Sensory experience in early postnatal life, during so-called critical periods, restructures neural circuitry to enhance information processing(1). Why the cortex is susceptible to sensory instruction in early life and why this susceptibility wanes with age are unclear. Here we define a developmentally restricted engagement of inhibitory circuitry that shapes localized dendritic activity and is needed for vision to drive the emergence of binocular visual responses in the mouse primary visual cortex. We find that at the peak of the critical period for binocular plasticity, acetylcholine released from the basal forebrain during periods of heightened arousal directly excites somatostatin (SST)-expressing interneurons. Their inhibition of pyramidal cell dendrites and of fast-spiking, parvalbumin-expressing interneurons enhances branch-specific dendritic responses and somatic spike rates within pyramidal cells. By adulthood, this cholinergic sensitivity is lost, and compartmentalized dendritic responses are absent but can be re-instated by optogenetic activation of SST cells. Conversely, suppressing SST cell activity during the critical period prevents the normal development of binocular receptive fields by impairing the maturation of ipsilateral eye inputs. This transient cholinergic modulation of SST cells, therefore, seems to orchestrate two features of neural plasticity-somatic disinhibition and compartmentalized dendritic spiking. Loss of this modulation may contribute to critical period closure.