Most sources we contacted give credit to the English for introducing the blue ribbon. In 1348, King Edward III of England established the Order of the Garter, now considered one of the highest orders in the world. Ribbons had traditionally been used as a badge of knighthood. Members of the Order of the Garter were distinguished by wearing their dark blue ribbon on their hip.
A second theory presented by S.G. Yasinitsky, of the Orders and Medal Society of America, was new to us:
Another version of the blue ribbon as meaning the highest achievement may have originated among British soldiers who practiced abstinence by belonging to the various army abstinence groups, especially in India, in the latter part of the nineteenth century. Their basic badge for the first six years’ total abstinence was a medal worn on a blue ribbon. Hence a ‘blue ribbon unit’ was one which was comprised of all men who were sporting a blue ribbon in their buttonhole to denote their sobriety. ‘Blue ribbon panel’ and ‘blue ribbon selection’ followed this, I’m sure.
Yasinitsky and others have speculated that our ribbon color schemes might have had an astronomical basis. Blue, the highest award, represented the sky and the heavens the highest point possible. Red (second prize) represented the sun, which was high up in the sky. Yellow (third prize) represented the stars, once thought to be lower than the sun. Yasinitsky mentions that runners-up in fairs and festivals are often given green ribbons as consolation prizes. The green color probably represents the lowly grass on the ground.
From: WHEN DO FISH SLEEP?
by: David Feldman