Gresham was born in Baltimore, Maryland. As a child, he moved to New York with his family, where he became fascinated by the sideshow at Coney Island. Upon graduating from Erasmus Hall High School in Brooklyn in 1926, Gresham drifted from job to job, and worked as a folk singer in Greenwich Village. In 1937, Gresham served as a volunteer medic for the Loyalist forces during the Spanish Civil War. There, he befriended a former sideshow employee, Joseph Daniel "Doc" Halliday, and their long conversations inspired much of his work, particularly Gresham's two books about the American carnival, the nonfiction Monster Midway and the fictional Nightmare Alley.

Returning to the United States in 1939, after a troubling period that involved a stay in a tuberculosis ward and a failed suicide attempt, Gresham found work editing true crime pulp magazines. In 1942, Gresham married Joy Davidman, a poet, with whom he had two children, David and Douglas. Gresham was an abusive and alcoholic husband. Davidman, although born Jewish, became a fan of the writings of C. S. Lewis, which led eventually to her conversion to Christianity. Davidman eventually fled her marriage to Gresham and married Lewis, their relationship forming the inspiration for the play and movie Shadowlands.

Gresham married Davidman's first cousin, Renee Rodriguez, with whom he had been having an affair and who was herself suffering an abusive marriage. Gresham joined Alcoholics Anonymous and developed a deep interest in Spiritualism, having already exposed many of the fraudulent techniques of popular spiritualists in his two sideshow-themed books and having authored a book about Houdini with the assistance of noted skeptic James Randi. He was also an early enthusiast of Scientology but later denounced the religion as another kind of spook racket.

In 1962, Gresham took a turn for the worse. He had started to go blind and had been diagnosed with cancer of the tongue. On September 14, 1962, he checked into the Dixie Hotel — a place around which he had hung out during the writing of Nightmare Alley over a decade earlier. There, 53 year old Gresham took his life with an overdose of sleeping pills. His death went generally unnoticed by the New York press, but for a mention by a bridge columnist.