Well, I've recently read a pretty authoritative book on this subject ("Norton I, Emperor of the United States and Protector of Mexico", by William Drury), so I've updated the following information a bit.  Joshua Norton was a British citizen who came to San Francisco in the mid-to-late 1800's. He came there planning to make a lot of money, and did for a short time, but then made a single disastrous investment and was bankrupted. Ruined, he dropped out of sight for a while...and went quietly mad. A few months later, he brought attention to himself by putting an announcement in the paper.  Essentially, it said:   September 17, 1859 – Joshua A. Norton, who lost his money in an attempt to corner the rice market, today declared himself Norton I, Emperor of the United States. The people of San Francisco found this hilarious, and his reputation quickly spread, due to both his continued pronouncements and his presence around town.  He became something like the town mascot - if he wanted to be the Emperor, as far as the citizens of San Francisco were concerned, he could be it.

At this point he was essentially a bum, about one step up from being homeless, since he did in fact have a flophouse apartment. He ran around in military garb bought second-hand, leftovers from the Civil War, along with a sword and a hat full of peacock feathers. He was scruffy and dirty and unkempt, and many people - like Mark Twain, who knew him - thought him sweet, but pathetic. Others thought him comical, because he was so serious as he went about his "duties". But in his mind, he was ruling an Empire.

He placed Imperial Decrees in the papers regularly, announcing that he was doing things like abolishing Congress (for being full of corrupt idiots who were ruining the country, basically), or ordering all religions to gather and resolve their differences, so that everyone could worship together in harmony. His decrees were so popular that getting to print them was a coup for any paper.  They were so good for circulation that some papers - lacking anything new from the Emp to print - would go ahead and make something up themselves.

When he was short of funds, instead of begging, he "taxed" people, going to various merchants and rich businessmen and saying they owed the Imperial Treasury money.  Generally, those he taxed were good-natured about it, and paid. Later on in his life, he actually made a semi-decent living selling his own Imperial Treasury Bonds, which most people bought solely for his autograph.

Lots of places - restaurants, hotels, etc. - allowed him free services in exchange for permission to display a sign: "By Appointment to His Emperor, Norton I."  Being nice to the Emperor made a business popular - turning him away earned the public's scorn.  Lots of businesses did everything they could to get their name attached to his in one way or another - the advertising was priceless. There wasn't a theatre in town that wouldn't let him attend opening nights for free - in fact they saved him a seat.  Everyone in the crowd expected him.  As the railroads were built and finally crossed the country, traveling just for pleasure became possible for the first time. San Francisco had little to attract visitors at the time, and the fledgling town played up the Emperor as one of their sights to see. The publicity made him known throughout the country.

His lunacy evidently did not affect his intelligence - he was supposedly a very well-informed person. He "ordered" the Bay Bridge built before anyone else thought to make it a reality. He also, after a train employee's inattention caused a deadly collision between two trains, invented a track-switching device that neatly solved the problem, but for various reasons his device was ignored. From what I can tell, he was not only tolerated, but beloved by many, and considered - without sarcasm - to be a man of great wisdom and empathy.   I found this quote somewhere, about how his presence stopped an impending racially-based attack in San Francisco:
 

He continued to maintain that he was the Emperor from until the day he died. When he did, the more well-off folks who knew him collected money and gave him a respectful funeral, saving him from being buried in a pauper's grave. He was undoubtedly one of the only bums in the world to get an obituary in the New York Times. As he lay in state, over 10,000 people evidently showed up to pay their last respects - viewing hours had to be extended to accomodate the crowd, and later on people were turned away so the burial could proceed. Emperor Norton I died a hero to the people of San Francisco (and elsewhere).

Here is a list of major points in his life, along with some things he declared. (From the Museum of the City of San Francisco)
 

If anyone wants to send me any additional facts, feel free to email me.

Some Emperor Norton Links (that I stole from someone who stole 'em from someone else):

On the Trail of Emperor Norton
Emperor Joshua Norton
The Emperor Norton Utilities
Emperor Norton -- Seattle Cacophony Society
San Francisco History - Emperor Norton
Emperor Norton I - part of the Dreaming (Sandman comic)