Sorry it took me so long to find these instructions. This is from Big Book of Knitting by Katharina Buss, page 174, in case you can find the book at your library:
"Tassels are even simpler to make than pom-poms. A fat tassel can even replace a pom-pom on a knitted hat. Instead of fringes, you can make many little tassels on a scarf. Tassels are also a traditional and attractive touch on pillows, tablecloths, and table runners.
For tassels, you need scraps of yarn and a rectangular piece of cardboard that is as long as the desired tassel length.
Place a double piece of yarn along the top of the cardboard and loosely wind the yarn around both the piece of yarn and the cardboard. Then knot the top threads tight together, and cut the bunch of yarn at the bottom edge. Wrap yarn tight around the bunch of yarn about 1/2" below the top edge, pull the ends through the wrapped part, and cut them off. Finally, trim the bottom edge of the tassel so that it is straight."
There are pictures that show these steps, but these are the exact directions from the book. If you have any questions, I'll try to answer them from the pictures, but I've never made a tassel. Really looks easy though.