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I make blocks for my three grandsons by going to the cutoff bin in my local Home Depot store. They have lots of short pieces of wood that can be cut into blocks. I sand them while watching TV. I round the edges, apply stain and then polyurethane them. I then get one of those handy paint buckets to store them in. My grandsons love to build with these and can even take them outside to their sand box if they want. They are pretty durable.
Make toy blocks out of soap boxes. They are fun for kids to stack up and you can collect a lot of different ones and fill them with paper and tape them shut. For the really creative, you can cover them with paper and tape and put the alphabet or the child's name on the blocks.