My understanding is that pure oxygen atmosphere was selected because:
-while in space, the only pressure inside the capsule was partial pressure of oxygen. This enabled lighter pressure vessel (=capsule) construction
-without nitrogen in capsule atmosphere, there was no need for heavy and cumbersome tankage, piping and regulator
-no risk of decompression sickness in EVA or leak event
-in microgravity there is no convection to carry combustion products away and bring fresh oxygen to fire, reducing fire hazard in orbit
The need for high pressure oxygen during ground testing rose from requirement of positive pressure inside the capsule to avoid contaminants entering. Because ECS produced only oxygen, they used it. Also there hadn't been any problems reported before. Soviets lost one cosmonaut on earth in low pressure, pure oxygen habitat but it was kept secret.
AFAIK the Apollo capsule should have been free of flammble materials but one by one flammable materials were installed inside for convenience's sake.
All those factors combined with go fever caused that nobody thought it was dangerous. Until one electrical fault arced... Sadly, the normalization of deviance seem to be part of human nature, especially under pressure. Eroding of O-rings or hits from insulation foam weren't considered dangerous either, until the Challenger and Columbia disasters...
Lurky