Oxford Dictionaries says the bee’s knees first appeared “in the late 18th century when it was used to mean ‘something very small and insignificant’.” 

The Meaning of ‘the Bee’s Knees’

The earliest publication I could find on my own that referred to the bee’s knees was an issue of The Saturday Evening Post published in 1917, and it used the phrase in an article explaining why certain “fine families” didn’t make it to a theater show. At that time, it seemed to mean something delicious or rare:

“There were, however, some seventy-five of our first families who never came to our theater. As an unsolved human problem this, of course, wouldn’t do, so I went to the bat to see what was the matter—and here it was. It is uncomfortable and undignified to stand in line after dining on bees’ knees and other rare dishes—especially if you are all dolled up.”

Just a few years later, by the early 1920s, it had come to be used how we use it today—to describe something delightful. And I was delighted to find a language column in the 1922 Spokesman-Review that specifically addressed the phrase. The article is titled “Slang of Today Talk Tomorrow: ‘Bee’s Knees’ and ‘Cat’s Pajamas’ Already Giving Way to Latest ‘Flapperese.’”

These are a few separate paragraphs from the article:

Every generation has its language and it is an axiom that the slang of one generation is the common speech of the next. It is well within the memory of people not so old today when “stunt” was absolutely new in the vocabulary of the young.
…
Last year, the “bee’s knees” and the “cat’s pajamas” came in for attention of the young and this year brings its crop of foolish words.
…
The jazz hounds of this generation love to use the long and ugly adjectives like revolting, nauseating, and disgusting. Vile is a favorite word also, and lurid has its admirers.

So, the bee’s knees and the cat’s pajamas were hot slang around 1921． I only wish that the article had a byline because I’d love to acknowledge the author; it’s rare for me to come across something that so specifically pinpoints something I’m researching.

The Song ‘Bees Knees” Helped the Phrase Stick

In 1923, a huge and influential music publishing firm called Leo Feist released a song called “Bees Knees,” which seems likely to have helped the phrase stick in people’s minds. I found a snippet of the sheet music, and Teresa Reinalda, a friend and an actress and visual artist sang it for me so we can hear what it may have sounded like. (Listen to the audio in the upper right corner player here; it will be near the end.)

The Origin of ‘the Bee’s Knees’

In addition to the cat’s pajamas and the bee’s knees, Oxford Dictionaries, the Online Etymology Dictionary, and the website The Phrase Finder  say that phrases such as the flea’s eyebrows, the cat’s whiskers, the cat’s meow, the monkey’s eyebrows, the snake’s’ hips, and the canary’s tusks were also in use during the 1920s. It appears that using “an animal’s something” to describe a wonderful, excellent, or outstanding thing or person was simply a linguistic trend at the time. (You can find even more examples in this entry at World Wide Words.)

So if you ever dress up like a flapper for a costume party and your date says you are the bee’s knees, you can properly respond that he is the flea’s eyebrows. 

Some other instances of the bee’s knees from the 1920s and 1930s:

The headline of a story about a mayor giving a bee-keeping talk. 1931

The headline of a story about warm weather bringing out bees. 1928

An odd joke about detectives investigating bees that were squashed against a windshield. 1927

Decorated “Bees Knees” sheet music at the top of the page reproduced with permission from ninjagrl at Etsy.