Hand Tools Archive
Bill Houghton, Sebastopol, CA
Yes, that's for holding nails, to start them in awkward places, like over your head where you can't reach up with both hands or in a tight spot where both hands won't fit. You put the nail in place between the two spring-loaded ball bearings and facing straight back, head in the T-shaped part of the slot, then drive it hard enough to stay in place when you pull the hammer straight down; then you can spin the hammer around and drive the nail home. This is one of several designs - I've seen designs that use magnets in place of the ball bearings yours has.
You need, of course, a nail at least long enough to reach past the claws - 6d or 8d, maybe.
The hammer in my carpenter's toolbelt is of that design (mine's German - I'm not sure who all made them). I've yet to use it, but it's nice knowing it's there.