G-d does not mean for only the Jewish people to be holy, but rather offered the Torah to all the nations of the world. Only the Jewish people accepted it, along with the great responsibility that came with it. Being able to accept this responsibility means that Jews were chosen to serve as a nation with the mission to bring G-d's message of morality and ethics to the entire world
Judaism is based in a covenant with God formed by the Israelites, and traditionally it is via matrilineal descent that people are bound by that covenant (either that or conversion, through which one voluntarily joins the covenant with God). Judaism does not have the belief that it is “the one true religion,” other peoples can worship God and not be Jewish as part of a different religion
For example in Medieval Iberia many Sephardic Jews adopted a similar idea to the Muslim belief around “people of the book,” under which Jews, Christians, and Muslims are all thought to worship the same God (although they might think that others are wrong about some pieces of info, like the deification of Christ in Christianity and stuff)
I’m curious what evidence you have for the historic basis of this? From a religious perspective it’s about that the Jewish soul is passed down through the mother, so if someone has only a Jewish father they’d have to convert to get a Jewish soul And then, like, for a more secular analysis traditionally and most of the time still it’s the mother that raises the child, it’s the mother who passed down the values and traditions and everything so the group membership comes with the mother