The story
The cipher was invented in 1854 by Charles Wheatstone, the physicist who built some of the first practical electric telegraphs. It carries the name of his friend Lyon Playfair, a chemist and later a politician, who championed it in government circles. The story goes that the two of them demonstrated it to ministers, that the Foreign Office thought it too complicated, and that Wheatstone offered to teach it to boys from a nearby school in a quarter of an hour.
Its strength was speed: a trained clerk can encipher by hand with nothing but a keyword in his head, and the square can be rebuilt and thrown away. It became a field cipher for the British Army, used in the Boer War and in the First World War, where it was meant to protect messages only for the few hours they mattered.
PT-109
It was still in use in the Second World War. In the Solomon Islands, Australian and New Zealand coastwatchers hid on Japanese-held islands with radios and reported ships and aircraft. In the early hours of 2 August 1943 the American torpedo boat PT-109, commanded by Lieutenant John F. Kennedy, was rammed and cut in two by a Japanese destroyer in Blackett Strait. According to David Kahn, a Playfair message about the lost boat, keyed on the words ROYAL NEW ZEALAND NAVY, reached the coastwatcher network. Kennedy and the ten other survivors swam to small islands, were found by the Solomon Islander scouts Biuku Gasa and Eroni Kumana, and were rescued a few days later.
How it was broken
Playfair hides single letters but not pairs. Some pairs are far commoner in English than others (TH, HE, IN, ER), and a reversed pair always comes out reversed: if AB gives XY, BA gives YX. With enough cipher, or a guessed word, a codebreaker can rebuild the square piece by piece. During the First World War German cryptanalysts are said to have read British Playfair traffic regularly.
That was acceptable for a cipher meant to last a few hours. Against a determined enemy with time, Playfair is a speed bump, not a wall.