KnowYourPhrase.com - The Origins of Phrases and the Meanings of Sayings
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It's thought that this phrase comes from fairs. Fairs have many different types of games that can be played, some being based around accuracy, others on strength. For example, there's a game known as "high striker" where the player takes a mallet and swings it as hard as they can at a target. If the target is hit hard enough, a metallic object rises up and rings a bell, meaning the player has won. Fair games usually have prizes that are handed out to the winners, prizes such as stuffed animals or other kinds of toys.
Well, apparently there may have been a time in the 20th century where cigars were among the prizes that could be won. If this is true, I could certainly picture the people in charge of certain fair games shouting "close, but no cigar" to players who were just shy of winning the prize.
This idiom looks to go back to at least 1934, where it appears in writing in a Pennsylvania newspaper called the Chester Times:
"An unseen pedestrian loomed before their headlights, narrowly dodged the sliding wheels.
'Close, but no cigar,' the lieutenant shouted."
* My coach yelled 'close, Mike, but no cigar,' after I failed to break my previous record on the 100-yard dash.
* I'm trying to lose some weight by the end of this month and my goal is 5 lb, and as of right now I'm almost there, close, but no cigar.