In 1888, an esoteric/occult group was founded in England called the Order of the Golden Dawn. There were several well-known members, including poet W.B. Yeats, and Aleister Crowley and A.E. Waite, who both went on to found their own orders. Crowley and Waite also created their own Tarot decks; Crowley created the Thoth deck with artist Lady Freida Harris, and Waite created the RWS deck with artist Pamela Colman Smith, who was also a Golden Dawn member. The GD only lasted a few decades but was very influential group which basically set the tone and established the pattern for esoteric groups and theories which came afterwards, and its effect is still felt to this very day.
The GD founders were innovative in that they created an entire complex system composed of several mystical systems such as Tarot, astrology, Qabala, Enochian, etc., and wove them together into one vast system. One of the founders, MacGregor Mathers, created a deck which his wife Moina painted, and this single hand-made deck was used as a prototype for the members, who were supposed to create their own hand-made decks by copying the Mathers one. Two modern decks, the Golden Dawn Tarot by Robert Wang and the New Golden Dawn Tarot by the Ciceros, are meant to reflect what the original Mathers deck might have looked like.
Waite was a Tarot scholar who had already published books on the Tarot, and he decided to create a new deck for publication. He contracted the services of GD member Colman Smith, and he designed the Major Arcana according to his own views, including ideas from the GD system, as well as symbols from Christian mysticism and Masonic symbols. We know that for the Major Arcana, he dictated to Smith what the pictures should show (although in Stuart Kaplan's Encyclopedia of Tarot vol. 3, there is a reproduction of a picture she did before the RWS which shows an angel with flaming hair, so it seems that at least for the Lovers card, she provided that element). However, for the Minor Arcana, we don't know what the process was and to what degree Waite or Smith contributed to deciding what would be on the cards. In other words, we don't know if Waite said to Smith, "draw a person standing and looking down at three spilled cups while two remain unspilled," or if he simply gave her the divinatory meanings for the card and let her decide how to illustrate them.
It was decided to illustrate the Minor pip cards with scenes. There had been an earlier deck, the 15th century Italian deck called the Sola Busca (currently available under the title Ancient Illuminated Tarots), which used scenes for the pip cards, and we know that Smith must have consulted this previous deck because several of her pip cards echo designs from the Sola Busca. For the divinatory meanings, Waite used a combination of influences from the GD system and common playing-card meanings from the time, specifically those created by Etteilla, which you can read about in the Villa Revak link which Mari provided above.
Colman Smith was paid very little for her work on the deck. Although the deck has, I believe, been in print continously since it was first published, I don't think she received royalties, and she was poor when she died. Soon after her work on the RWS deck, she renounced her esoteric interests, left the GD, and became a devout Catholic, which she remained for the rest of her life.
There are Aeclectic members who know lots more about the history than I do, and I'm probably wrong in a few details, but that's the general idea.
-- Lee