The real story
In the 1500s, a huge deposit of unusually pure graphite was found at Borrowdale in England's Lake District. People thought the soft, dark stuff was a kind of lead, and the name stuck. Shepherds used it to mark their sheep before anyone thought to wrap it in wood. Graphite is actually a form of carbon, the same element as diamond.
The modern pencil core was invented in 1795. France was at war and cut off from English graphite, so Nicolas-Jacques Conté mixed powdered graphite with clay and fired it in a kiln. More clay makes a harder, lighter pencil (H), and more graphite makes a softer, darker one (B). The same basic recipe is still used today.