Up until the late 1800's drinking water was obtained from ponds, wells and rainwater tanks. Waste was dumped, untreated into a dry well or leaching cesspool, or even a lake where it often found its way back into drinking water supplies. It's no wonder that diseases such as cholera and typhoid fever were commonplace. Unfortunately there are many places where this is still a problem. Later into the 20th century, chlorination of drinking water drastically reduced some of the diseases caused by bacteria. It wasn't until fairly recently until there was a systematic treatment of wastewater in urban, suburban and rural areas.
Natural Water Purification
The Water Cycle
Water can exist in three states like most substances. Unlike most substances, we can see all three states of water in a day, especially in the winter where it may snow (solid) from clouds (vapor) and melts on the road into puddles (liquid). Evaporation of water (liquid --> gas) is probably the most obvious way we can visualize nature cleaning dirty water. Most contaminants are left behind as the water evaporates. After the vapor condenses (gas --> liquid), the result is pure water.
Soil
The soil also has beneficial bacteria and other microorganisms that help break down some organic materials into CO2 and water. Sand and gravel in the soil can act as a filter remove suspended particles from the water. Minerals such as limestone can help neutralize any acids present in the water. While the filtration and limestone can help remove some undesirable materials, they also add other substances to the water. While these dissolved substances (Ca^+2 and Mg^+2) are not health hazards, they can make water "hard". The result is water that may not dissolve some soaps as effectively as softened water. Water can be treated to remove the Ca^+2 and Mg^+2 ions. This process is called water softening.
Municipal Water Purification
Drinking Water Treatment
Wastewater Treatment