In 1895 when the first short film was publicly exhibited, "La Sortie de l'Usine", it was short due to technical restrictions, but as technology improved, films tended to get longer and longer. This is when Hollywood came about.
Currently however Hollywood needs short films in order to be successful. Now that the Hollywood system is extinct, Hollywood uses short films as a cut price lab for experimentation and innovation. Short films are used as calling cards for new and aspiring directors, actors and pretty much anyone that is part of the crew of a film set.
Short films became a way to take risks without any financial worries. Hollywood developed a system whereby they scout for new directors etc at short film festivals and the likes.
Experimental Avant-Garde Auteurs found a home in art for their short films as they simply did not have the money to compete with Hollywood. Avant-Garde experimental films were usually short films as they were relatively cheap to create.
Bibliography:
1: N/A. (2010). Workers Leaving the Lumiere Factory. Available: http://en.wikipedia.org/wiki/Workers_Leaving_the_Lumière_Factory. Last accessed 29th January 2010.
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