I like to know where expressions originate. This one is interesting. I think the part that I find the most striking is that the thing that's been carried on is a mispronunciation. Why does that bother me so much?
Some will say that the expression means something small and insignifigant. You'll have to agree, the knee of a bee is pretty itty-bitty.
However another school of thought is an expression from the 1920's which stated, "The be all and end all of everything." in reference to a disaster. This was too long, so it was shortened to the "B's and E's" which was mispronounced as the "Bee's Knees".
The origin of the expression "the Bee's Knees" appears to have been in America in the 1920s. It means something along the lines of "the height of excellence."