Gents, as I wasn't around then (honest!), I really don't know why rotary engines were invented. And I'm no world expert anyway. But I can have (what I hope!) is a couple of reasonably well-informed guesses:
1. Since aeroplanes began, the aeroplane designer's quest has always been "more power but less weight". In fact it still is, and it's only in relatively modern times that concerns such as low fuel burn, low emissions, and low noise became a quest as well - and those concerns don't play a big role during war time!
2. The fact that the Wright Bros got a bloke to help them design their own engine was the key to them becoming (arguably) the 1st with a successful powered, controllable heavier-than-air aeroplane. (I'm hedging my bets here in case there are any Brazilians reading this - they are convinced that the 1st truly controllable aeroplane was by Santos Dumont a few years after the Wrights). But I digress -the key to the Wrights was an engine with enough power v a low enough weight to make powered flight possible.
3. The Wright's engine was, I think, a flat four and water cooled, as were a number of other pioneer aero engines before WWI. But again "the holy grail" of more power/less weight led to the idea of more cylinders plus air cooling (obviously lighter than water or other mixtures). A "simple" way to add more power is to add more cylinders and a "tidy" way to arrange this, WITH air cooling, is to arrange the cylinders in a circle. Rotary engines came MUCH earlier than radials (look how complex that bloke's model is in the OP), and certainly during the first 2 or 3 years of WWI rotary engines predominated in just about all military aircraft. BTW, it was not the con rods that were fixed in a rotary, it was crankshaft itself that was bolted to the aeroplane, with the whole of the rest of the engine rotating around it - even the propeller was bolted directly on to the crankcase! Just as your Dad says, the torque reaction of this rotating mass meant that aeroplanes like the Sopwith Camel (and the Fokker Triplane, and many others) could "turn on a sixpence" in one direction and "lumbered around like barges" in the other direction.
4. It was only during the latter part of WWI that liquid-cooled in-line engines came more to the fore because they could produce more power within acceptable weights. Think R-R Falcon (Bristol Fighter), US Liberty (DH9), Hispano-Suiza (SE5A), and Mercedes (Fokker D7). And radials had still not yet been invented - I think the idea of radials first came from the USA, during the 1920's, and as an example, Lindbergh's Spirit of St Louis was radial-powered, and that was 1927 or '29 if my memory serves.
So in a nutshell, I GUESS (don't know) that rotary engines developed 'cos at the time it seemed to be the "simplest" way to get more power without too much extra weight.
Hope that helps/isn't too boring.
As an aside, sometime in the early '80s I went to the Model Engineer Exhibition in London and saw a working scale model of a Bentley rotary engine (Sopwith Camel) built by an Australian gent called Len (or Lew, I forget, sorry) Blackmore. He ran it at the show (yup, indoors, in the Wembley Conference Centre - MARVELLOUS!) and his engine subsequently became a highly detailed series of articles in the ME mag. Find the right back number and you'll find a picture of his engine on the cover of the issue that started the series. Just like the real thing it had no proper throttle arrangement, just a "blip switch" which turned the magneto on/off, so that the engine was either running full bore or was simply running down without power, due to the inertia of the rotating mass.
Now HE was/is an engineer!
Just as well this section is headed "Off Topic"!
Krgds
AES