Mike Sweeney et al:
David Moriarty is correct that there was a skating pond in the quarry during the early years. There was also a skating HUT on the ridge between the pond and the green and, if memory serves, there is a picture of it in Tolhurst's edition of Golf At Merion (perhaps not).
The club archives probably have some background on when that went away. I can tell you that the bottom of the quarry had only a drainage ditch in the 1960's and early 1970's. At some point, the drainage pipe(s) got clogged and a swamp formed. Pictures might show whether that was prior to the '81 Open or afterwards - I'm guessing beforehand. Anyway, a decision was made to leave it that way and, ultimately, the area was staked and lined in red as a real live Water Hazard. The thing got deep enough that the footpath at the bottom of the stairs from the 17th tee box was raised, widened and covered with wood chips. All this took a couple of years to evolve.
It got complicated some years later when the club was decided to eliminate the swamp and "restore" that part of the golf course (not sure why). That proved easier said than done as the area had, by now, become an official "wetlands" according to somebody who makes issues of those things. There were several interesting critters living down there so opening the drainpipes and drying the place out became something more than just doing it.
At any rate, it got done.
The real effect of the Water Hazard was on the tee shots from #18 (especially from the back tees), not #17. While the red stakes were in place, if you failed to clear the quarry wall on the right (there used to be trees there that often kicked your ball back down), you could lift your ball from the hazard and there was a drop area to the right of the Members' tee box (looking at it as you played #18). A Lost Ball or Unplayable Lie situation wasn't operative. You were still looking at double bogey, but making the fairway in 3 shots and playing on from there was the norm. Without the hazard, if your tee ball stays in the quarry, the best option (if you have one), is usually to re-tee and have the same daunting drive as before - now for your THIRD shot. Now you're looking at double bogey only if you make par with your second effort.
The problem with the tee shot is more difficult without the Water Hazard in place.
You know what - I just made a post on GCA regarding both golf architecture and the history of Merion's design without criticizing anybody. What a concept!