I think they sorted out the basics before the turn of the last century. Google "1884 safety bicycle".
If they made the diameter larger, the frames would have to be wider so the spokes didn't get too steep, and smaller frames would cause the front wheel to hit your foot unless the frame were so long that you'd have to reverse your stem, which would make the bike handle funny.
I probabaly can't even conceive of all the reasons, but many, many different combinations were tried and they hit upon "70cm" as the ideal size. I know Velocio felt a 50cm wheel with 5cm tires was the more ideal solution for many situations, though.