Lee was: the Incarnation  ! 
Answered on: 2 Aug 2005

The Internet Oracle has pondered your question deeply.
Your question was:

> Oracle of oracles, whose radiant visage is outshone only by his
> wisdom, please tell me which great captain first said "The floggings
> will continue until morale improves!"
And in response, thus spake the Oracle:

} Arg, ye best sit down, Supplicant, 'cause ye're likely not to believe
} me answer.
} Ahem.  Sorry, the Oracle had suffered a little flashback to his long
} gone, sea-going days.  Anyway, it was none other than Cap'n Crunch!
} Yes, the cereal guy.
} You see, many years ago, just after he became captain of his own ship,
} Cap'n Crunch was not the lovable character you know today.  It was
} only his third voyage as captain and he was attempting to get a
} shipment of cheap toys from China to the U.S.  The first two voyages
} had had their difficulties, but nothing like this one.
} First, the crew left port with a typhoon coming in from the south.
} They managed to outrun the worst of it, but just barely, and the seas
} were so bad even the most experienced sailors were getting seasick.
} Then, just as the skies cleared, one of their engines broke down.
} After a couple days delay to fix it, they were set upon by pirates.
} Although they were boarded, the crafty Cap'n Crunch managed to turn
} the tables on the pirates.  In many ways, the chaos that ensued
} resembled a "Home Alone" movie.  Unfortunately, the crew sacrificed
} a quarter of their cargo in the process.
} At this point, the ship wasn't even halfway to its destination yet.
} There were rumblings of discontent from the crew and Cap'n Crunch
} feared mutiny.  Several were still loyal to the captain, though, and
} one informant ratted out the ring leader of the mutineers.  The
} captain felt he had no choice and had the man lightly flogged as an
} example to the rest.  A ship's captain is, after all, the absolute
} master of his ship.  It was at this point he uttered the famous
} phrase, "the floggings will continue until morale improves."  There
} was no laughter from his crew in response.  They knew he was quite
} serious.
} Remarkably, the rest of the voyage went well and morale actually did
} improve.  When they reached the U.S., all sailors were given shore
} leave, and the Cap'n's quote started circulating at all the local
} bars.  It slowly spread across the country, but quickly became an old
} tale and largely forgotten for decades.  In the meantime, Cap'n Crunch
} retired from sailing and started his cereal business.  He had greatly
} mellowed in the years since he uttered the soon-to-be-famous phrase.
} Then came computer bulletin boards.  The phrase was the perfect length
} for using as a tagline.  Once one old sailor who still remembered the
} tale put it in his tagline file, it wasn't long before others stole
} it.  The attribution to Cap'n Crunch was, of course, lost in the
} process and it was largely regarded as a joke.  Then came the Internet
} and the phrase quickly became a part of pop culture.
} There are a few, besides myself, who still remember its origin.
} Whenever we tell others, they scoff of course.  No one believes Cap'n
} Crunch could ever have been such a hard man, but it's true.
} You owe the Oracle a cat-o-nine tails made of cereal, a part of a
} complete breakfast.

Notes: It took me a few minutes to decide which "captain" was the best choice. Captain Kangaroo was an early front-runner, but I decided it best to stick with an "actual" sea captain.