Something that caused a bit of a ripple when it occurred in the season 3 premiere was Betty’s dropping the word “lesbian” in relation to little Sally. She tells Don when he returns from his adventure in Baltimore that Sally ‘has taken to his tools like a little lesbian’.

Was the use of this word at all common in those days? Well, taking into account Betty’s background at Bryn Mawr, one of the Seven Sisters rather known for its lesbian proclivities, she probably has some experience knowing lesbians. From this, her rather un-demure comment to Don comes from this background: Betty feels she has the authority to say this, whereas Don doesn’t know as much about it. If you notice, in these areas, Betty grows more decisive and stronger in voice, in this instance and a few others (when she orders food, for example). 
As for the use of the word, it isn’t at all unbelievable that it would be flying around at this point.

From commenter Luna in this post:

“Between 1955 and 1969 over 2,000 books were published using lesbianism as a topic, and they were sold in corner drugstores, train stations, bus stops, and newsstands all over the U.S. and Canada. However Most were written by, and almost all were marketed to heterosexual men. Coded words and images were used on the covers. Instead of “lesbian”, terms such as “strange”, “twilight”, “queer”, and “third sex”, were used in the titles, and cover art was invariably salacious.”

Apparently “lezzie” was also the preferred insult, so perhaps Betty was being kind by using the full word?

• footnote - by Natasha Simons