Ultrasonication is the most widely used technique for the dispersion of a range of nanomaterials, but the intrinsic mechanism which leads to stable solutions is poorly understood with procedures quoted in the literature typically specifying only extrinsic parameters such as nominal electrical input power and exposure time. Here we present new insights into the dispersion mechanism of a representative nanomaterial, single-walled carbon nanotubes (SW-CNTs), using a novel up-scalable sonoreactor and an in situ technique for the measurement of acoustic cavitation activity during ultrasonication. We distinguish between stable cavitation, which leads to chemical modification of the surface of the CNTs, and inertial cavitation, which favors CNT exfoliation and length reduction. Efficient dispersion of CNTs in aqueous solution is found to be dominated by mechanical forces generated via inertial cavitation, which in turn depends critically on surfactant concentration. This study highlights that careful measurement and control of cavitation rather than blind application of input power is essential in the large volume production of nanomaterial dispersions with tailored properties.