Using the Shred Tobacco recipe and a Copper Grinder or Grindstone Shred 12x of the same Dry Tobacco Leaves to produce 3x Shredded Tobacco. If you use a mix of Dry Tobacco Leaves your Shredded Tobacco will default to the lowest Tier of Tobacco used.
Right-click your equipped Pipe and select "Puff". Each Puff has a chance to reduce your Madness level by 1. The higher your Madness level and the higher the tier of Tobacco used the higher the chance of dropping a Madness level. Each Puff adds wear to your Pipe.