Square and contra dancing are some of my favorite social activities (going back to the "Virginia reel" unit in elementary school ...), and are real treats for me, since I don't get to go dancing all that often. (Though I could, if I could afford it, as there's an active dance community in Ann Arbor, just ten miles or so from here.) The highlight of my summer (when we get to go) is the Friday night dance at the Non-Electrical Musical Funfest (or "dulcimer funfest", as it's put on by the Original Dulcimer Players Club and predominantly attended by hammered dulcimer players) in Evart, MI, the third weekend in July, with music provided by the Ruffwater String Band (who play a dance either every month or perhaps even every week at the village attached to the Henry Ford Museum) and called by Glen Morningstar, my favorite caller.
My parents play (he the hammered dulcimer, she the mountain dulcimer) in a band that hosts contra dances every month or two, and my dad recently (last year) started helping to provide the music for a local Scottish country dance group. (Which gets us invited to a Memorial Day gathering of the Ann Arbor-area traditional music and dance community, including a contra dance, each year---which is very nice.)
The history as I understand it: Square and contra dancing both developed in America from European country dancing, throwing the various styles into the folk process but simplifying them all significantly. (Scottish country dance has stuff that you're supposed to do with your feet at specific points in the dance, and I suspect English country dance does too; in square and contra dancing all that matters in relation to your feet is that you're in the right place at the right time facing the right way, and that you don't step on anyone.) And with dancers being farmers rather than gentry---and, again, with the folk process changing dances all over the place---it became unreasonable to expect the dancers to all know one version of the same dance by heart, so callers became important.
Vanya Katerina Jaynin wrote:
It's actually just because modern people don't dance. Everyone has a different reason for this... my dad said he grew up to see dancing disappear. His theory is that as modern music got worse, so did the dancing. He described dancing as deteriorating to the point where all anyone did was "stand in the middle of the floor and jiggle" at which point no one would do it anymore because it was too embarrassing.

My theory is that dancing began to go downhill (my standard line is that "my idea of dancing is the sort of thing that was popular when George Washington was president") when people stopped primarily writing tunes to existing dances (and occasionally modifying dances to work especially well with particular tunes) and started writing an entirely new dance for each new popular song. (I also think that the invention of electrified musical instruments and of electrical amplification was either the tipping point in the decline of popular music, or yet another particularly heavy straw on the camel's back.)