Originally, the switching equipment was driven with pulses, and your phone interacted with it directly. As the dial plans got more elaborate, things like digit

Originally, the switching equipment was driven with pulses, and your phone interacted with it directly. As the dial plans got more elaborate, things like digit absorbers got in between you and the actual call routing equipment, but they all still talked to each other and to you with pulses. When tone dialing made its debut, some offices had switched over to electronic control and could natively understand touch-tone, but a lot had not, so there were front-end circuits that would decode the tones and control the switching equipment. Throughout the 80s, pretty much all the step, panel, and crossbar switches were replaced with common-control switches (where a computer did the thinking, even if relays were still used for the actual routing), and the fees became bogus. If you had Call Waiting, you should not have been paying extra for touch-tone.