In the late 17^th century, about the same time Europeans adopted the Christmas tree as a holiday tradition, they began making special decorations for them.  Edible ornaments, such as cookies, popcorn strings, and candy were most popular.  It was around this time the first candy canes were made. 

Originally, candy canes were straight, all-white and full of sugar but lacking in any other flavoring.  Some believe the first hooked candy cane originated with a German choirmaster who encouraged candy makers to bend the sticks to represent a shepherd's staff.  He then distributed them to children during nativity services to keep them quiet.

In 1900 the candy canes become striped with the traditional red and white Christmas colors and became flavored with peppermint.

Some people are convinced the shape of the candy cane is a "J" for Jesus and that the red and white colors symbolize the blood and purity of Christ.  However, this is an urban legend that has been refuted in an interesting article on Snopes.com.