Originally posted by Woodsman'sgame
Hispanic is actually an incorrect term. It ... refers to anything from the peninsula of Hispania, which includes Portugal and the Basques and Catalans and Gallegos that don't speak Spanish.

The term came into use in the US census (1920 I think). The US government was wanting to figure out a way to get numbers on Spanish speakers in the US, who of course checked any racial column that fit their particular race.
Someone came up with the term Hispanic and listed it under "race".
The correct term for the peninsula where Portugal and Spain are located is Iberia. This is what latin (roman) historians called the region as early as 98 B.C. a time when Spain and Portugal were far from being recognized as the countries they are today. One of the regions into which the peninsula was divided was indeed called Ispania.

The term Hispanic started being used in the early 19th century in Latin-America to designate the period of history in which those countries were not yet under spanish rule. In spanish: Periodo Pre-Hispanico. The designation was mostly a political one, as the 11 new republics sougth to distance themselves from all colonial ties and did not really care which region of Spain their conquerors came from.