The U.S. Army Ordnance Department designed the Medium Tank M4 as a replacement for the Medium Tank M3. The M3 was an up-gunned development of the M2 Medium Tank of 1939, in turn derived from the M2 light tank of 1935. The M3 was developed as a stopgap measure until a new turret mounting a 75 mm gun could be devised. While it was a big improvement when tried by the British in Africa against early German tanks, the placement of a 37 mm gun turret on top gave it a very high profile, and the unusual side-sponson mounted main gun, with limited traverse, could not be aimed across the other side of the tank.

Detailed design characteristics for the M4 were submitted by the Ordnance Department on 31 August 1940, but development of a prototype was delayed while the final production designs of the M3 were finished and the M3 entered full-scale production. On 18 April 1941, the U.S. Armored Force Board chose the simplest of five designs. Known as the T6, the design was a modified M3 hull and chassis, carrying a newly designed turret mounting the M3's 75 mm gun. This became the Sherman.

The Sherman's reliability resulted from many features developed for U.S. light tanks during the 1930s, including vertical volute spring suspension, rubber-bushed tracks, and a rear-mounted radial engine with drive sprockets in front. The goals were to produce a fast, dependable medium tank able to support infantry, provide breakthrough striking capacity, and defeat any tank then in use by the Axis nations, though it would later fall short against the much heavier tanks developed by Germany.

The T6 prototype was completed 2 September 1941. Unlike later M4s, the hull was cast and had a side hatch, which was eliminated from production models. The T6 was standardized as the M4 and production began in October.

The first production began with the Lima Locomotive Works on the assembly line set for tanks for British use. The first production Sherman was given over to the US Army for evaluation and it was the second tank of the British order that went to London. Named Michael probably after Michael Dewar, head of the British tank mission in the U.S., it was displayed in London and is now an exhibit at Bovington Tank Museum.

In World War II, the U.S. Army ultimately fielded 16 armored divisions, along with 70 independent tank battalions, while the U.S. Marine Corps fielded six independent Sherman tank battalions. A third of all Army tank battalions, and all six Marine tank battalions, were deployed to the Pacific Theater of Operations (PTO). Prior to September 1942, President Franklin D. Roosevelt had announced a production program calling for 120,000 tanks for the Allied war effort, which would have created 61 armored divisions. Although the American industrial complex was not affected by enemy aerial bombing nor submarine warfare as was Japan, Germany and, to a lesser degree, Great Britain, an enormous amount of steel for tank production had been diverted to the construction of warships and other naval vessels. Steel used in naval construction amounted to the equivalent of approximately 67,000 tanks; and consequently only about 53,500 tanks were produced during 1942 and 1943.

The Army had seven main sub-designations for M4 variants during production: M4, M4A1, M4A2, M4A3, M4A4, M4A5, and M4A6. These designations did not necessarily indicate linear improvement. For example, A4 did not indicate it was better than an A3. These sub-types indicated standardized production variations, which were in fact often manufactured concurrently at different locations. The sub-types differed mainly in engines, although the M4A1 differed from the other variants by its fully cast upper hull, with a distinctive rounded appearance. The M4A4 had a longer engine system that required a longer hull, a longer suspension system, and more track blocks, and thus the most distinguishing feature of the A4 was the wider spacing between the bogies. M4A5 was an administrative placeholder designation for Canadian production. The M4A6 had an elongated chassis and additional armor, but fewer than 100 of these were ever produced.

While most Shermans ran on gasoline, the M4A2 and M4A6 had diesel engines. The M4A2 with a pair of GMC 6–71 straight six engines, the M4A6 a Caterpillar RD1820 radial. These, plus the M4A4, which used the Chrysler A57 multibank engine, were mostly supplied to other Allied countries under Lend-Lease. "M4" can refer specifically to the initial sub-type with its Continental radial engine (R-975), or generically, to the entire family of seven Sherman sub-types, depending on context. Many details of production, shape, strength and performance improved while in production, without a change to the tank's basic model number. These included more durable suspension units, safer "wet" (W) ammunition stowage, and stronger armor arrangements, such as the M4 Composite, which had a cast front hull section mated to a welded rear hull. British nomenclature differed from that employed by the U.S.