Etymology
The word retard dates as far back as 1426. It stems from the Latin verb retardare, meaning to hinder or make slow. The English adopted the word and used it as similar meaning, slow and delayed. The first time the word "retard" was printed in American newspapers was in 1704. At this time, it was used in a way to describe the slowing down or the diminishing of something.
The first time that any form of retard was used to describe mentally disabled people was during the 1960s when "there was a push among disability advocates to use the label mental retardation". This push from advocates was because older terms for the mentally disabled, like moron, imbecile, feeble-minded and idiot, had developed negative meanings.
Retard was not used to refer to mentally disabled people until 1985. It was widely accepted to refer to people who are mentally disabled as mentally retarded, or as a retard. From there, it turned quickly into a pejorative term, as people began to use it interchangeably with words like stupid, or idiot. Many communities, particularly in North America, regard the word as no longer socially acceptable. The fact that it is still commonly used has led to a continuing debate. A common replacement is the phrase "the r-word".
Modern use
"Retard" has transitioned from an impartial term to one that is negatively loaded. For this reason, it is now widely considered degrading even when used in its original context.
Much like today's widely socially acceptable terms idiot and moron, which are also defined as some sort of mental disability, when the term retard is being used in its pejorative form, it is usually not being directed at people with mental disabilities. Instead, people use the term when teasing their friends or as a general insult when in an argument.