This routine, made famous by Slydini in the twentieth century, has its roots in an old stage gag described in the 1886 book Les Farces et Facéties de la Prestidigitation by Gilles et De Phlanel (the flannel vest), a punning pen name of George Méliès. The gag, which Méliès called “Appétit Féroce” (Fierce Appetite, p. 28), involves seating someone on stage and pretending to swallow a billiard ball for them on the count of three. Unseen by the seated person, but witnessed by the rest of the audience, the performer secretly tosses the ball over the person's head, and an assistant behind the person catches it.
Joseph Dunninger published the trick, using a balled-up silk, in the September 1914 issue of The Sphinx, Vol. 13, No. 7, p. 135. Dunninger reports having used it as a “joke” for “a number of years”. He propelled the silk with a flick of the fingers rather than a tossing action.
Harry Blackstone, Sr. used this stunt in his shows. He tossed a silk or borrowed watch (in a crumpled piece of paper) over a spectator's head to an assistant behind. Blackstone's handling is described by Milbourne Christopher in The Sphinx, Vol. 49 No. 9, Nov. 1950, first page of the M-U-M insert.
George Johnstone built this into a more substantial piece in his show and eventually he taught it to Slydini. (Source: Phil Willmarth in The Linking Ring, Vol. 77 No. 4, April 1997, p. 103.) Slydini went on to develop his Paper Balls Over Head routine, for which an early description can be found in The Linking Ring, Vol. 26 No. 10, Dec. 1946, p. 39. Max Maven points out that in the 1920s, Dunninger was also doing the trick with a handkerchief. George Jason was another early performer of the trick who expanded it. It's first appearance in the English literature seems to be a description by Horace Goldin, in The Magazine of Magic, Oct. 1914, p. 29, titled “A Subtle Vanish for a Handkerchief”. Goldin doesn't claim it, but says he saw a Chicago magician do it, whom he doesn't identify. Blackstone was in Chicago around this time, so the magician may possibly have been him.