I first saw how to build one of these in John R. Nelson, Jr's fantastic book American Folk Toys. Over time, I've changed it a bit to match my tastes and what materials I have on hand or have been given (- thanks Jeff) but that doesn't take anything away from the Mr Nelson's indispensable classic.
After you finish all 36 nails, trim off the excess ribbon and you are all set.
Playing with the toy is very simple. Just hold the long sides of one of the blocks and let the rest of the blocks hang down. Now rotate your hand down on the side that has ribbon showing. The next block will seem to tumble away. Now just rotate your hand back the other direction and the tumbling action will happen again.
With a little bit of practice you can get two blocks cascading at the same time. Which looks pretty neat.
I've left most of mine in natural wood but you can also paint them in bright colors and give them a protective finish. You can make one of these in under an hour. They make great gift and they really last. I made my first one almost 10 years ago and it is still going strong.