Knothole gangs came about long before Happy Felton formed his in Brooklyn. The term came from a time when baseball fields had wooden fences. Kids who could not afford the price of a ticket found they could watch the game for free when knots in the tree fell out, creating a knothole. Naturally, gangs of kids would gather around these to watch the games.
The first actual knothole gang came about in the late 1800s, probably about 1889, when New Orleans Pelicans owner Abner Powell promoted the first knothole gang when he allowed kids to watch for free if they showed good behavior.