Fonda was born in Grand Island, Nebraska to advertising-printing jobber William Brace Fonda and Elma Herberta Jaynes, in the second year of their marriage. The Fonda family had emigrated westward from New York in the 1800s, and traces its ancestry from Genoa, Italy to The Netherlands in the 1500s, and then to the United States of America in the 1600s, settling in the town now called Fonda, New York.

Fonda was brought up as a Christian Scientist and claimed that “my whole damn family was nice”. They were a close family and highly supportive, especially in health matters as they avoided doctors due to their religion. Fonda was a bashful, short boy who tended to avoid girls, except his sisters, and was a good skater, swimmer, and runner. He worked part-time in his father’s print plant and imagined a possible career as a journalist. Later, he worked after school for the phone company. He also enjoyed drawing. Fonda was active in the Boy Scouts of America and was a Scoutmaster, but was not an Eagle Scout as some report. When he was about fourteen, his father took him to observe a lynching, from the window of his father’s plant, of a young Black man accused of rape. This so enraged the young Fonda that a keen social awareness of prejudice was present within him for his entire adult life. By his senior year in high school, he grew suddenly to over six feet but remained a shy teenager. He then attended the University of Minnesota, majoring in journalism, but he did not graduate. He took a job with the Retail Credit Company.

At age 20, Fonda started his acting career at the Omaha Community Playhouse when his mother's friend Dodie Brando (mother of Marlon Brando) needed a juvenile player for You and I. He was both fascinated by the stage, learning everything from set construction to stage production, and also profoundly embarrassed by his acting ability.When he received the lead in Merton of the Movies, he realized the beauty of acting as a profession, as it allowed him to deflect attention from his own tongue-tied personality and create stage characters relying on someone else’s scripted words. Fonda decided to quit his job and go East in 1928 to strike his fortune. He arrived on Cape Cod and soon found a job with the Provincetown Players and Joshua Logan's University Players, an intercollegiate summer stock company, where he worked with Margaret Sullavan, his future wife, and began a lifelong friendship with James Stewart. His first role with Logan was as an Italian nobleman in The Jest, which quickly proved that Fonda had little talent to play foreigners with accents and needed to stick to American roles, as did his friend Jimmy Stewart.