The phrase lead in one’s pencil denotes male vigour, especially sexual.

In this phrase, there is wordplay on the noun penis, and, interestingly:
– via a post-classical alteration of the classical-Latin diminutive form pēnĭcillus, denoting literally a little tail, hence a painter’s brush or pencil,
– the noun pencil is ultimately derived from the classical-Latin noun pēnis, denoting literally a tail, hence the penis.
—Cf. also the multiple meanings and origins of ‘P’s and Q’s’.

I have found an early occurrence of the phrase lead in one’s pencil in the column The Town Slouch, published in the Orlando Morning Sentinel (Orlando, Florida) of Sunday 27^th November 1927—the following is from a dialogue between Toney and his dentist:

“Toney,” he saz, “I give you ze air, you takka one whiff
And you go alla out jus lak a stiff.”
I saz, “No! Ziz air,—I will not him tak,
I go out all right. How I know I come back?”
He saz, “Y’ dam Wop! Ziz air he is two,
Ze gaz put you out; oxygen pull you fru.
Ze gaz mak you sleep but ze oxygen’s pep,
It put lead in your pencil and zip in your step.”

However, the other early occurrences of the phrase lead in one’s pencil that I have found date from the 1940s:

1 & 2-: Sidney John Baker (1912-1976) recorded the phrase:

1-: In A Popular Dictionary of Australian Slang (Melbourne: Robertson & Mullens Ltd., 1941):
—as quoted in the Oxford English Dictionary (online edition, September 2021):

(This will) put some lead in your pencil, this (esp. a drink of beer or spirits) will make you feel fighting fit.

2-: In The Australian Language (Sydney and London: Angus and Robertson Ltd., 1945):

Indigenous toasts are: here’s looking up your kilts! here’s lead in your pencil! down the gully! and here’s to ’ee (the last taken from an advertising slogan used by the makers of Toohey’s beer, Sydney).

3-: From Jill (London: Fortune Press, 1946), a novel by the British author Philip Larkin (1922-1985):

He took the burning cigarette from his mouth and dropped it by accident on to the floor, where he abandoned it after a slight preliminary groping. While he stood at the counter, a ragged man picked it up, pinched it out, and put it behind his ear. He was sitting by John’s seat when the latter returned with another pint to drink.
‘Just finished my day’s work, locking the gates of the cemetery,’ he said to John affably. ‘Stop ’em all gettin’ out. Well, ’ere’s more lead in yer pencil.’ He finished off his half-pint, wiping his mouth with relish.

4-: From Chapter 19 of Jigger Moran, by the U.S. author John Roeburt (1909-1972), published in the Capital Journal (Salem, Oregon) of Tuesday 25^th June 1946:

“Why don’t you take a couple of days off, Jigger, and get your bearings? We’re runnin’ a business here. Not a home for the crippled.”
Jigger sought enlightenment, matter-of-fact: “You knocking me off, Monk?”
“That’s the size of it. Maybe a rest will put the lead back in your pencil.”

5-: From Loser Tags the Lamb, by Travis Ingham, published in The Boston Daily Globe (Boston, Massachusetts) of Sunday 23^rd October 1949:

The guide took a sharp knife, stepped out the door and expertly snipped the hide away from the deer’s haunches. He peeler [sic] the skin back over the dark red meat, sliced off three generous steaks.
“Better have a taste of what you’re after,” he said, handing them to the visitors. “It’ll put lead in your pencil for tomorrer.”

Although Sidney John Baker recorded the phrase in the 1940s, the earliest Australian-English use of lead in one’s pencil that I have found is from Mr. Butterfry, a short story by the Australian author Harold Edward ‘Hal’ Porter (1911-1984), published in The Bulletin (Sydney, New South Wales) of Saturday 13^th April 1968:

He pours a final jigger of Parfait Amour into the turbid Special and, his mask of malice merely slightly tempered by hostliness, lifts one of the brimming pilsener glasses: “Come an’ get it! It’s curl-a-mo, chico. Lead in the old pencil.”