, Caresse Crosby and others. He is usually regarded as representative of America's Lost Generation. Hemingway removed direct reference to Cowley in a later version of The Snows of Kilimanjaro, replacing his name with the description, "that American poet with a pile of saucers in front of him and a stupid look on his potato face talking about the Dada movement". John Dos Passos's private correspondence revealed the contempt he held for Cowley, but also the care writers took to hide their personal feelings in order to protect their own careers when Cowley became assistant editor of The New Republic. From his two decades of struggling, he (along with Edmund Wilson) later became a well-known chronicler of the expatriate generation.

Perhaps the most famous work he wrote was his early book of poetry, Blue Juniata (1929), encouraged by Hart Crane. His most autobiographical was Exile's Return, published in 1934. The second book is one of the first published in the United States about the "Lost Generation", and was reissued in a less radical edition with new material, like his Fitzgerald revivals, in 1951. American literary historian Van Wyck Brooks described it as "an irreplaceable literary record of the most dramatic period in American literary history."

Cowley began reviewing books during his college days (at USD$1 each) and edited and contributed to small journals. His biggest impact was from 1929 through 1944, when he was an assistant editor at The New Republic. During this period, as with a number of American writers and artists, he became a radical Marxist and began writing about politics in addition to his many literary productions. Like some of his peers, Cowley came under scrutiny by J. Edgar Hoover, head of the FBI.

As an editorial consultant to Viking Press, he pushed for the publication of Jack Kerouac's On the Road. In 1946 Cowley edited Viking's edition of The Portable Faulkner, and his introduction is generally considered a turning point in William Faulkner's reputation in the United States at a time when many of his early works were in danger of going out of print. Cowley's work anthologizing 28 Fitzgerald short stories and editing a reissue of Tender is the Night, restructured based on Fitzgerald's notes, both in 1951, were key to reviving Fitzgerald's reputation as well, and his introduction to Sherwood Anderson's Winesburg, Ohio, written in the early 1960s, is said to have had a similar effect on Anderson's reputation.