Meaning

Excellent - the highest quality.

Origin

Hard to tell if we need an etymologist or an entomologist for this one.

Bees carry pollen back to the hive in sacks on their legs. It is tempting to explain this phrase as alluding to the concentrated goodness to be found around the bee's knee. There's no evidence for this explanation though. It is sometimes said to be a corruption of 'business', but there's no evidence to support that either.

Nor is there any connection with another phrase, 'a bee's knee'. In the 18th century this was used as a synonym for smallness, but has since disappeared from the language:

Mrs. Townley Ward - Letters, June 1797 in N. & Q. "It cannot be as big as a bee's knee."

There's no definitive origin for 'the bee's knees', but it appears to have been coined in 1920s America. The first printed reference to it I can find is in the Ohio newspaper The Newark Advocate, April 1922, under the heading 'What Does It Mean?':

"That's what you wonder when you hear a flapper chatter in typical flapper language. 'Apple Knocker,' for instance. And 'Bees Knees.' That's flapper talk. This lingo will be explained in the woman's page under the head of Flapper Dictionary." [an 'apple knocker' is a rustic]

Clearly the phrase must have been new then for the paper to plan to take the trouble to define it. Disappointingly, they didn't follow up on their promise and 'the lingo' wasn't subsequently explained. Several U.S. newspapers did feature lists of phrases under 'Flapper Dictionary' headings. Although 'bee's knees' isn't featured, they do show the time as being a period of quirky linguistic coinage. For example, from one such Flapper Dictionary:

Kluck - dumb person.

Dumb kluck - worse than a kluck.

Pollywoppus - meaningless stuff.

Fly-paper - a guy who sticks around.

more......

http://www.phrases.org.uk/meanings/the-bees-knees....

Etymology

Slang coined in the 1920s. Stories in circulation about the phrase’s origin include: “b’s and e’s”, short for “be-alls and end-alls”; and a corruption of “business”.

A modern misinterpretation of the B’s and E’s and as such has become a piece of slang in its own right.

B’s and E’s pronounced with many colloquial English accents, would be combined as a single Bees-an-ees. The actual saying, “the be all and end all” is still in use. The very latest and best, something that cannot be improved upon.

http://en.wiktionary.org/wiki/bee's_knees

It’s sometimes explained as being from an Italian-American way of saying business or that it’s properly Bs and Es, an abbreviation for be-alls and end-alls. Both are without doubt wrong. Bee’s knees is actually one of a set of nonsense catchphrases from 1920s America, the period of the flappers, speakeasies, feather boas and the Charleston.

Various writers have accumulated long lists of phrases of this type that you might have heard in that decade: elephant’s adenoids, cat’s miaow, ant’s pants, tiger’s spots, bullfrog’s beard, elephant’s instep, caterpillar’s kimono, turtle’s neck, duck’s quack, duck’s nuts, monkey’s eyebrows, gnat’s elbows, oyster’s earrings, snake’s hips, kipper’s knickers, elephant’s manicure, clam’s garter, eel’s ankle, leopard’s stripes, tadpole’s teddies, sardine’s whiskers, canary’s tusks, pig’s wings, cuckoo’s chin, and butterfly’s book. Plus many others.

None of these made much sense — but then slang fashions often don’t — and their only common feature was the comparison of something of excellent quality to some inappropriate or non-existent part of an animal with, if possible, a bit of alliteration or rhyme thrown in.

Another example was cat’s whiskers, which is sometimes said to have been the first of the bunch to arise, from the cat’s whisker that was the adjustable wire in crystal sets used to receive early radio broadcasts. Some researchers argue that it was the model for all the others. This is my first sighting:

That’s the pussy cat’s whiskers, all right!

Chicago Daily Tribune, 28 May 1922.

more.........

http://www.worldwidewords.org/qa/qa-bee1.htm