Why Does MIDI Offer 127 Notes
I think what you are missing is that MIDI was created in the early 1980's, not to run on personal computers, but to run on musical instruments with extremely limited processing and storage capabilities. Storing 127 values seemed GIANT back then, especially when the largest keyboard typically has only 88 keys, and most electronic instruments only had 48. If you think MIDI is doing something in a strange way, it is likely that stems from its jurassic heritage.
Yes it is true that typically a pitch value of 60 will give you C4, or middle C. Most synths work this way, but certainly not all.
Yes ... there has always been a disagreement about where middle C is in MIDI. On Yamaha keyboards it is C3, on Roland keyboards it is C4. Yamaha did it one way and Roland did it another.
Now, these pitch values do not correspond to specific pitches.
Not originally. However, in the "General MIDI" standard, A = 440, which is standard tuning. General MIDI also describes which patch is a piano, which is a guitar, and so on, so that MIDI files become portable across multitimbral sound sources.
In the MIDI protocol there are status bytes (think commands, such as note-on or note-off) and there are data bytes (think parameters, such as pitch value and velocity). The way to determine the difference between them is by the first bit. If that first bit is 1, then it is a status byte. If the first bit is 0, then it is a data byte. This leaves only 7 bits available for the rest of the status or data byte value.
So to answer your question in short, this has more to do with the protocol specification, but it just so happens to nicely line up to good number of available pitch values.
Now, these pitch values do not correspond to specific pitches. Yes it is true that typically a pitch value of 60 will give you C4, or middle C. Most synths work this way, but certainly not all. It isn't even a requirement that the synth uses the pitch value for pitches! MIDI doesn't care... it is just a protocol. You may be wondering how alternate tunings work... they work just fine. It is up to the synthesizer to produce the correct pitches for these alternate tunings. MIDI simply provides for a selection of 128 different values to be sent.
Also, if you are wondering why it is so important for that first bit to signify what the data is... There are system realtime messages that can be interjected in the middle of some other command. These are things like the timing clock which is often used to sync up LFOs among other things.
You can read more about the types of MIDI messages here: http://www.midi.org/techspecs/midimessages.php
127 = 27 - 1
It's the maximum positive value of an 8-bit signed integer, and so is a meaningful limit in file formats--it's the highest value you can store in a byte (on most systems) without making it unsigned.
Simple efficiency.
As a serial protocol MIDI was designed around simple serial chips of the time which would take 8 data bits in and transmit them as a stream out of one separate serial data pin at a proscribed rate. In the MIDI world this was 31,250 Hz. It added stop and start bits so all data could travel over one wire. It was designed to be cheap and simple and the simplicity was extended into the data format.
The most significant bit of the 8 data bits was used to signal if the data byte was a command or data. So- To send Middle C note ON on channel 1 at a velocity of 56 A command bytes is sent first and the command for Note on was the upper 4 bits of that command bit 1001. Notice the 1 in the Most significant bit, this was followed by the channel ID for channel 1 0000 ( computers preferring to start counting from 0)
10010000 or 128 + 16 = 144
This was followed by the actual Note data
72 for Middle C or 01001000
and then the velocity data again specified in the range 0 -127 with a 0 MSB
56 in our case
00111000 So what would go down the wire (ignoring stop start & sync bits was)
144, 72, 56
For the almost brain dead microcomputers of the time in electronic keyboards the ability to separate command from data by simply looking at the first bit was a godsend.
As has been stated 127 bits covers pretty much any western keyboard you care to mention. So made perfectly logical sense and the protocols survival long after many serial protocols have disappeared into obscurity is a great compliment to http://en.wikipedia.org/wiki/Dave_Smith_(engineer) Dave Smith of Sequential Circuits who started the discussions with other manufacturers to set all this in place.
Modern music and composition would be considerably different without him and them.
Enjoy!