Of course you mean System 1, not MacOS 1.0. Handles were used all the way through System 7, last released in 1997. Perhaps by then it was more about the legacy than the need. Don't know the physical limits, but a Quadra 950 could support 256MB RAM and more through VM (ramdisk), and of course these later gen machines did have MMUs.

In ye olden days, addressing was probably physical, so being non-multi-tasking ensured the safety of using handles, ie if used properly. IOW the system process was free to clean up the heap and manipulate your pointers b/c your app would only yield at specific points where you aren't holding onto a dereferenced handle.