We had all heard that it was a great dam, as modern as any of its kind in the world.

had heard 的参照物，不是宾语从句，而是另外一个语境的动作。指在某事之前早就听说过。

it was a great dam：表示“那是一座大型水坝”（陈述过去的一个事实），不受“听说”早晚的影响，而独立存在。

如果用了 it had been a great dam，意味着它曾经是座水坝。在听说的时候，已经不再是水坝了。也许盖楼了。

时态决定存在，做个比较，仔细体会主、从句的时态：

We hear that it is a great dam. （水坝仍在）

We heard that it is a great dam. （水坝仍在）

We have heard that it is a great dam. （水坝仍在）

We hear that it was a great dam. （水坝已不在）

We hear that it has been a great dam. （水坝已不在）

We heard that it was a great dam. （水坝在 heard 时仍在，现在不详）

We had heard that it was a great dam.（水坝在 heard 时仍在，现在不详）

We heard that it had been a great dam. （水坝在 heard 时已不在）

We had heard that it had been a great dam. （水坝在 heard 时已不在）