It was a Mercury-bromine compound used as a topical disinfectant of the skin and wounds. Many of us had this red liquid painted on us when we were young for skinned knees and small cuts. It has been outlawed in the US for years, although non-mercury types are still available. Today you would use neo-sporin or similar products.
The answer to who invented mercurachrome is here: http://en.wikipedia.org/wiki/Merbromin
I believe because it contained an unsafe amount of mercury
The United States Food and Drug Administration (FDA) removed it from the "generally recognized as safe" and into the "untested" classification to effectively halt its distribution in the United States in 1998 over fears of potential mercury poisoning. It is readily available in most other countries.