Apparently it's stretched during the fabric manufacturing process. Then when it gets wet, it relaxes and you get relaxation shrinkage, which is really just a return to its natural size.
Check thefabricofourlives.com, did you know section, "why do cotton and wool shrink.' Wool is protein-based and wool fiber itself shrinks each time it is cleaned. (Does this explain the woolly knots in my terrier's coat?) Cotton and linen are plant-based, and it is claimed that the fabric, not the fiber, shrinks, because during fabric manufacture, tension is applied to the fabric, and this tension is released when the fabric gets wet or is steamed. The release of tension allows the fabric to return to its natural, smaller size. I've often wondered about this myself, and now there it is, thanks to the cotton industry.
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