That folder (or rather whatever serves its purpose) has been around since the beginning, so all the 16-bit applications at the time would look for OS libraries in C:\WINDOWS\SYSTEM\.

Then 32-bit comes along, and you can't exactly drop 2 files with the same name in the same folder, so the 32-bit ones got put in their own named folder.

Then 64-bit comes along, and it turns out way too many applications hardcoded the System32 path to change it, so they kept the name the same and inserted a filesystem redirection for legacy 32-bit apps so when they try to read from System32 the kernel redirects that to SysWoW64.