It developed as a mill town during the Industrial Revolution, but has today lost much of its industry and is characterised by pockets of severe deprivation and some of the lowest house prices in the country.
An Iron Age hillfort called Castercliff is on a hill to the east of the town. The area was historically known as Marsden. The modern town spans two townships of the ancient parish of Whalley. Little Marsden was on the southwest of Walverden Water, its lands considered part of the manor of Ightenhill and Great Marsden to the northeast, part of the manor of Colne. Great Marsden included the southern parts of Colne, and Little Marsden included all of modern-day Brierfield. Walverden Water joins Pendle Water next to Nelson & Colne College, that river formed the boundary of the Forest of Pendle. Both the manors and forest where parts of the Honour of Clitheroe. The forest of Pendle was made famous by the Pendle witch trials of 1612. One of the accused in the less well-known witch trails of 1634, Margaret Johnson, confessed that she first met her familiar in Marsden.
A small mill had been established by the Ecroyd family at Edge End as early as 1740, and there were two coal mines nearby, but it was the coming of the Leeds and Liverpool Canal in 1796, followed by the East Lancashire Railway Line in 1849, that spurred its development as an industrial town, with an economy based mainly upon cotton weaving. The first Ordnance Survey map of the area, published in 1848 shows three small villages; Marsden (around St Paul's Church), and Hebson and Bradley, both on Walverden Water in the modern-day centre of town. Also apparent are the estates of Marsden Hall to the east and Carr Hall across Pendle Water to the northwest. And the turnpike roads of the Marsden, Gisburn and Long Preston trust (Scotland Road) heading north and the Blackburn, Addingham and Cocking End trust (Manchester Road) heading east. Brierfield railway station was originally called Marsden and Nelson railway station became known as the Nelson Inn, Great Marsden, after the adjacent public house, the Lord Nelson Inn (named after Admiral Lord Nelson). As the villages developed into a town, the name Nelson was chosen to differentiate it from Marsden across the Pennines in the neighbouring county of Yorkshire (West Riding).
There was a worsted mill at Lomeshaye close to a "cotton factory" and another cotton mill along the canal at Reedyford by 1848. Walverden Mill in Leeds Road was built in 1850, and was soon followed by others. From 1862, Phoenix Foundry, the steam engine factory of William Roberts stood at the site of the shopping centre's car park, and has been called "Nelson's most significant engineering site". The town became associated in the 20th century with the production of confectionery as well, including Jelly Babies and Victory V and was where the package holiday company Airtours (formerly Pendle Travel and now part of Thomas Cook) began life as an independent travel agent. The textile industry, in particular, has now sharply declined, leaving the town with low property prices and higher than average unemployment.
Nelson was granted its charter of incorporation as a municipal borough by Queen Victoria in 1890. Radical left wing politics in the early 20th century led to it being labelled "Little Moscow" by both the local and national press; indeed, the Nelson Leader ran the headline "Moscow calling" during the lock-out of 1928. There was significant Communist Party influence in the town between the wars. When the Labour Party came to power in the town, they responded to local political feeling by placing utilities such as gas and water under the control of the municipal council, anticipating by decades the nationalisation of such utilities after World War II. The council refused, moreover, to participate in celebrations for King George V's silver jubilee in 1935, saying that they would rather spend public money on free dinners for school children and the jobless.