In the process of re-tiling the bathroom. Underneath the tile and cement board we found what looks like plaster. Roughly an inch of cement then what appears to be plaster. There was even a holder for a soap dish. I am just curious is that how they use to handle shower walls?

I would expect cementatious plaster. it's not impervious to water, but it's resistant. if it gets soaked up, however, it will never ever dry out.

I would take it all out to the studs, which are probably not compatible with modern dimensions by the way, but would be closer to 8/4 x 15-16/4, and do the modern thing... either membrane on the studs and then 1/2 inch cement board, or 1/2 inch cement board and Schluter waterproof membrane on thinset, then tile... and put a nice showoff stripe or two in of metallic or glass tile in your field of base tile.