A quick googling of the phrase brought up this page The Indian Blanket Act For those who don't wish to read the entire article (it's not long, though) here is the gist (any emphasis added):

All West­erners are familiar with the expression, "You've got the Indian sign on him." It implies a psychological control. The Indian blanket of the old days, woven to depict historical events, to represent the mythology of the Indian people or to otherwise portray definite meaning, could well have been and was in slang called an Indian sign. The expression grew out from pioneer recognition of the unusual control an Indian performer could seemingly exercise with his blanket in the Indian blanket act. The expression, like many others of distinctive meaning, crept into the language of the West and remained; whereas, the physical fac­tors of the blanket act, not being understood, have lived almost entirely in the early stories of a com­parative few who have seen something of the show­manship of the native culture of the Old West.

The article, title notwithstanding, is not about an act passed by the US government affecting native americans, but about a performance act in which a blanket is used to tame a horse who is visibly untamed in the beginning. Interestingly, the blanket itself has nothing to do with the taming, much as the snake charmers playing of an instrument is equally unrelated to the charming.