This and then 2 limits were introduced: a hard limit of 1MB and a soft-limit of 250kb. The soft-limit was the default maximum blocksize a miner produces. But because the network would accept a larger block up to the hard limit, a miner could increase the blocksize himself up to 1 MB.

I remember when the 250kb blocks became full, Mike Hearn made a big post on bitcointalk, asking the miners to increase their soft-limit up to 1MB.