Milquetoast is used to refer to a person or thing that is mild, wimpy, or otherwise lacking. It is most often used to refer to people, particularly boring, meek, and unexceptional people.
The term milksop has been used for centuries in this sense, perhaps being most familiar in the English translation of Don Quixote, in which Don Quixote berates Sancho using the phrase, "who baits thee, thou soul of a milksop?" (This is not a direct translation from the Spanish; the closest phrase appearing in the original rant is 'corazón de mantequillas', 'heart of butter'). The phrase was used long before this, and has appeared in other works as a surname for a weak character. As a matter of fact, we have historical examples of milksop being used to refer to people that appear long before any (surviving) examples of it being used to refer to bread soaked with milk.
By the early 1800s, the more current phrase milktoast began to be used in the same fashion. At this time it was more often used for the dish, milk toast, which was commonly served to young children and the infirm, as an easily chewed and digested meal. During this time the phrase had a distinct subtext of 'unmanly', and was much more likely to be used for timid boys and men than women... after all, women were supposed to be timid.
The current form, 'milquetoast', was first used by U.S. newspaper cartoonist H.T. Webster in his strip The Timid Soul, in which the central character was named Caspar Milquetoast -- "the man who speaks softly and gets hit with a big stick". The strip ran from 1924 to 1952, depicting the life and times of Caspar, a very meek man indeed. By the 1930s, the word milquetoast was starting to enter common usage. It is still in use today, although it becomes more obscure every year.