Libby Holman was born Elizabeth Lloyd Holzman on May 23, 1904, to a Jewish lawyer and stockbroker, Alfred Holzman (August 20, 1867 - June 14, 1947), and his wife, Rachel Florence Workum Holzman (October 17, 1873 - April 22, 1966), in Cincinnati, Ohio. Alfred and Rachel were married on March 17, 1900. Their other children were daughter Marion H. Holzman (January 25, 1901 - December 13, 1963) and son Alfred Paul Holzman (March 09, 1909 - April 19, 1992). In 1904, the wealthy family grew destitute after Libby's uncle Ross Holzman (April 1874 - ?) embezzled nearly $1 million of their stock brokerage business. At some point, Alfred changed the family name from Holzman to Holman. Libby graduated from Hughes High School on June 11, 1920, at the age of 16, then entered the University of Cincinnati, graduating on June 16, 1923, with a Bachelor of Arts degree.

In the summer of 1924 Libby left for New York City, where she initially took up residence at the Studio Club. Her first theater job in New York was in the road company of The Fool. Channing Pollock, the writer of The Fool, recognized Libby's talents immediately and advised her to pursue a theatrical career. She followed Pollock's advice and soon became a star. An early stage colleague who became a longtime close friend was future film star Clifton Webb, then a dancer. He bestowed upon her the nickname, The Statue of Libby. Her Broadway theatre debut was in the play The Sapphire Ring in 1925 at the Selwyn Theatre, she was billed as Elizabeth Holman, it closed after 13 performances.

Libby enjoyed a variety of intimate relationships with both men and women throughout her lifetime. Her famous lesbian lovers included the DuPont heiress Louisa d'Andelot Carpenter, actress Jeanne Eagels and Jane Bowles. Louisa was to play a significant part throughout Libby's lifetime. They raised their children and lived together and were openly accepted by their theater companions. With men, she had no qualms about dating anyone much younger than she, such as fellow American actor Montgomery Clift, whom she mentored.

Although Libby didn't have to work after her marriage to Reynolds, she never completely gave up her career, making records and giving recitals. One of her last performances was at the United Nations in New York in 1966. As always, she sang her trademark song, Moanin' Low.

Libby took an interest in one particular fan. Zachary Smith Reynolds, the heir to R. J. Reynolds's tobacco company, was smitten from the start, despite their seven-year age difference. They met in Baltimore, Maryland in April 1930 after Smith watched Libby's performance in a road company staging of the play The Little Show. Smith had begged friend Dwight Deere Wiman, who was the show's producer, for an introduction to Libby. Smith pursued Libby all around the world in his plane. With the persuasion of her former lover, Louisa, Libby and Zachary Smith Reynolds, who went by his middle name, married on Sunday November 29, 1931 in the parlor of Monroe, Michigan Justice of the Peace Fred M. Schoepfer. Unfortunately their marital bliss did not last long. Libby's and Smith's natures conflicted greatly. He wanted her to abandon her acting career. She consented by taking a one-year leave of absence. During this time, however, his conservative family was unable to bear Libby and her group of theater friends, who at her invitation often visited Reynolda, the family estate near Winston-Salem, North Carolina. Accusations and arguments among them were common. In 1932, during a 21st birthday party Smith gave at Reynolda for his friend and flying buddy Charles Gideon Hill, Jr. (July 5, 1911 - October 18, 1960), who was also Smith's first wife Anne Ludlow Cannon Reynolds's first cousin, Libby revealed to her husband that she was pregnant. A tense argument ensued. Moments later, a shot was heard; friends soon discovered Zachary Smith Reynolds bleeding and unconscious of a pistol shot to the head. Libby and Albert Bailey Ab Walker (December 10, 1909 in Chicago, Illinois - August 2, 1954), a friend of Reynolds's and a supposed lover of Libby's, were indicted for murder. Louisa Carpenter paid Libby's $25,000 bail in Wentworth, North Carolina, appearing in such mannish clothes bystanders & reporters thought she was a man. The Reynolds family contacted the local authorities and had the charges dropped for fear of scandal. Though Reynolds's death was ruled a suicide by the authorities, it is still a scandalous affair.

Broadway producer Vinton Freedley offered Libby the starring role in the 1934 Cole Porter musical Anything Goes but she declined. Ethel Merman got the part of Reno Sweeney.

The MGM film Reckless, starring Jean Harlow as a Broadway star similar to Holman, is a fictionalized version of this scandal. Reportedly, Harlow was a friend of Holman and she resented being contractually required to make a film that would exploit Holman.

Libby's only child, Christopher Smith Topper Reynolds (January 10, 1933 in Philadelphia, Pennsylvania - August 7, 1950), died tragically as a teenager. Libby had given her son permission to go mountain climbing with a friend on California's highest peak Mount Whitney, not knowing that the boys were ill-prepared for the adventure. Both perished. Those close to Holman claim she never forgave herself. In 1952 she created the Christopher Reynolds Foundation in his memory.

Libby's second husband was film and stage actor Ralph (pronounced Rafe) Holmes. Twelve years younger than Libby, and troubled by both his homosexuality and by the post-traumatic stress of his military service during World War Two, Holmes drank himself to death in 1945, at the age of thirty. Libby had been seriously dating his older brother Phillips Holmes and married Ralph when Phillips was in Europe training pilots for the Royal Canadian Air Force during the Spanish Civil War. Ralph joined the RCAF in 1941, after Phillips' death on a training flight, and was a bombardier on missions over Germany during WWII.

Her third and last husband was artist/sculptor Louis Schanker, they married on December 27, 1960. The marriage turned out to be an unhappy one. Libby was found nearly dead by her household staff, in her Rolls Royce, the motor running in the closed garage. She was taken to the hospital, where she was pronounced dead. According to the Holman biography Dreams That Money Can Buy by Jon Bradshaw, few of Libby's friends believed the coroner's report that she had committed suicide. Some of the circumstances didn't add up, in particular the question of how the slight, elderly Holman could even open and close the heavy, manually-operated garage door.