As I have written here previously¹, that’s actually a bit of revisionist history, or at least a significant omission. Speaking as someone who was actually using Unix systems when this happened, the "ssh" command was replacing the rsh command, and also still ships an "slogin" command, replacing rsh’s companion command, "rlogin" (and "scp" replaced "rcp"). Where I was, nobody was even using telnet or FTP internally; everybody was using rsh, rlogin and rcp! This also better explains the naming; going from "rsh" to "ssh" is easier.
If someone had wanted to make telnet encrypted, they would just have had to implement the standard telnet protocol and add another option in the protocol; it has a bunch already, and even one for encryption, IIRC.