Back then, we were just happy having a personal computer. I'm sure there was better tech being used somewhere. But MS-DOS / Windows was just your cheap $99 OS in an age when other compilers and OSes cost you something like $1000 to $10,000.
You formatted your hard-drive in FAT because MS-DOS used FAT. You used MS-DOS because that's what PCs and PC-clones came with. There was no alternative, and PCs were already considered a pretty luxury / nerd item. (I know people brag about their DEC Alphas, Unix copies or OS/2... but you got enough "nerd cred" back then if you simply had a PC at all)
Its just how computers worked back then. Every PC was using FAT, and every few months of regular use the disk reads/writes would get so slow that performance was unbearable.
At that point, you spent an hour defragmenting the hard drive, and everything worked great again.
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Eventually 4GB hard drives were made, and you upgraded your computer to FAT32. Soon after that, Windows promised an end to defragmenting with its next-generation NTFS filesystem (based off of the B-trees discussed in this article) and we never looked back.