In the 1840s a group of Boston industrialists recognized the tremendous potential for building water-powered factories by the Connecticut River's Hadley Falls. In 1847 they backed a plan for an industrial city to replace the agricultural village beside the falls. The plan included a dam, three levels of canals and 50 factories. The developers expected the new City of Holyoke to rival the successful cotton manufacturing factories of Lowell and Lawrence. In Holyoke, however, the dominating product turned out to be high quality paper.

Immigrants occupied most of the construction and factory jobs. The Irish arrived first, escaping the potato famine in their homeland. They lived in shanties near the river until they could afford rental apartments or find company-built housing. The new workers set the pattern of moving uphill into wealthier sections of the city as their financial stature improved, although the grand homes in the highlands remained far beyond their means. The contrasting city neighborhoods dramatize the economic and social gap between industrial workers and factory owners.

After the Civil War growing industries attracted French Canadians and Europeans laborers. The city's diverse population swelled to 36,600 in 1890, with 48% foreign-born, and peaked at 65,000 in the early 1920s.

The City of Holyoke produced woolens, cotton, thread, silk and industrial machinery, but it became best known for its fine quality paper. However, three main causes for the industrial decline were evident as early as the 1920s. Companies gradually moved south, where labor was less expensive. Holyoke's fine papers faced competition from less expensive wood pulp paper that was made in factories closer to the vast northern pine forests. The development of steam and electric power allowed companies to relocate far away from water power.

Holyoke's population today is about two thirds of what it was in the 1920s. However, the city continues to be richly diverse in culture. The city’s dam and canals now generate hydroelectric energy, rather than providing water power directly to factories through the original turbine-driven mechanical systems. The historic mills attract new businesses and cultural activity.