Does anyone know why? The only thing I could think of was that Gygax and Co. wanted to make a human-centric world, and simply made a game mechanic which limited the power demihumans could achieve.
That was part of Gary's reasoning, at least from what I remember from the "Ask Gary" threads. Also, demihumans had various minor abilities like infravision, ability to examine stonework features, better chances to spot secret doors and so on, as well as multiclassing which made them more attractive to players.
Balance. I think it was kind of a backwards balance, given that it didn't come into play until you hit levels most PCs never reached, but that's about it.
Apart from having no level limits, humans in 1e got boned. Well, I suppose no other race could quality for an 18/00 Strength at the beginning of the game, but that's all I can come up with.
Yeah, this is my feeling on the whole level cap stuff. Humans could advance to any level in any class they wished, but demihumans had level and class limits. The level limits were stricter in 1e, and I don't know what they were, but in 2e they were extended which made the whole balance concept useless.
Here's 2e's limits:
Dwarf:
Fighter 15
Thief 12
Cleric 10
Elf:
Ranger/Wizard 15
Fighter/Cleric/Thief 12
Gnome:
Illusionist 15
Thief 13
Fighter 11
Cleric 9
Halfling:
Thief 15
Fighter 9
Cleric 8
Half-elf:
Bard No limit
Ranger 16
Cleric/Fighter 14
Wizard/Thief 12
Druid 9
Now 2e, didn't have name levels
per se because level titles were dropped, but classes still gained followers, and those point's were essentially the equivalent of name level for those classes. Those levels are:
Fighter 9
Ranger 10
Cleric 8
Thief 10
So around 9th or 10th level is 2e's equivalent of name level. Note that the level limits for all the "favored classes" of every demihuman race is well above that limit, and many of the levels are at it or above it. Worst is the half-elf, which has a name level cap for only the druid, and everything else goes above that, and no limit for bard! And in addition, half-elves had the best multiclass combos in the game, they could combine almost anything. So by 2e, the whole level limit concept was useless as balance, since the typical game ended before most of them came into play. Basically, whatever balance Gary had originally intended had been utterly thrown out at this point, and the multi/dual-class system did not improve things. The only reason to play a human was if you wanted a paladin or one of the other special classes that weren't open to a lot of the demihumans. The 2e DMG mentions the game balance and human-centric aspects, but generally the level limits were only coming into play with NPCs. And even that didn't make sense, because if elves are so good with magic, and gnomes with illusions (for example), then why do humans still manage to advance further?