The square was the heart of Madrid during the Middle Ages. In the thirteenth and fourteenth centuries was the trading hub of the city, including market place. Went into decline from the fifteenth century, when King John II of Castile ordered the construction of the Plaza del Arrabal (preceding the actual Plaza Mayor), which shifted the business of the town.

However, it maintained its importance as a place of residence of the principal noble families of Madrid. In his various palaces were situated environment (such as palatial homes of the Lasso de Castilla and the Marquis de la Romana, among others), of which only retains the Palacio de los Vargas, linked to the civic elite name from the Christian conquest of the city.

The place also had a great significance from a religious standpoint. The square was conducting a Catholic custom, located at the origin of its name and which was introduced in the sixteenth century, after the Bishop´s Chapel built in the southern side of the enclosure. The residents of the village were required to deliver straw to chaplains and chapter of that chapel, which they feed their mules.

In the nineteenth century, owners of the old palaces ceded their plots for construction of housing for the working classes, with which they derived rental income.

Legend says that in the Plaza de la Paja, opposite the church of San Andrés, existed until the nineteenth century the palace of the Laso de Castilla, a huge building according Mesonero Romans who knew him, communicated with the church of San Andres an overpass, which had a famous meeting place of the grandees of Castile with Cardinal Cisneros who, being questioned what powers ruled that, standing on the balcony said: "These are my powers until the prince comes", pointing the artillery was in the square.