The above video is titled: Christmas Toyshop (1945) a.k.a. Ye Olde Toy Shop (1935), so it seems it's a combination.
This sweet little film from Castle Films is a mix of live action and animation. The mom in this film needs a rocking chair. I loved the Sandman appearance.
(12/25/2008: I removed my incorrect date when the correct year was offered in a comment below.)
12/1/2009: Weird Wild Realm dates the film 1945, saying:
The cartoon that takes up the middle of the film is obviously of older vintage than the live action frame. The distributor, Official Films, was known to buy up old films to reissue as one-reel home-view movies on 8 mm & 16 mm reels. When they obtained the Terrytoon Ye Olde Toy Shop (1935), they produced the anonymously directed live action portions to frame the original cartoon & stretch it out to a full-reel ten minute reel.