The wire coming into the concentrator is to the local phones, and the wire leaving it is from the local phones. Nonlocal phones' time slots just pass through the concentrator unchanged. If the concentrator breaks, a fail-safe relay shorts the in wires to the out wires, and nonlocal phones detect no difference. (The central switch periodically counts concentrators, by the way, and schedules maintenance, probably before you notice the failure.) Concentrators for several hundred customers can be threaded on this loop like pearls.
The trick is that after the central switch tells the concentrator which time slot to use, the concentrator "opens" a time-slot on the loop to a local phone. The allocated time slot on the wiring into the concentrator is used to send data from the remote telephone's microphone to the local telephone's speaker. The allocated time slot on the wiring out of the concentrator (with the same time slot number) carries data from the local microphone to the remote speaker.
So, to arrange a connection, the switch just completes the circle between your phone and the remote phone. It interchanges the data from one to the other. Telephone "exchange" is exactly correct terminology.