I don't know specifically what the confusion they're thinking of was, having not been around during that half-century, but I can easily make some educated guesses.
By "prior geometry," I believe what MTW mean is any aspect of the geometry that is externally fixed or non-dynamical. So any additional constraints on the mathematical structure other than $G = 8 \pi T$ or the underlying structure (metric, connections, etc) really fall under this.
The first obvious case is Mach's principle, which contains speculation about the correct notion of physically meaningful reference frames, and physically meaningful notions of motion. This was thought to be important, and lead to Einstein's ideas behind the equivalence principle. After GR was formulated, people (including Einstein) asked if Mach's principle was consistent with, or derivable from, GR / the equivalence principle, but it turns out that it is not. (There are, however, some remnants of the idea left in GR.)
Before people realized this, it did lead to a lot of confusion, even among some of the big-name people, and some of that confusion seems to have lasted a lot longer than it should have. But trying to impose Mach's principle on top of GR would constitute a "prior geometry" in a sense, and would either render GR inconsistent with observation, or make it mathematically inconsistent, depending on how one does it, so this could be one of the things they had in mind.
The second obvious case that jumps to mind is a little more subtle (but was still certainly understood by MTW's time), and is the issue that, if you want to break up the metric as
$g_{\mu\nu} = \eta_{\mu\nu} + \epsilon h_{\mu\nu}$
or more generally,
$g_{\mu\nu} = \overline{g}_{\mu\nu} + \epsilon h_{\mu\nu}$
for an appropriately defined small $\epsilon$, what are the correct interpretations of $g$, $\overline{g}$, and $h$?
One can surely, without making any additional assumptions, write the metric as the sum of two parts, and write Einstein's equations in terms of these two parts without changing anything. But you want to "decouple" the "background" and "perturbed" parts of the metric in order to allow you to solve some kinds of problems, such as gravitational waves.
It seems, though, once you have done this, you may have done something strange. You now have two independent metrics, which describe two seemingly independent, unrelated ("decoupled") spacetimes, and have two independent sets of symmetries. So it now seems you may have, in addition to the prior geometry of $\overline{g}$, an ambiguity in matching coordinates from $g$ to ones in the components $\overline{g}$ and $h$ due to their independent diffeomorphism symmetries.
This ambiguity lead to some confusion over if this kind of method is applicable (it is), if you have to be careful in using it (mostly, you don't), and if it introduces any fundamental conceptual difficulties (it doesn't). (I don't remember how well MTW explains this, but you can find some detailed descriptions in some of the newer GR books, IIRC, so I won't describe it here.)
As far as I know, this confusion started in considering gravitational waves, and was later picked up by people trying to study quantum gravity as a canonically quantized version of GR in this way. The trouble in the quantization case was, through misunderstandings related to this prior geometry issue, people thought it okay to introduce what amounted to
actual "physical" prior geometry, and thought that this problem that had been understood by the gravitational wave people was telling them something important and fundamental about how quantum gravity worked.
This prior geometry, in the quantum gravity case, I believe amounts to problems like selecting a preferred reference frame that would typically be quite obvious macroscopically, or breaking Lorentz invariance to (e.g.) a discrete subset, or causing the theory to become inconsistent. Unfortunately, it seems some of the people working on various "alternative" approaches to quantum gravity still haven't learned this lesson, and continue to try to write down theories like this. But to the rest of the world, this issue has been well-understood for a very long time.