I think the pinnacle must have been before the title bar gradients were added. They always annoyed me: is the title bar any less of a title bar towards the right? No? Then why does it fade out?
The color is a background for the text. It fades out because the bar stops being about showing the title text, and starts being about showing window controls, that exist as buttons with their own backgrounds and borders.
Sort of like how desktop icons have text with a blur-extruded drop-shadow. It fades out at the point where text is no longer shown.
The title is shown in the entire title bar (e.g. long titles for web pages) all the way until it reaches the buttons, which as you say have their own border, so there is no gradual change in its character. It's 100% draggable and 100% showing text all the way, so the form (showing gradual change) is at odds with the function (sharp distinction between title and buttons).
Was this the pinnacle of UI design, or is nostalgia clouding our judgment?