A much
better phrase than '
one-horse town', but
meaning the same thing - a one-eyed town is a
very, very
small town.
Basically, it goes like this... people knew that inbreeding caused mutations. A popular belief was that the inbred often had their eyes closer together (facial features being a popular tool for determining intelligence back then...) so if the residents of your town only had one eye, well, they must have really been forced to inbreed.