Anyone who has ever wondered why the "blue plaques" clamped to the walls of various London buildings are sometimes pinky brown, sea green or even pewter will find the answer in the introduction to this fascinating illustrated encyclopaedia. It turns out that the scheme for marking the places where famous people have lived or worked in the capital has had several sponsors since its inception in 1866. Each successive authority has naturally had different ideas about the best way to design a commemorative plaque which draws attention to itself without coming on too strong. Initially the Society of Arts was in charge, and favoured a rather ugly chocolate brown. Then, from 1901, it was the London County Council (LCC) which adopted a dizzying freestyle, including bronze tablets and sepia circles. From 1965 the GLC settled on a standardised blue roundel, a decision which English Heritage has subsequently been happy to endorse. These days, and for the foreseeable future, the Blue Plaque scheme remains definitively and unwaveringly blue.

You don't have to be British to qualify for a plaque  there are plenty of resident Americans who have been honoured, as well as Japanese and Chileans who were just passing through. Indeed, the first batch to go up included Benjamin Franklin, along with the more obvious Byron, Nelson and Reynolds. You simply have to have been very good at what you did, to have contributed to the overall happiness of mankind and be recognisable to the person in the street. This last condition has proved the trickiest. In order to guard against sudden gusts of celebrity, anyone who is granted a plaque will either have been dead 20 years or have passed the 100th anniversary of their birthday, whichever is the soonest. That way, so the reasoning goes, there is no danger of elevating someone to plaque status only to find a decade later that no one can remember who they were.

All the same, there are a few cases where the 100-year rule has been waived. Mahatma Gandhi and Herbert Morrison were considered such shining examples of public virtue that they were allowed plaques almost straight away. Others have had their applications knocked back at least once, including two Sylvias, Pankhurst and Plath. Arthur Pinero and Wilkie Collins were likewise rejected initially on the grounds of cultural insignificance. These facts, and the recollection that Morrison was leader of the LCC in the 1930s, suggests that the scheme has at times veered towards the parochial. It is for that reason that all over London today you can still see plaques to people who once cut a tremendous dash  the archaeologist William Flinders Petrie, for example, or the wartime US ambassador to Britain, John Gilbert Winant  whose fame has now somewhat dimmed.

These uneven results have come about despite everyone's best endeavours. Since 1989 a panel composed of fair-minded people, including recently Andrew Motion, Gavin Stamp and Stephen Fry (who has written a foreword for the book), has considered around 100 names each year, all submitted by members of the public. A third of these nominees go forward to the next stage, which involves a team of researchers clambering all over the archives in order to verify that there is, in each case, a suitable residence on which to hang a plaque. Rate books and census records are scoured to ensure that the person in question really did lay their head at a particular address. In the case of someone such as Disraeli, who fibbed crazily about his early life, much caution is exercised. Nevertheless, things sometimes go awry and a plaque embarrassingly makes its appearance in the wrong place. This happened with Benjamin Franklin, whose residence in London was initially celebrated at number 7 Craven Street, just off the Strand, before being shifted correctly to number 36. The usual reason behind such slips is the Victorians' mania for renumbering their streets, then losing the paperwork.

In some cases, despite hunting high and low, it has been impossible to locate an extant London residence at which to celebrate a particular person. This is the case with Beatrix Potter and Humphry Davy, who both remain "homeless". Then there are the skittish subjects who have moved around so much that they have three plaques apiece. Dickens, Chamberlain, Rossetti and Gladstone all have more than their share, although such greediness is no longer encouraged. These days two plaques is considered the dignified maximum, although one is the preferred norm. If there is a choice about which address to use, then the preference is always for the handsome, semi-detached house where the subject spent their productive grown-up years rather than the sooty garret where they dossed for six months in late adolescence.

Only if it proves absolutely impossible to find a residence on which to mount a plaque will the panel consider substituting a place of work. Private houses are always preferred because they seem to bear traces of their occupier's personality in a way that a hospital, church or bank cannot. But still there might be snags. Over the years a surprising number of owners of historic houses have rejected the idea of having a piece of blue encaustic ware slapped on their front wall. In the early days it was perhaps the feeling that having "LCC" above one's door made it look like a public convenience. More recently the worry has been that inquisitive tourists will tap on the window and insist on being shown round.

At the other end of the spectrum have been the householders who frantically lobbied for a plaque as a way of avoiding their property's imminent destruction. Extraordinary though it might seem, Dickens's Doughty Street residence and Keats House in Hampstead would both have disappeared in the late 19th century had it not been for their recently granted plaques. In other cases even a blue tablet was not enough to save a property from the demolition ball; the homes of John Tenniel, Arthur Sullivan and Edmund Kean have all been lost despite their acknowledged significance. What's more, the practice of putting up a plaque bearing the words "on this site" on the replacement building is no longer countenanced. From the mid-20th century the feeling grew that this sort of sleight of hand encouraged "false history" which might, in time, become undetectable. The nightmarish outcome, as far as the more scrupulous members of the LCC were concerned, was that future generations might really start to believe that Daniel Defoe or James Boswell had happily hunkered down in a Victorian villa.

Lived in London organises itself around geographical area rather than commemorated subject, which allows the reader to see what types of people have tended to gather in one part of town or another. Harley Street, unsurprisingly, has always drawn medics, while Holborn is bristling with lawyers and Tower Hamlets is packed with social reformers. Chelsea, meanwhile, is home to several shady ladies, including Lillie Langtry and Dorothy Jordan. The prize for the starriest road, though, must go to Essex Street in Covent Garden, whose celebrity count is so high (it includes Bonnie Prince Charlie and Samuel Johnson) that it was decided early on that one plaque would have to cover everyone.

All the same, there are some surprises here. What, for instance, is Captain William Bligh doing in land-locked Lambeth, and why is C Day Lewis kicking his heels with his family in Greenwich rather than the more obvious Hampstead? Heath Robinson in Pinner conjures up all kinds of suburban mayhem, while Clement Attlee in Woodford Green just seems wrong. Most surprising of all, though, are Emile Zola in Upper Norwood and Edwin Chadwick, supremo of Victorian drains, in fragrant Richmond. And finally, the thought of a young Noël Coward in pre-silk dressing gown days, mooching around his native Teddington, never fails to make one stop and wonder.

Kathryn Hughes's The Short Life and Long Times of Mrs Beeton is published by Harper Perennial.