I've towed light things with my 1997 Z71 and it didn't have tow haul mode and nothing ever went wrong
I'm not sure, because I never asked the Engineer that worked for GM that I knew personally that was the plant manager of the Oshawa and later was transferred down to Michigan to the GMC truck plant the reason why they incorporated the Tow / Haul mode.
My guess is that they knew that the new brakes they were using were not capable of stopping the truck on a long term basis or while towing a heavy load. The newer engine with more horsepower and a truck with less weight and a frame that was stronger then anything previous all lead to a lot of problems that were already anticipated before the truck was ever built.
Just the fact that GM changed the design of the transmission in 1999, 2000 and 2001 tells me that they knew that they had a problem with the design of the transmission, but that they needed something right now to put into the truck and so they didn't care if they built a bunch of junk. I would guess that they figured the failure rate of the transmission to be somewhere around 10% during the warranty period and that if they could get the owner beyond the warranty period, the owner would have to adsorb the expense of having the transmission repaired or replaced out of their own pocket.
When you have 3 model years and none of the transmissions interchange - you know that they knew that there was a problem and they were trying to fix the problem as they continued making the truck.
The way they fixed the problem was to make the transmission longer, put more clutches and steels in the clutch pack and a heavier shell of a different design and change the length of the drive-shafts.