"Spanish fly" refers to an actual chemical - one that is much more likely to cause blisters than arousal. It's still not okay to expose kids to it, but a secret experiment in the 1950s did exactly that.
Spanish fly, the drug that is supposed to induce uncontrollable arousal in those who eat it, comes from an actual insect. This insect, commonly but unenticingly called the "blister beetle," does exactly what its name suggests. It gives people blisters, and that's when it is only applied externally. Swallow it, and it irritates the entire digestive system. This is where it gets its name. Some people find the slight irritation it causes the urethra sexually stimulating.
Cantharidin, or cantharides, is the name of the substance that cause the irritation. For some time it was considered as a treatment for rheumatic fever - a type of fever that causes liquid to pool in the joints, and in more critical places, like around the heart. Not all scientists agreed, but they did know that the fever and the chemical had an effect on each other.
So in 1952, a doctor in the UK decided to try out using cantharides on children that had rheumatic fever, just to see what happened. He used the chemical to blister the skin of their torsos. He snipped the blistered skin away with scissors and dressed the wound, noting that it healed after a few days. His conclusions were, "The blister size is reduced in acute rheumatic fever, possibly because of increased diffusion of fluid from the blister. ACTH treatment reduces blister size further, but the suggested mechanism for this is a decrease in capillary permeability."
About forty children were subjected to the experiment, without their consent or knowledge. It was not, by any extent, the worst experiment performed on people, or even on children, but the fact that it was done to already-sick children caused a minor scandal when it came to light. The report of the next experiment with cantharides, done on patients with rheumatoid arthritis, stressed that it used "adult volunteers."