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The first telephone numbers weren't numbers, they were names. The name of your company or you as an individual. That was too confusing to build a telephone system on since many people in a town might share the same name. Starting in 1879, then, scarcely three years after the telephone was invented, the switch to assigning a customer a number began, with a four digit code being typical. Calls were not dialed by the customer, indeed, there were no dial telephones yet. All calls were connected manually by an operator at a switchboard. But dial telephones would come along.

AT&T's operating companies started installing dial telephones in the mid to late 1920s. Customers could now dial numbers themselves, instead of having an operator place them as before. Rather than use all digits to indicate a telephone number, AT&T hit upon a hybrid system of letters and numbers. Instead of a number like 351-1017, the Bell System referred to it by a name like ELgin 1-1017, ELliot 1-1017, or ELmwood 1-1017. Something like that. The two letters and a number indicated a customer's switching office or exchange, the last four digits the actual customer's number. But why use letters?

The Bell System thought abbreviations would prevent misdialing, a mnemonic device to help callers unaccustomed to using dial telephones. AT&T's William G. Blauvelt designed a dial with the letters and numbers we use today, one without a Q or Z, one without letters for the digits 1 and 0. The assumption was, therefore, that customers could dial four or five numbers correctly but not six or seven. And that somehow they needed letters as well.

I've never understood, though, why PEnsylvania 6-5000 should be easier to remember or dial than 436-5000.

Source:
Link:

http://www.privateline.com/mt_telecomhistory/