How a Telephone works.
When a phone is inactive, that is on hook, its bell, beeper, flasher or other alerting device is connected across the line through a capacitor. The inactive phone does not short the line, thus the exchange knows it is on hook and only the bell is electrically connected. When someone calls this phone, the telephone exchange applies a high voltage pulsating signal, which causes the sound mechanism to ring, beep or otherwise alert the called party. When that user picks up the handset, the switchhook disconnects the bell, connects the voice parts of the telephone, and puts a resistance short on the line, confirming that the phone has been answered and is active. Both lines being off hook, the signaling job is complete. The parties are connected together, and may converse using the voice parts of their telephones.
The voice parts of the telephone are in the handset, and consist of a transmitter (often called microphone) and a receiver. The transmitter, powered from the line, puts out an electric current which varies in response to the acoustic pressure waves produced by the voice. The resulting variations in electric current are transmitted along the telephone line to the other phone, where they are fed into the coil of the receiver, which is a miniature loudspeaker. The varying electric current in the coil causes it to move back and forth, reproducing the acoustic pressure waves of the transmitter. Thus, it speaks.
When a party "hangs up", that is puts the handset on the cradle, DC current ceases to flow in that line, thus signaling to the exchange switch to disconnect the telephone call.