Wrestling has a long history in Europe, going back to Ancient Greece where wrestling was a pretty popular sport in the Olympiads and it continued on throughout history Early Modern Era, Modern Era, etc. Although very different wrestling from what we think of when we think "wrestling", and I mean in both the staged version "pro wrestling" and the real athletic version "amateur wrestling". It naturally came to America and really a whole culture of professional sports in American began to take off around the 1800s. Specifically Irish immigrants helped bring a more recognizable form of wrestling known as "collar and elbow" This is where the contestants lock up with their hands around each others shoulders, and if you watch pro-wrestling you'll instantly recognize this hold as this is how most pro-wrestling matches begin.

After the civil war the popularity of this style of wrestling began to spread, and became sort of a popular sport in Union camps during the actual war, and just in general organized sports began to take off in the post war age and specifically the gilded age when large amounts of lower class to middle class city dwelling people began to have the time and disposable income to actually view organized sports. Wrestling during this time was generally a "sideshow" act and wrestlers would often be men with some form of training going with circuses and touring putting on matches. During this time one of the first real wrestlers came about, his name was James McLaughlin and he travelled around Europe and the USA putting on matches and sometimes commanding around 1,000 $ per match. Wrestling during this time was not fake, and was quite brutal with McLaughlin supposedly killing two of his opponents.

Around the late 1800s "Greco-Roman" wrestling became more popular, it banned all holds below the waist and was generally closer to actual wrestling as opposed to the older collar and elbow which was more of a bare-knuckle style brawl then an actual wrestling match. The new style generally required more muscular contestants as opposed to the older collar and elbow which requried smaller, more agile fighters.

Next came a wrestler named William Muldoon, he was a Greco-Roman style fighter, his importance is that he created an actual championship belt and actually gave other fighters in the sport something to try and achieve as opposed to just going from fight to fight for a couple bucks. For this he's gained the title "father of modern American wrestling". Around this time a new style called "catch wrestling" which is more submission based wrestling. Its funny that around this time wrestling was considered a more real sport than boxing, which had several famous scandals around it that involved fixing fights; obviously the roles would soon change, but for the moment wrestling was seen as the more real sport.

So the question then becomes how did the sport become a work?

Well wrestling began to fade in popularity as an actual sport, it was still entertaining but the rise of baseball and football decreased wrestling's appeal as an actual sport. So wrestlers began to make less money and thus they had to tour more and fight more matches. So men like Muldoon, hoping to keep their fame and title, would often work behind the scenes to make sure certain wrestlers won and time limits were instituted to keep older wrestlers from losing long matches to younger opponents. Furthermore wrestling in carnivals became popular and what would happen there is a promoter would offer to pay money to anyone who could beat a certain strong wrestler. Obviously in order to make money they would have to present the wrestler as beatable and thus they would have certain "plants" in the audience who the wrestler would get beaten by. This carnival style of wrestling would be an important training ground for future wrestlers in the early/middle 20th century. Carnival wrestling is also why wrestlers use the term "mark" to refer to wrestling fans, since perspective customers in a carnival are referred to as marks.

This carnival wrestling became popular and wrestlers and promoters alike saw that they needed to keep the audience interested and in order to do that they needed to keep up the illusion that outcomes were legitimate. So wrestlers began to become secretive and very protective of the business, especially when dealing with outsiders. They adopted a form a slang, mostly derived from pig Latin when dealing with outsiders. From this we get the term "Kayfabe". For those who don't know, Kayfabe refers to the staged nature of wrestling, to "keep Kayfabe" is to keep the true nature of the wrestling business secret and pretend that what's happening in the ring is actually real. While the Wikipedia page for Kayfabe says that:

Though the general public had been aware of the staged nature of professional wrestling for decades,

I would heavily disagree with that, Kayfaybe was generally kept quite strong until the 80s, especially in the southern territories of the USA where wrestling was very popular. In bigger, Northern cities it was a bit harder to keep it secret, but in more rural areas like Tennessee, Florida, the Carolinas, etc. Kayfaybe was quite strong and wrestlers were very protective of the business. For those who are interested look up some older wrestling stories from the 70s and 80s and look at what some older wrestlers did to keep Kayfaybe . Jim Cornette, a relatively well known wrestling figure in the 80s and 90s told a story about how he met two wrestlers in an amusement park. Now in the story lines these wrestlers and Cornette were "fighting" so Cornette immediately ran out of the amusement park because they threatened to beat him up in the middle of a huge crowd. The farther you go back the more hilarious it gets. There were some wrestlers in the 30s who nearly got in huge trouble because they refused to testify in court because it would have exposed the business. And the fans took it seriously too, when famous wrestler "Sgt. Slaughter" became a bad guy in the 90s he played a character that was an Iraqi sympathizer (I know). And he had to have full times body guards because he was so hated, some people legitimately thought he was an actual Iraqi sympathizer.

Finally kayfabe came to an official end in 1989 when Vince McMahon acknowledged in a court hearing that wrestling was fake in order to get out of paying taxes that other sports like boxing had to pay. Wrestling has since entered a "reality era" where its more akin to acting; wrestlers openly break character as soon as they step out of the ring; something that would have been unthinkable nearly 20 years prior.

So to give a quick recap, it became fixed when carnival style wrestling became far popular than the more sports style wrestling that had been popular before.

The best source for this is "Ringside: A History of Professional Wrestling in America" by Scott Beekman

How was the general public generally OK with the gradual revelation that this spectacle presented as a sporting event was completely staged, as compared to other sports-fixing scandals or the game show fixing scandal of the 50s? Especially considering that until fairly recently, pro wrestling had to do its business through state athletic commissions.

When you watch modern pro wrestling, it's obviously a scripted entertainment spectacle, but when you watch stuff from the 50s, it was absolutely presented as a legitimate competition. The presentation was similar to how a televised boxing match would be presented (and in fact, many announcers did both boxing and wrestling). Why was this OK, both legally, and with the general public?

Toots Mondt should be credited with the North American style of wrestling