We have to thank the 1973 Michael Crichton sci-fi film Westworld for the image blurring digital effects of today. Crichton wanted to create what looked like a blurred digital machine and he first turned to NASA's Jet Propulsion Lab. But the $200,000 price tag was a bit too much. Instead, John Whitney Jr did the job for him. Here's the story:
Machines that could scan film into a computer or record computer images onto film were rare. Whitney knew of a Los Angeles-based company, Information International, Inc., that made such equipment. He struck a deal in which the company supplied a programmer and access to a scanner and recorder. From there, it was trial and error; he spent two months creating test footage and projecting it onto theatre screens to determine the best contrast and resolution for the pixelated effect, and to figure out what kind of raw footage would be easiest to understand once it was pixelated. In the process, he also learned that the digitally created colored areas needed to start as rectangles so they would appear square when projected in Panavision.
Crichton and Whitney eventually got the desired effect, but the effect was slow to catch on. Read more over here: [New Yorker]