The American Law Institute was founded in 1923 following a study conducted by a group of prominent American judges, lawyers, and teachers known as "The Committee on the Establishment of a Permanent Organization for the Improvement of the Law."

The Committee reported that the two chief defects in American law — its uncertainty and its complexity — had produced a "general dissatisfaction with the administration of justice."

According to the Committee, the law's uncertainty stemmed in part from a lack of agreement on fundamental principles of the common law, while the law's complexity was attributed to the numerous variations within different jurisdictions of the United States. 

The Committee's recommendation was that a lawyers' organization be formed to improve the law and its administration. This led to the creation of ALI. The Institute's mission, as set out in its charter, is to "to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work."

ALI's incorporators included Chief Justice and former President William Howard Taft, future Chief Justice Charles Evans Hughes, and former Secretary of State Elihu Root. Judges Benjamin N. Cardozo and Learned Hand were among its early leaders.