Wordorigins.org

To pull the wool over someone’s eyes is to deceive them. The metaphor behind this phrase is quite straightforward, but not readily apparent today. The wool refers to a powdered wig. To pull the wool down over a man’s eyes is to temporarily blind him. The phrase is an Americanism and variants include the use of the verbs to draw and to spread, in addition to pull. From the Jamestown Journal (N.Y.) of 24 April 1839:

That lawyer has been trying to spread the wool over your eyes.

(Source: Oxford English Dictionary, 2nd Edition)