It's the same principle as green-screen technology, just on a more primitive level. Hell, it's the same tech used to make Claude Rains disappear in 'The Invisible Man'.
They'd have the actors for the tiny people standing around in their costumes, but surrounded by black. They'd have black sheets on the floor, black curtains behind them, black everywhere. When it was filmed, it would look like a person standing surrounded by black.
Then, they'd film the shots of Pretorious, or the glass jars, or anything they needed, and they'd place the two shots together, of the tiny people and the sets they needed to be on. The black background could be easily replaced with the other shot, again similar to how green-screen tech works.
In 'The Invisible Man', they did the opposite, dressing Claude Rains head to toe in black clothing, then having him wear his costume on top, such as bandages and a dressing-gown. Then, when he needed to 'strip' to become invisible, they'd film him removing the items of clothing, but would, again, replace the black clothing with the background they had filmed.
In particular the best shot in 'The Invisible Man' is the one in the mirror, because it had to be filmed something like 4 different times. They had to film Rains from the back, then from the front, and then the set, and then a reverse of the set to the placed in the mirror-frame, with the front-shot of Rains.
It's a fascinating thing to look into, considering how early this was in cinema and how we're still using the same techniques.
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