The story
The cipher was designed by Fritz Nebel, a young German signals officer. The first version, with only five letters, A D F G X, and a five-by-five square, came into use in early March 1918, shortly before the first of the spring offensives. At the start of June a sixth letter, V, was added, and the square grew to six by six so that it could carry the ten digits as well.
The letters were not picked at random. In Morse, A D F G V X are easy to tell apart, so a tired operator on a crackling field radio was less likely to send or hear the wrong one.
Why it was strong
The square alone would be a simple substitution of letter pairs, easy to break by counting. The transposition alone could be undone by trying column orders. Together they are much harder: the two halves of each letter end up in different columns, far apart in the message, so neither counting nor anagramming works directly. Codebreakers call this fractionation.
The radiogram of victory
On the French side, Lieutenant Georges Painvin of the army's cipher bureau attacked the new system from the first weeks. In early June 1918, with German troops close enough to Paris to shell it, he broke a message that the French later called the radiogramme de la victoire. In our words, it told a unit to hurry up the supply of ammunition, by day too if they could not be seen. Where it was sent from helped show where the next blow would fall, and when the attack came near Compiègne on 9 June the French were ready for it. Painvin is said to have lost about fifteen kilos during those months of work.
How it was broken
Painvin did not have a general method. He needed luck in the traffic: several messages sent on the same day with the same keys, especially ones that began alike, so that the column lengths and the patterns of letters could be compared. From those he could rebuild the order of the columns, and then the square fell to frequency counting, because once the columns are in place it is only a substitution of pairs.
The puzzle above skips the hardest part by handing you the square. Even so, you have to rebuild the column order, which was always the first step. Painvin and Nebel met in 1968, half a century after the war.