The words pen and pencil are totally unrelated. The pen that holds ink is from penna, the Latin word for (and distant cousin of) feather, and it dates from the days of quill pens. Note that the French word for pen is plume, another "feather" word. A pennant is a relative of the writing instrument, but the pen that holds animals is a completely different Old English word — see pond.
Pencil, on the other hand, is significantly more intricate. The basic Latin "pend-" root means "to hang" or "to weigh" and is the source of such words as depend, suspend, pendulum, appendix, penthouse, impending, etc. The original meaning of perpendicular was a plumb line. In Latin, penis was a normal word for "tail"; it was not restricted to the male anatomical item. From the sense of "animal's tail" the word also came to mean "paintbrush", and in particular a "pencil" (little tail) was originally a small brush used by artists for fine details. The modern graphite-and-wood item is called a "lead pencil" to distinguish it from the earlier artistic use. Penciled eyebrows were drawn with a brush for two thousand years; the current "eyebrow pencil" in the form of a crayon is a 20th century invention. Physicists talk about a pencil of light rays, and pinceau is French for "paintbrush".
Penicillin is exactly the same word as pencil. The scientific name of ordinary blue-green bread mold is penicillium, because under a microscope the spores look like tiny paint brushes standing on end. The drug, of course, was originally extracted from the mold.
Pound (either the weight or the British monetary unit) is another "pend-" word by way of the sense of weighing on the beam of a scale. The original meaning of the verb to ponder was to weigh in the literal sense, just as something ponderous is exceptionally heavy, not something that needs much thought. The western Ponderosa Pine is a notably large tree, at least when it isn't growing next to a Sequoia. Finally, an expense is something "weighed out" or apportioned, and such a portion is a pension or a stipend. [27Jan08] The experts are divided as to whether spend is a purely Germanic word or if it is a clipped form of dispend (the Old English form of dispense), which is definitely a "pay out" word.
It's a real stretch, but it can be demonstrated that "pen" is related to "hippopotamus". Search for "Mesopotamia" if you don't believe me.
The authorities believe that the real root was spend-. All Indo-European languages have a tendency to attach or detach an initial /S/ at will, so the Latin "pend-" words are no problem. The basic ie meaning seems to have been "stretch", so spin, spindle, spider, span, and expand must be admitted to the family. [23Dec07] Note that the stretchy Spandex® is simply the reverse of "expand". Spawn is yet another relative of expandare; the reference is to the "spreading out" of fish eggs in water.
