I'm pretty sure it's what's called a "standing wool rug" or a shirred rug. Try Googling "standing wool rug". Here is a website I found:
http://www.netw.com/~rafter4/stwool.htm
and a book:
http://www.amazon.com/Traditional-Sh.../dp/1931426317
As far as I can tell from Googling, this is a standing wool rug made by shirring the wool strips.
From your photo, I would guess that you sew a gather in the wool, lock that stitch, and continue gathering and locking for awhile, then attach with the thread around a thread in the prior row.