Since the OP asked about the history of instruments in church, I also wanted to sketch the history of the modern praise team, as I lived through most of it. Many younger posters here grew up with the praise team, and know of the organ only as "how old people's churches do it".
Only classical instruments (organ and symphony) were allowed in the Catholic church and thus in most mainline protestants. Smaller churches had "reed organs" (harmoniums) and later sometimes pianos in missions and for children's church. Even Vatican II in 1960 stated that guitar would be permitted by way of suffrance as an outreach, but the organ was the definitive instrument of Catholic worship. Even the first guitar hymn (Silent Night) was written only because the organ was broken, and no repairman could be found on Christmas Eve.
The guitar makes its appearance in the camp meetings of the Civil War. Battlefield demanded outdoor worship, which demanded portable instruments. Cowboys sometimes carried guitars and harmonicas. In the 1940's, a worldwide outreach movement to teens pioneered Saturday night services with "combo" bands, guitar, acoustic bass, light percussion, trumpet, sax, or whatever.
The guitar came into the Catholic and Episcopal churches in about 1962, with Lutheran, Methodist, and a few others following. The idea was as outreach to people in those mission areas (like the US) too backward to understand the organ. Part of this was the purpose of opening up the use of native drums in African Catholic services. Indigenous instruments were to be used as outreach. The postwar baby-boom increased the young people on college campuses, and created plenty of demand for the new music at services. At this point, it was all to share gifts of joy and creativity, and "guitar choirs" could have 20 people in them, many instruments, and played simpler music based on chord structures. I led many of these, and played acoustic bass and banjo, as well as organ in keyboard style with them.
The charismatic renewal started among college students in 1966. The "Spirit filled" catholics became interdenominational, and used guitar choirs as more informal, and portable music. They also invented the new worship order of a period of praise and worship music followed by prayer, prophecy, and sermon, replacing the old complex order of the mass and mainline services. The music was exclusively acoustic.
The movie "Change of Habit" went a long way to popularizing what a guitar could do in church. In 1969, Elvis Presley led a rock and roll combo in the entrance hymn at a Catholic mass in the last scene.
The charismtic renewal joined their prayer group service and the traditional service in the "charismatic mass", some of which are still being done here and there. A traditional service order is preceded by ten minutes or so of praise and worship music, and the acoustic guitar group leds all the hymns. Time is created for prophecy and healing prayer. My wife's music group originated from this advance. This proved the prayer meeting music could work in a large church.
By 1980 or so, the Catholics rejected the charismatic renewal, and lost most of the leadership. Many leaders opened their own churches, and took the prayer meeting music with them. This was the invention of the non-denom church. The next generation brought in drums and electronics.
The need for new music created "Hosanna! Integrity" which gave rise to "CCLI", and a new musical culture. The development of computerized recording and large screen TV display linked with the electronic music ministries of today. Time worked its magic and now there is a certain agreement about which music you will use, how many guitars you will have, how many singers, etc.
Home groups and small churches frequently stop anywhere along this trail of development and have anything from no instruments, acoustic combos, solo pianists, or mp3 players leading their music.