See:
http://auto.howstuffworks.com/speedometer1.htm for a more in-depth explanation of how a typical eddy-current speedometer works. Basically they have a small cup that looks like a jar lid that the needle attaches to. That cup is spring-loaded so that it wants to return to the zero position. Inside of that cup is a magnet that attaches to the speedo cable.
As the magnet spins, eddy currents created by magnetism cause the cup to want to spin with the spring restraining it. The faster the magnet spins, the further the cup travels and the higher the needle registers against the number legend (speed) on the dial face.
What I've seen happen is that the parts within the speedometer either wear until clearances increace to the point that the cup "wobbles" and makes contact with the magnet, or contaminates (rust, grease, etc) get in there and allow the cup and magnet to touch.
The other common thing is for the spring to lose tension or break entirely. Either way, it causes the needle to fly around or act erratically.
Fortunately there are speedo shops around that can fix 'em. Unfortunately it's spendy. I need to get it done on my '37 as we speak ;'{
