The British tradition of Christmas crackers has been around since the 1840s. Originally called bonbons or Cosaque they were developed by one Tom Smith of London from bonbon sweets - of course, crackers look like a large sweet in a wrapper. The sweet itself was later replaced by other, larger gifts, and it was Tom Smith's son, Walter, who added in the paper hat.
The company Tom Smith crackers still exists today, although is no longer family owned.