This is 1947 Newbery-award winning book The Twenty-One Balloons by William Pene du Bois, one of my great favorites as a child. The edition I remember had this cover:
but it looks like newer editions have a different one.
The utopian island with the alphabetic families is Krakatoa, so things don't end well for their society.
The discussion about using U as a name goes like this:
Another good reason is that the twenty-first letter in the alphabet is
'U'. You wouldn't want to be called Mr. U. Everytime somebody said,
'Hey, you!' you would have to turn around. If someone asked you who
you were, you would have to answer, 'I am U.' You would keep
overhearing snatches of conversation which would bother you. If
someone were to tell a friend, 'I want to see you tonight,' you would
wonder what was meant by 'you'...
I loved all the detailed drawings by the author like this cutaway of the hero's balloon-lofted house.
It's a great book. And if anyone is wondering, from the wikipedia article on the author:
These books exhibit whimsical ingenuity in story and illustrations.
Though not usually so classified, these books seem to qualify as