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Uncertain; possibly from the English slang term chat(“louse”). The word predates the chadless punch, which therefore cannot be its origin, and a derivation from Scotschad(“rivergravel”) stated in some dictionaries is now thought to be nothing more than guesswork.
2011 June 1, David P. Mikkelson, “Chad: Does the word ‘chad’ come from the Chadless keypunch, invented by a Mr. Chadless?”, in Snopes.com, retrieved 7 September 2016:
The keypunch wasn't named after a Mr. Chadless; it was so named because, as expected, it punched tape while producing little or no chad.
1939 May 20, Ross A. Lake, Printing Perforating Telegraph Apparatus, US Patent 2255794:
Prior devices of the type according to the present invention have been arranged to cut out the perforations completely at a single movement, thereby producing chads or waste material which often present difficult problems of disposal.
Much of the controversy seems to revolve around ballot cards designed to be perforated by a stylus but which, either through error or deliberate omission, have not been perforated with sufficient precision for a machine to count them. In some cases a piece of the card—a chad—is hanging, say by two corners. In other cases there is no separation at all, just an indentation.
^ David P. Mikkelson (2011 June 1) “Chad: Does the word ‘chad’ come from the Chadless keypunch, invented by a Mr. Chadless?”, in Snopes.com, retrieved 7 September 2016.
^ William Safire (2004) The Right Word in the Right Place at the Right Time: Wit and Wisdom from the Popular “On Language” Column in The New York Times Magazine, New York, N.Y.: Simon & Schuster, →ISBN, page 43.
