If the hash changes after every character, doesn't that make it possible for someone to determine your password one character at a time if they know what each hash was?

I'm guessing that wasn't in the threat model at the time.

Yeah this reduces the time required to crack a password from

(# available characters) ^ (password length)

to

(# available characters) * (password length).

If you were patient you could crack someone's passwords by hand.