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It's a common source of confusion that player "levels" and spell "levels" are related but not equal (e.g., new players really don't understand why they can't cast level 2 spells at level 2). This has been known since at least 3E, and I've seen someone claim Gygax mentioned it way back in the intro to 1E (He wanted to call them "circles" to avoid this problem).
Are there any recorded statements from anyone at WotC (or TSR before them) about why they never changed the terminology?
Level has been with the game since its origin. It was published in 1974 and had been play tested for a few years before that. Spell complexity was used in Chainmail, a predecessor to D&D, but a choice was made not to use that for D&D. More on that further down.
Did they think of calling it something else?
In the AD&D 1e PHB, on page 8, published by TSR in 1978, there are four usages for level explained in detail.
- Level as an indication of Character power {snip}
- Level as used to indicate Depth of the Dungeon complex beneath the ground {snip}
- Level as a measure of Spell difficulty {snip}
- Level as a gauge of a monster's potential threat {snip}
Right under that, the following additional explanation is offered:
It was initially contemplated to term character power rank, spell complexity was to be termed power, and monster strength was to be termed as order...{examples snipped} However, because of existing usage, level is retained throughout with all four meanings, and it is not as confusing as it may now seem. (PHB, p 8, AD&D 1e, bolding mine)
The game had at this point been in play for about six years, and published for about four years; the game playing community knew what it meant.
Usage of the word "level" was also explained in Holmes Basic, page 12, TSR 1977. But that did not include "why we didn't call it something else" explanation like the above citation does.
The four usages of 'level' were explained on page B4 of the Moldvay Basic D&D. He notes:
"The uses of the word "level" will become quite familiar to the players once they have played a few games. (Basic D&D, Moldvay, p. B4, Dec 1980)
By the time AD&D 2e came out in 1989 this usage had been a part of the game's jargon for over 15 years.
By the time WotC published the Third Edition in 2000, that usage had been the standard for over 26 years.
(He wanted to call them "circles" to avoid this problem).
If at some point Arneson, Blume, Kask or Gygax intended to use circle for spell complexity, power, or level that was overcome by events when the Druid class was established since "Initiate of the {x}Circle" became the names of various druid levels. Examples include (PHB p. 21):
Druid of the 3rd level was called "initiate of the 1st Circle"
Druid of the 7h leve was called Initiate of the 5th circle"
...for whatever artistic reason the creators had arrived at.
This was a carry over from the Eldritch Wizardry Druid in OD&D (1976), which introduced that notation for Druid level names (initiate of {x} circle). Each level for a class having names was a thing: a level 3 cleric was called a Priest and a level 7 cleric was called a Lama while, a level 3 Fighter was called a Swordsman while a Level 7 Fighter was called a Champion. You were not called a Wizard until you had earned it: that was the level 11 name for a Magic User.
We started playing in 1975 when I was in high school and we were never confused by what it meant. We never needed an explanation. Why? Probably because we had the context of the term 'spell', or 'class' or 'monster' in the same sentence with the word level when it came up in conversation during play. Level under the ground to mean depth of dungeon never needed any explanation, since it was a lot like the floor of a building in reverse. (I note that some modern buildings use increasing G levels for how deep under the ground a given level a garage is, but that may not be universal)
KorvinStarmast has explained how the usage of the term was established in early editions. But I think it's also worth a note about why it persists in 5e and, presumably, beyond.
Fourth Edition (4e) D&D did in fact get rid of this ambiguity. Spell levels and monster levels were unified with player characters' class levels: a level-six cleric casts level-six spells and fights level-six monsters. Fireball thus became a fifth-level spell: level five is when a wizard can first cast it. This also meant that spells went all the way up to level twenty-nine, for things like meteor swarm. (The highest level a player character could reach was 30, but they didn't gain any new spells at that level.)
The problem was, 4e had killed a few too many sacred cows. Many fans of 3e refused to touch it, saying it was no longer D&D. Fifth edition tried to woo these fans back by restoring terminology from old editions, even when it was applied to different things: 3e wizards and 5e wizards both "prepare" their spells, for example, but the word means something entirely different for each of them.
While I'm not aware of any official statement from WotC on the matter, bringing back "spell levels" is presumably for the same reason: the old terminology makes the game feel "more like D&D" for fans of 3e. Emphasizing continuity with what came before outweighed the ambiguity of overloading the word "level". (And 5e did stick with 3e's "challenge ratings" instead of AD&D and 4e's "monster levels", so the word isn't used in quite as many ways as it once was.)
