Does anybody know what this is and why it started smoking???

We called them condensers. Looks like you are running a Pertronix or some other electronic conversion and if that is true you can safely sh*t can it. They extended the life of points by bypassing RF energy to ground and reducing the amount of arcing that occurred when the points opened and closed. They also provided job security for tune up shops by shorting out and killing your ignition at the most inopportune times...