There are plenty of spots at plenty of perfectly good schools - a fit for every student. There are plenty of seats at public colleges, although not everyone is going to get into their flagship state U. They might have to go to a state college. There are plenty of seats at less selective private colleges; in fact, they’re often available at a substantial tuition discount. But not everyone is going to get into the top LACs. They might have to settle for a less popular LAC, but they will still go to a perfectly good college, and have access to an excellent education.
The situation is not a game of musical chairs. This is not like the residency match for foreign medical graduates. There is room for all - just not room for all at the top, most-competitive universities and top LACs. But most US high school students weren’t planning on going to top schools anyway - they were planning on going to in-state flagships or in-state 4 yr colleges or community colleges. This is really only an issue for highly qualified students from the US and from abroad, who aspire to get into T20 schools, or even tippy-top schools.
For them, yes, it is a nightmare. It’s not right that valedictorians with perfect SATs should not be able to get into all the top schools. They probably would, if half the seats weren’t going to kids who get boosted by “holistic” admissions policies - meaning those with lesser qualifications who are admitted because they’re “legacies”, donors’ kids, recruited athletes (when did the ability to play a sport that doesn’t fill a stadium become a qualification to get into an elite school?), underrepresented minorities, or have extremely high EC achievement that has nothing to do with academics - the actors, the musicians, the olympic athletes, the social justice warrior who hit the news cycle just right.
But the reality is, if the tippy-top schools took students the way Canada does - just submit your grades and scores, and don’t bother with letters of recommendation - as long as those tippy-top schools don’t increase their student body, and do continue to take a number of students from abroad, then being first in your class with a perfect SAT score STILL won’t be enough to guarantee admission to a tippy-top school. But there’d be twice as many seats available to them at T20 schools.
So, if you really want the answer to when, where, how, and why did US college admissions go wrong, the answer is 1926, Harvard, the antisemite Abbott Lawrence Lowell, and the imposition of a restrictive quota upon Jews by means of “legacy” admissions preference (to preserve the White Anglo-Saxon Protestant makeup of the student body) and the use of “Character and fitness and the promise of the greatest usefulness in the future as a result of a Harvard education” in order to justify admitting WASP students with lesser academic qualifications, in preference to students of “The Hebrew Race” with better academic qualifications. Inclusion of a passport photo was also mandated that year - I suppose the committee was sure that they could tell if a student was WASP or Jewish just by looking at their photo. These policies were quickly adopted by the rest of the Ivy league schools, and just as quickly, City College of New York (a free CUNY college) became for the next thirty years the college from which so many future leading scientists, physicians, legal scholars, and academicians were graduated - because they had been kept out of the Ivy League by the antisemitic “holistic” admissions policies, initiated by Harvard’s president Lowell to exclude Jews and reserve seats for WASP students with lesser academic qualifications. If it sounds familiar to what was revealed in the recent lawsuit alleging anti-Asian discrimination by Harvard (in order to admit less-qualified legacies, donor kids, athletes, and underrepresented minorities), by means of a “holistic” admissions policy that gave students a “personality” rating, that’s because it is. And the end result will be the same - more amazing, high-achieving students attending their flagship state U’s, whose standards have just been going up, up, up.
It goes without saying that in 1926, and until the 60’s. non-White young men had little to no chance of admission, no matter what their qualifications, and of course women were not even welcome to apply until the Ivy League began admitting women mostly around 1970…