I've heard that the push behind teaching whole word is that is how most adults read. You don't sound out each letter unless it is an unfamiliar word, you just look at the word and know what it means. So the education "experts" figured that since that is the point where people end up, you might as well start there. However, that makes as much sense as prohibiting infants from crawling and insisting on teaching them to walk immediately. Without learning the motor skills needed to crawl, only a lucky few would be able to learn how to walk. Similarly, without early phonics only a lucky few will become skilled readers with the hole word method.
I had a teacher in an elite private school explain to me that "all kids can't learn to read via phonics" so they use a compromise called the whole word method so they appeal to all kids' types of learning modalities.
I explained back that since 87% of the English language is phonetic, it makes a hell of a lot more sense teaching phonics and having the kids memorize the relatively few irregular words than the other way around. Schools teaching exclusively low-IQ kids use phonics, so why not regular schools ?
Rudolph Flesch used the system to teach Chinese characters with the whole word AKA Look-Say method - why teach a phonetic language just like the Chinese have to learn their image-based written language ?
"See and say" or "whole word" was invented to teach the deaf to read. "See and say" was primarily championed by William S. Gray and was adopted by the educational establishment in the 1930's and 1940's (the "Dick and Jane" books).
Q1. Why? Good question. Phonics had been successfully used to teach reading in a multitude of languages for thousands of years. The most likely reason for the switch is that overeducated, fundamentally arrogant and stupid people with no common sense or grounding in reality acquired great power in the field of education and foisted a completely unrealistic and whimsical reading theory on millions of innocent children. A more cynical reason might be that the education establishment wanted a certain percentage of children to fail so they could expand their empires by having to hire special ed teachers, remedial reading teachers, and so forth. Also, the sellers of textbooks are not averse to selling multiple books on reading, remedial reading, AV materials and computer programs to first do, and then undo, the damage inflicted by "whole word" instead of selling the pack of phonics drill cards that work "first time (almost) all the time".
In 1955, "see and say" was completely exposed for the fraud it is by Rudolf Flesch in his famous book Why Johnny Can't Read And What You Can Do About It. There have been dozens of studies fully documenting the inferiority of the "whole word" method of teaching reading compared to phonics. And yet some 80 percent of all public school districts still use "whole word" or its equivalent.
Q2. Why? Good question. See the possible answers under Q1.