People can judge the age/quality of a horse by looking at its mouth. If you were going to buy a horse, you would want to check there to make sure the horse has the qualities you think you’re paying for.
The idea is that, if someone is giving you a horse for free, it shouldn’t really matter what qualities that horse has (assuming you are interested in owning a horse at all). Trying to assess its value, particularly right in front of the giver, is kind of like getting a gift and asking “How much did this cost?”. It can come across as rude or ungrateful.
Keep in mind that before the invention of the automobile (and even for decades after), horses were extremely more prevalent than they are today. People bought and sold horses in immense numbers. And the health of the horse was vital as they were too expensive to be considered “expendable”. So everyone knew to check the health of the horse before purchasing one.
However, if you were “gifted” a horse, it would be kind of rude to check the health of the horse in front of the person giving it to you. Hence the phrase “Never look a gift horse in the mouth” was implying that if someone gifts you something, be polite.
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