In
the early days of the American colonies, there wasn't much need for
paper. There were few newspapers and most books were imported. As the
population began to grow and more people went to school, the demand
for paper increased. The first paper mill in America was established
in 1690 near Philadelphia. They made paper from two simple
ingredients, cloth rags and water.
When the paper industry was established in the United States, it was a rag recycling industry. The rags were made from old clothes, made from cotton, linen wool or silk. The rags were sorted for color, washed, bleached, left to soak for a few months and then ground up into tiny fragments.
The best paper was made from only linen rags. This fancy grade paper was used for documents and writing paper. Other rags were used to make newspapers and lower grades of paper for wrapping, wallpaper, etc.*
For 900 years, making paper was a slow job, but in the 1800's peope invented machines to make it faster.
By the mid-1800's there were hundreds of paper mills in Massachusetts. All of them were located near canals or rivers, in order to get power and water need for the manufacturing process. Many of these mills employed several hundred workers. Many of them were skilled craftsmen, who were the most highly paid. In addition to the craftsmen, the mills employed many unskilled workers sorting rags and doing other manual labor.
In Massachusetts, the Crane Paper Company began to sell fine quality paper to the U.S. government for printing currency. All of the paper for United States currency is still manufactured by the Crane Paper Company in Dalton, Massachusetts.
Eventually, a shortage of rags and a high demand for paper led people to search for other sources of raw materials for paper. The first groundwood pulp mill in the United States was founded near Stockbridge, Massachusetts, in 1867, and the very next year the first New York newspaper to use groundwood pulp was printed.
http://www.conservatree.com/learn/Papermaking/History.shtml
http://www.discovery.com/guides/history/historybuff/library/ref1690.html
http://www.cavepaper.com/html/city_pages.htm (photo of Cave Paper company mold/deckle)