Douglas Harper's Etymology Dictionary
1923, a survivor of a fad around this year for slang terms denoting "excellence" and based on animal anatomy. Also existed in the more ribald form bee's nuts. Other versions that lasted through the century are cat's whiskers (1923), cat's pajamas, cat's meow. More obscure examples are canary's tusks, cat's nuts and flea's eyebrows. The fad still had a heartbeat in Britain at the end of the century, as attested by the appearance of dog's bollocks in 1989. Bee's knee was used as far back as 1797 for "something insignificant."
Wiktionary
n. 1 (&lit bee 's knee English) 2 (cx entomology English) corbiculae. 3 (context idiomatic dated usually with ''the'' English) Something or someone excellent, outstanding.
Usage examples of "bee's knees".
He had to keep reminding himself that his ship was more maneuverable, but when outnumbered three to one that wasn't the bee's knees.