Following the capture of Washington in 1814, and in many cases it must be supposed welcoming the excuse, the banks outside of New England suspended specie payment. The elimination of any need to redeem notes greatly facilitated their issue. It alse led to a highly complicated set of discounts when the notes were forwarded for buying goods or paying debts. The notes of New England banks, since they were exchangealbe into gold o silver, were accepted at par therewith. The slightly less promising notes of New York were subject to a discount of 10 percent. The distinctly more garish notes of Baltimore and Washington banks had a 20 percent discount. Numerous notes from west of Appalachians were at a 50 percent discount. Galbraith, p.92.
In the naval battle of Copenhagen in 1801 Nelson lead the attack of the British fleet against a joint Danish/Norwegian enemy. The British fleet of the day was commanded by Admiral Sir Hyde Parker. The two men disagreed over tactics and at one point Hyde Parker sent a signal (by the use of flags) for Nelson to disengage. Nelson was convinced he could win if he persisted and that's when he 'turned a blind eye'.
In their biography, Life of Nelson, published just eight years later, Clarke and M'Arthur printed what they claimed to be a Nelson's actual words at the time:
"Putting the glass to this blind eye, he [Nelson] exclaimed, I really do not see the signal."
The first recorded use of the phrase in the form we normally use it today is in "More letters from Martha Wilmot: impressions of Vienna, 1819-1829." These were reprinted in 1935 and this quotation is recorded as being sent by Ms. Wilmot in 1823:
turn a blind eye and a deaf ear every now and then, and we get on marvellously well."
also mentioned in UCB "History of Information".