The method of loci is ancient. Cicero, the Roman orator, recommended it. Lecturers in his day were not allowed to use lecture notes, so memorization techniques were valued.
Cicero told a traditional story about how the method of loci was discovered. A Greek poet named Simonides was entertaining a group of wealthy noblemen at a banquet. Suddenly a pair of mysterious figures called him outside. They turned out to be messengers from the Olympian gods Castor and Pollux, praised by Simonides in his poem. As soon as Simonides stepped outside, the roof of the banquet hall collapsed, squashing everybody inside. The mangled corpses could not be identified until Simonides stepped forward, pointed to the place where each victim had been sitting, and said each name in turn.
How did Simonides accomplish this feat? He mentally recreated the scene of the banquet, visualizing each reveler in his place. When he saw the places, it helped him remember the person who had been sitting there.
Story of Simonides from: Psychology: An Introduction by Russell A. Dewey
More fascinating facts on the Method of Loci can be found at: http://www.ba.infn.it/~zito/loci.html