The poem the lyrics were based on was written by Lenny Lipton, while a 19-year-old, studying physics at Cornell University. He went on to develop 3-D cinema systems.
It was worked into a song with additional word by Peter Yarrow, of Peter Paul and Mary. It was controversial as some people saw it as having a deeper meaning relating to drug use.
SeasideMan
Pro

It really is a lovely song, and I never subscribed to that view of it as being about drugs. It's just a couple of words and some remarkably obscure connections that point that way, whereas the whole rest of the song isn't.
I bet they wish they'd called the dragon Fluff instead of Puff though! Here's an interesting reggae version of it:
http://www.youtube.com/watch?v=Bi4ZL3RcDwk
Tom.