UNIX was, for all intents and purposes, free-ish to users, developers and educators up until the mid-1980s. During this free-ish period, many individuals all over the nation contributed back to the UNIX community.
After UNIX became decidedly not-free, two main movements began to provide Free (as in Freedom) alternatives to it: GNU and BSD.
AT&T sold UNIX to many vendors which began the "UNIX Wars" of the 1980s and sidetracked many in the UNIX community while cheaper and less efficient (for the time being) hardware alternatives with software from Microsoft rose around them.
In 1991, Finnish student Linus Torvalds began what would become known as Linux. Linux was a UNIX-like OS kernel developed in a "clean-room" environment and was thus free from genetic UNIX code unlike BSD.
Enter the Bazaar
During all of the "UNIX Wars" of the late 1980s a man by the name of Eric S. Raymond (ESR) was a UNIX administrator and contractor. ESR was formally trained in Philosophy from his University days, and would often times wax philosophical about the things happenning around him. By 1992, he was already maintaining a number of documents including ["A Brief History of Hackerdom"]. Like many in th UNIX community, he was oblivious to Linux until it had already achieved much success.
He was amazed that something as complex as Linux could "coalesce as if by magic out of part-time hacking by several thousand developers scattered all over the planet, connected only by the tenuous strands of the Internet". In 1996, he had a need of a very specific POP mail application. After searching the web for one that fit his needs, he wound up taking project maintenance over of an existing one and enhancing it for his needs. This program (later known as fetchmail) gave him a microcosm research tool to try and understand why and how the development for Linux worked.
The results of this research became the document (which you can find in print form as well) known as [The Cathedral and the Bazaar] where he compared traditional proprietary development to building a Cathedral, "carefully crafted by individual wizards or small bands of mages working in splendid isolation", and working with projects like Linux as redembling "a great babbling bazaar of differing agendas and approaches out of which a coherent and stable system could seemingly emerge only by a succession of miracles."
In this very influential document, ESR coins the term "Open-Source". Open-Source is used to describe anything where the source code used to create it is open and available to all. Thus, it included things like Free-Software (which is published under GPL, LGPL, etc) and other things not Free-Software (such as things published under the MIT license, BSD license, etc).
Open-Source became a very popular term to use to describe the things going on in projects like Linux or Apache, and very quickly became more used than the term Free Software. The reasons for this popularity probably stem from the fact that the "Free" in "Free Software" is used to mean "Freedom", which is not something most people these days equate "Free" with (more often than not, people these days equate "Free" with "no cost"), and the term "Open-Source" has this sort of marketting tingly sound to it that non- and quasi- technical folk love. (At least, that's my take on it ;-)
Open-Source vs. Free-Software
As the term Open-Source rised, many people such as RMS became irritated to have it used to describe Free-Software. Since Open-Source technically includes Free-Software licenses, it's not incorrect to use the term in this respetc. It's just not entirely accurate.
People such as Linus Torvalds began using the term all the time, and so did many other developers of GPL software. Thus, people from the Free-Software community began to be upset because the use of the term tended to muddle just exactly what was being talked about (recall that the majority of software in a Linux, BSD, or even general UNIX system is Free-Software).
The years from 1997 to 2000 were rife with some very juvenile antics on the matter. It's still a sore spot today, but things have calmed down considerably.
