So it all started when I theorized that Princess Peach was actually the hive mother of the mushroom people. Traditionally, Toads are all males or drones, and they work to serve and worship the only female in their society. This lead to the deeper question. Do Toads have big, mushroom shaped heads, or is that a hat that their fungus-based society expects everyone to wear like a turban?
I discussed this issue with some of my friends who worked at Nintendo. Some said that because of the way they are illustrated, it is clearly a hat. Others said that they are called the Mushroom People because they are, in fact, mushroom people. There was a clear agreement that Mario, Luigi and Peach were different from the Toads. The best answer I heard though was that we were seeking the answer to a zen question.
For me, though, this only lead to more questions. If Mario, Luigi and Peach were different, where did they come from? The answer was clearly New York. The brothers were the grandchildren of the superintendents who helped Ann Darrow off the roof of the empire state building after that whole exaggerated gorilla affair. Mario and Luigi inherited the third generation family business, holding an 80 year reputation for solving plumbing problems that no-one else could. This is why they were called upon when spiky-shelled turtles that could bite your head off started showing up in the depths of the New York sewers. These exploits are recorded in the original "Mario Brothers" video game.
Little did anyone realize that "Mario Brothers" was Mario and Luigi's interdenominational journey from New York to the Mushroom Kingdom. The Mushroom Kingdom uses advanced space-bending plumbing systems much the way we use subways. While this enabled the Mushroom People to travel great distances in seconds, it also had the pesky side effect of becoming tangled with the perfectly normal plumbing of neighboring dimensions. One may think that when something so cataclysmic as this occurs, it needs to get checked out immediately. In many cases, such interdenominational rifts were patched up quickly by the Mushroom cultures top hypertransplumbologists. However, when a culture based and built around fungus was connected to a culture that produces an endless supply of dookie, a match in heaven was made.
Ironically, it was the sudden boom in the Mushroom People's prosperity that sparked the Koopa war. In truth, the first hero of the Mushroom Kingdom was not Mario, but Peach herself. The daughter of subway workers in New York, Peach was kidnapped by the first Koopa invading army, but lead to their defeat. I am, however, getting ahead of myself.
When Mario and Luigi arrived in the Mushroom Kingdom, it was just after the second invasion. Peach was imprisoned, as were many of the Toad people. Upon learning this, Mario felt an obligation to this new world and decided to save the Princess with intent to bring her back to her home in New York. Luigi, however, was reluctant and initially wished to return immediately. Luigi's older brother, however, convinced him that they could not leave a sister New Yorker behind, and thus they set out.
The reason that Mario, Luigi and Peach were able to thwart the Koopa Armies is because of the reduced gravitational pull on the mushroom kingdom's planet. While Mario and Luigi were not the most athletic of gentlemen, it took but a few steps to realize they could jump sky-high compared to the squat residents of this world. The New York brothers discovered their best weapon against the reptilian invaders was their own weight. This is of course, how Peach defeated the first invading army and was elevated to royal status by the Mushroom People. So graceful was she in kicking and stomping turtles that many stories tell of her floating in air.
Once the right castle was discovered, Peach pleaded with Mario and Luigi to stay because the Mushroom People needed them. Mario took little convincing, but Luigi was reluctant for some time before making the Mushroom Kingdom his home.
But what of the Mushroom People? Could it be that Peach was there all the time, and is actually the hive-mother of the species? No. It took some digging, but there have been cases of female Toads, particularly in the RPG style games. This suggests they reproduce as mammals do. Their females are simply difficult to identify by other races, much like Tolkien's Dwarfs.
And what of the Toads themselves? Are they wearing hats, or is that their head? It's a deep and difficult question, but I have the answer. Power mushrooms and 1up mushrooms are not eaten, they are actually creatures as stated in the instruction book. The same is true about Flowers, Stars, and most of the critters that give Mario and friends their super powers. This could simply suggest that since fungus is so prevalent, the simian Toads design their attire to reflect their environment. However, there are no records of monkeys or other primates in the mushroom kingdom from which advanced simians could have evolved. The power-Mushrooms and Goombas are to Toads what lemurs and apes are to us.
Therefor, Toads are not wearing hats. That puff is their head.