This is only an educated guess, but back in the early part of the 20th century, the main street in any given town was referred to as "the main drag". Since organized drag racing grew from street racing, if you challenged someone to race from one intersection to the next, you are racing on the "main drag", thus "Drag Racing". Now why the street in town was called the "main drag", well, that is another question to be answered elsewhere.
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Drag racing (1954) is from slang sense of "wagon, buggy" (1755), because a horse would drag it. By 1851 this was transferred to "street," as in the phrase main drag, and it was adopted by hot rodders for "race on city streets." Dragster is also from 1954.
edit: drag racing does not imply it is on city streets, it can be closed course and normally is
Born on the backroads of America in the post World War II years, drag racing's roots were planted on dry lake beds like Muroc in California's Mojave Desert, where hot rodders had congregated since the early 1930s and speeds first topped 100 mph.
One could even argue that drag racing was born in Goltry, Okla., in 1913, with the birth of Wally Parks, who nearly four decades later would found drag racing's most successful and influential sanctioning body.
Parks' family moved to California in the early 1920s, and Parks had an early interest in cars. He attended his first dry lake speed trials event in the 1930s, which whetted his fascination for performance. In 1937, Parks was one of the founders of the Road Runners Club.
Funny cars are a certain class of cars. They are the ones that the body lifts up on exposing the drive train, frame, and driver. No doors.