I have a vague memory of when I was younger, of visiting families in farm country in Minnesota, where there wasn't a dial phone. You picked up the phone and a switchboard operator would answer, and you would give her (always female) the number to connect to. She would then make the connection by plugging cable for the line you were on to a connection for the other phone. Below is a picture of a switchboard in action.
Dusting further, I think that those two letter prefixes originally identified a particular exchange (switchboard location). If you were calling inside the same exchange, you could be connected directly. If you were calling outside the exchange, the local exchange would patch to the target exchange, and an operator at that exchange would complete the call.
Phone service was metered by the call. The more calls you made, the more you paid - made sense since each call required a phone company employee action to complete the call. And you paid more calls outside of your exchange.
View attachment 25709
When I was in grade school, in suburban Minneapolis in the early 1960's, I remember that we had a two-party phone line. A private line was available, but it cost extra. We were not the only family who had a party line. I recall there was a kind of game to try to figure out where, if not who, the other party was that shared the line.