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In my German class, we learned that there are two past tenses, which we referred to as the "narrative" and "conversational," the former only being used for writing, and the other used exclusively for verbal communication. I'm sure it's much more nuanced than this, as it was only a 100-level course.
This is such an alien concept to me as an English speaker, I wonder how it came about.
I interpret the question as: How did the functional difference between a "narrative" and a "conversational" past come about? I assume the development of the forms is not relevant (i.e. the fact that German, like English, combined an auxiliary with a past participle to form a new tense).
I'll try to answer with a few (hopefully uncontroversial) remarks. Anything more detailed and the answer would have to turn into a book (or dissertation).
In Upper German dialects, the preterite had been lost by the end of the Early New High German period, around 1650 (Oberdeutscher Präteritumschwund, which I have seen translated as preterite decay). A potential reason for this loss that is commonly mentioned is a phonological phenomenon called apocope, whereby the final -e in preterite forms such as lebte was dropped, rendering them homophonous to the present lebt.
In those dialects where the preterite had been lost, the perfect took over all functions of the preterite and any difference in use between preterite and perfect was lost. However, since the Präteritumschwund only affected Upper German dialects and the preterite was preserved in Central and Low German dialects, as well as the developing standard language, dialect speakers from the South still encountered the preterite, specifically when dealing with the standard language as it was taught in schools and used in print. This, to me, can easily explain the connection between the preterite and written language (as well as a more formal register) and the common teaching aid of characterising the preterite as narrative past.
However, another factor is involved. To this day, functional differences between the two pasts have survived, which is not surprising given the fact that the preterite was preserved in many dialects, as well as the standard language. For instance, when greeting someone you have not seen for a long time, you might say:
Hallo! Wir haben uns aber lange nicht gesehen. Ich habe dich vermißt.
Using the preterite in this situation is out of the question. The specific meaning of the perfect is characterised in various ways by different people; however, the phrase relevant for the present is often used, i.e., in the given example, not having seen you and having missed you is affecting my current state, explaining my emotional reaction and so on. The fact that the preterite is missing the meaning component of being relevant for the present makes it ideally suited for narrative texts.
In short: Loss of the preterite in certain dialects, while being preserved in others as well as the developing standard, in interplay with a functional difference between preterite and perfect that makes the former more suited to narration.
Finally, note that the fact that the preterite is used for narration does not mean it is not used in spoken language. As is to be expected, speakers from the North use it more frequently than those from the South. Also, the fact that there can be meaning differences between the preterite and the perfect does not mean that there are no contexts where they can be used interchangeably – in many contexts, they are used interchangeably.
The belleslettres (BL) have a long post and video about "Präteritum oder Perfekt" and an additional short video on tenses in non-fictional texts which you may want to have a look at.
They start by stating that Germanic languages used to have 2 tenses: past and not past. Not past covers everything from present over factual, always-true (gnomic), time-independent to future. And this is still the case in German, just that in Southern (High) German, the perfect has taken over the function of the preterite, while the North kept the preterite.
But in contrast to other Germanic languages, German has 3 systems of tenses for different types of text: spoken vs. narrative (fiction) vs. factual written.
In everyday spoken German BL say that 50 years ago there was still quite a distinction between Southern (incl. Austria and German Switzerland) and Northern German: the Northerners used the same construction like all other Germanic languages to express past things: the preterite. The south used perfect instead, and this is mostly the standard way in spoken German now - BL decidedly link that to mass communication. (There are other north vs. south language differences, where the northern version has become standard, e.g. wegen + genitive)
Literary German (narrative) uses preteritum. They call this not a tempus for the past, but say it has the same use as the present in spoken language.
(I may add that that in a quick thought experiment of telling a tale, e.g. for a child, the past comes naturally to me and not only for fairy tales starting with "Once upon a time..."/"Es war einmal...").
They argue that this is not a temporal past since narratives taking place in the future are still told in preteritum, and it is also used for things that are independent of time.
Nowadays, narrative German uses plusquamperfect analogously to perfect in spoken language. BL cites Schiller using past for that as well.
Present/perfect appear in narrative in dialogues.
Non-literary (non fictional, non narrative?) texts form a third category: technical, scientific, journalistic, ... texts.
perfect produces an imperfective form of a perfective verb (as a counterpart to e.g. ge- historically making an imperfective verb perfective). Example entscheiden (to decide):
action finishes
Ich entscheide | ich habe entschieden
----------------------+------------------------------------------> time
action changing state | (ongoing) state (after finished action)
perfective | imperfective
Technically, there is the same distinction as in English. The preterite, in theory, puts you somewhat closer together with the events, thus the alternative name "Mitvergangenheit". You are with the past, so to say. Whereas the perfect is, well... perfect (i.e. closed, over, done, no longer actual), it's definitively no longer happening, nor are its effects.
Except, well, nobody uses it that way. Nobody! Alright, your teacher in elementary school might, if she is from the north...
German is much more relaxed when it comes to time, especially in speech (and even more in colloquial speech). For example, it can be perfectly correct to use present tense for past events:
Wir waren gestern im Kino, und wie wir gerade rauskommen ist da doch dieser Typ, der hat mich total blöd angemacht.
(Note: It really should be "als" in the above sentence, not "wie", but you know... unless you are in elementary school, it's just perfectly fine. Native speakers, except for the most obnoxious pedants, won't object or raise an eyebrow.)
There you go, you have one event within a single sentence which is in the past (and very demonstrably so, it was the day before) but you have three tenses (including present time!) in it. And believe me, it will not strike anyone as weird, or clumsy, or even wrong.
Generally, you are good to go (99%) by simply using the perfect. Using the preterite in speech will in most (though not all) situations make you sound either a bit snobby, queer, or antiquated.
Similarly, you can use present time for the future just fine in most situations:
Wenn ich mit dem Studium fertig bin, gehe ich nach Indien.
Very obviously, according to the sentence, you are not yet done, but that doesn't matter in any way (nor does it matter that you do not actually intend to walk to India, and how could one possibly guess that go or walk actually means relocate in this context!). However, nobody who is at his senses will say something like:
Wenn ich mit dem Studium fertig sein werde, werde ich nach Indien umziehen.
or even (to point out the correct sequence of events):
Nachdem ich mit dem Studium fertig geworden sein werde, werde ich ...
While it's arguably possible to say that, you will with absolute certitude attract puzzled looks from everybody around you.
As a native speaker, I would like to add a few things simply from my personal observation.
1.) As stated before, all past tenses have their specific function, so you will actually find all of them in written texts.
Examples:
Da sah Jenny, die so etwas noch nie erlebt hatte, dass ihr Fahrrad gestohlen worden war.
Die Unwetter haben inzwischen die Hauptstadt erreicht. "Wir sind vorbereitet" sagte ein Pressesprecher.
And of course, there are some cases where the past tense is commonly used in spoken language too, e.g.:
An dem Tag war ich krank.
Das lief jetzt nicht nach Plan.
So, it's hard to make a clear distinction between "narrative" and "conversational".
2.) I suppose, in many cases, the popularity of the perfect tense is simply because it is much easier to build (usually just add "ge-") and hence more convenient to use:
fahren / gefahren -vs- fuhr
lesen / gelesen -vs- las
3.) In slang or sometimes as a personal quirk, some people even use the past perfect commonly, kind of "doubling" the past tense for emphasis:
Warst du da schon gewesen?
Ich hatte dazu einfach keine Lust gehabt.
I think this is similar to a double-negative in English.
comment: I'm not sure how to answer this question is trying to accomplish, because it seems to assume that the distinctive use in written or oral speech were strictly proscribed and followed--which is not the case. Then it asked more broadly for the origin of the pasts, while only concerned about the false dichotomy, but going further, potentially expecting a clue from this for that.
Today, It is true that preterite is rarely used colloquially. This can have several underlying reasons. A reason not mentioned yet in other answers is that strong verbs inflect irregularly. This is difficult. The relation between ich mag and möchte is not even recognized (took me only twenty years) and they are thus treated as separate verbs. For the most part we just immitate what we hear, so we follow the past. Reasons that facilitate the prevalence of distinctive preferences also counted in the past.
In the past, as @DavidVogt points out, several developments happened, which were perhaps not semantic, but phonetically motivated. I criticized that very good answer for it did not touch upon strong verbs (admittedly, I read not the article that it has linked), so consider this: They suffered from sound change much worse than simple regular preterite forms. It's so bad, that [Grundfragen der Umlautphonemisierung] are not fully understood yet, for example. Forms like ?ich dächte, ?bräuchte (cp En ?thunk, ?brung), seem substandard. I'd say that after vowel shift, the strong verbs were perhaps not euphonic anymore. English even completely lost subjunctive inflections except in a closed class of verbs. It's hard to say which loss dragged the other ones down with them.[1] There really is no answer I am aware of, I'm affraid. Obviously we can hardly tell what was spoken, only what was written! As paper, ink and time is costly, scribes went to extreme ends to make the best use of it. Incidently, they would also be predestined to be taught in the proper forms of the grammar, and phonetics would hardly even play a role, except for speech transcripts. Obviously, the shorter preterite saves costs.
In much earlier past had be come these tenses to form. Indo-Germanic --the hypothetical last common ancestor of German and Indic, so to speak, today widely called Proto-Indo-European-- supposedly had a more powerful inflection system, as Sanskrit, Greek, etc attest to. This is mostly out of scope, so suffice to say that the origin of the participle prefix ge- in German is apparently not well understood, and might be a multifacetted problem, including tangents to geh- (gehen, confer *gana in Guus Kroonen's dictionary). The weak inflections supposedly developed later than strong inflections --which stem from Grammatischer Wechsel, Ablaut patterns in Proto-Indo-European-- perhaps in response to these loosing their charm not only on phonetic grounds, but also driven by semantic shift.
Afterthought: The Konjunktiv moods present a similar situation. This stuation is still more difficult to describe, so suffice to say that many forms are either obsolete (ich würf) or indistinct (ich schalte) and thus often replaced by an auxilary construction, i.e. in reported speech (Er sagt ich würde werfen, ich würde schalten) or irrealis (er sagt ich hätte geworfen--that en.wiktionary names plusquam perfect subjunctive II), which can get kind of cumbersome (ich hätte Geld gehabt, ich würde geworfen haben) and error prone (substandard hab ich dich getroffen [?gehabt]?). So it's become common concensus to simplify (ich würde Geld haben) when a report is neither decidedly potential nor irrealias and the tempus inappropriate.
[Grundfragen der Umlautphonemisierung]: Eine strukturelle Analyse des nordgermanischen i/j-Umlauts unter Berücksichtigung der älteren Runeninschriften. (Michael Schulte)--Review by Anatoly Liberman in Alvismal is free to read online
[1]: A similar topic might be strong inflection with Schwebelaut i/e as in ich werfe, du wirfst, wir werfen, from Middle High German, but Upper German i/e in singular/plural respectively, from uncertain origin (see Watts, West, Solms 2013, Zur Verbmorphologie germanischer Sprachen, pp. 40-45).
I have never heard the expressions "narrative" and "conversational" past tense, but I am fairly sure I know what is meant.
Concerning grammar: Similarly as English, German has three past tenses: Past Simple, Present Perfect Simple and Past Perfect Simple (though English has more, e.g. Past Progressive), and there are clear rules how to use them.
When writing about the past you should grammatically correctly use Past Simple ("Ich las das Buch"). This is narrative past. However, when speaking to other other people it is common to use Present Perfect ("Ich habe das Buch gelesen"). This is conversational past which is grammatically not correct. In my opinion it is an unfortunate habit, but if you speak grammatically correct, it would probably be perceived as somewhat pretentious. Weird, isn't it?
There are exceptions. In conversation auxiliary verbs are usually correctly used in their Past Simple form. For example, you would always say "Ich hatte Angst" or "Ich war krank" and not "Ich habe Angst gehabt" or "Ich bin krank gewesen".
