The Desktop level is called a "level" because there is a hierarchy of different levels, kind of like different floors in a tall building. When you can actually see the Desktop, you can double-click to open folders and then you see that folder's window, right? That window is one level of the hierarchy. If you open another folder that is within that window, you go down one more level into the hierarchy. Well, the Desktop level is the very top of the hierarchy (or the root, some might say) because the first window (including the hard disk window) sits on the Desktop.
You will also notice this hierarchy in any Open, Save, or Import dialog box (among others). Click the Desktop button or press Command D to go directly to the Desktop level (System 7 only), where you can open other hard or floppy disks or get to any file that is currently stored on the Desktop level (directly on the pattern of the Desktop, rather than in any folder or window).