I realize that "it" is excluded in Spanish (for the most part) and is not used today. "eso" and "esto" do not mean the same thing nor do él and ella. But what was the old Spanish word for "it" before "it" dropped out of existence ? I want to say I read some where that it is "lo." "lo" makes sense to me because "ce que" in French is "lo que" in Spanish. What happened to it (no pun intended) in ancient Spanish ?
I don't know exactly what you mean, there is an equivalent word for "it" in Spanish: ello (from Latin illud).
According to the Cambridge Dictionary
used as the subject of a verb, or the object of a verb or preposition, to refer to a thing, animal, situation, or idea that has already been mentioned
According to the D.R.A.E
- pron. person. 3.ª pers. m., f. y n. Forma que, en nominativo o precedida de preposición, designa a la persona, el animal o la cosa de los que se habla, por oposición a quien enuncia el mensaje y a su destinatario
The part that I've highlighted is practically a word-by-word translation.
The "n" in "m., f. y n" means neutral, it applies when the referenced element have got no specific gender.
But maybe you're talking why "It is raining" is translated as "Está lloviendo". What did happen with the "it"? I'm no Latin expert but I think that we have inherited that. The word "it" didn't dissapear from Medieval Spanish, it wasn't even there. There is no need in Spanish to explicitly mark the subject with a pronoun because that information is already present in the verb tense, like in Latin.
It in Spanish can be either él, ella, or ello, except when connected to a verb in which case it can be any of lo, la, and arguably le.
As a subject, though, él and ella are restricted to animate subjects (such that La mesa está allí. Ella es alta is incorrect, but La mujer está allí. Ella es alta is fine).
Notice that even when used with animate subjects, the use of él/ella is fairly redundant. They're really only used to disambiguate when you have two differently people of different genders that could reasonably be the subject, or for some particular emphasis. In the case of ello, which always refers to a general thing that cannot be sourced to a single concrete noun, there is generally enough context to not confuse the sentence with an animate subject. Likewise for inanimate objects.
Furthermore, unlike French, which generally only preserves endings in writing, but not speech, the pronouns aren't needed because the endings are still very much preserved in speech.
Ultimately the reasoning is probably multiple in nature: well-preserved endings, obvious contextual clues, and other ways (as you mentioned with the demonstratives) to distinguish if absolutely necessary.