William Penn, the Quaker leader and founder of Pennsylvania, wrote it in the preface to Some Fruits of Solitude, first published in London in 1693. The original reads “Time is what we want most, but what, alas! we use worst.” Time is the thing we most lack, and also the thing we waste most carelessly.
What it means
In Penn's English, “want” means “lack” as well as “desire”: time is what we are always short of, yet we spend it more carelessly than anything else. The preface goes on to urge the reader to think seriously about what they do with their time.
Where it comes from
The sentence comes from Penn's preface, not from the numbered maxims. In the later standard text: “There is nothing of which we are apt to be so lavish as of Time, and about which we ought to be more solicitous; since without it we can do nothing in this World. Time is what we want most, but what, alas! we use worst; and for which God will certainly most strictly reckon with us, when Time shall be no more.” (The 1693 printing reads a little differently: “There is nothing of which we are so lavish as of Time, and about which we ought to be more solicitous. Without it we can do nothing in this world.”)
Penn calls the book the fruit of solitude, written during a retirement in which he at last had “some Time he could call his own”. Looking back, he reckons that with better use of his life he could have had “Seven Years of his Time to spare”. The popular version drops the “alas!” and the religious close about God's reckoning, turning a personal regret into a general proverb.