Under the political feudal system all of the land of a country belonged in theory to the ruler. He always retained a portion of it as a demesne (royal domain, or crown lands), to provide himself with his direct private revenue, while the remainder was divided among his more important followers for military reasons. These retainers, in turn, likewise kept a demesne for themselves, and, if their portion was large enough, parceled out the rest to retainers of their own. This process generally continued down through at least three or four stages, until the pieces of land became so small that they could serve only as a demesne without further subdivision. The land thus transferred was known as a fief, which in Latin is feudum (hence, "feudal" system).
(from A History of England and the British Empire)