Wordorigins.org

One of the more frequently asked questions on this site’s discussion group is where the term two bits comes from. Most people know that two bits are worth 25 cents, but the origin is a mystery to them.

Bit, which ultimately comes from the Old English bita, originally meant a morsel of food. From there it went on to denote any small thing, particularly a fraction of a larger whole. By the beginning of the 17th century, bit had become a thieves’ cant term for money. In 1607, Thomas Dekker, a comic writer of the day, penned the following:

If they ... once knew where the bung and the bit is ... your purse and the money.

By 1683 in the English-speaking American colonies bit had come to specifically denote a Spanish/Mexican real, or one eighth of a peso (the famed pieces of eight). The Colonial Records of Pennsylvania of that year record the following:

Their Abuse to y^e Governm^t, in Quining of Spanish Bitts and Boston money.

The Spanish peso was a common form of currency in the colonies. And in the early days of the United States, pesos were commonly used as dollar coins and real coins represented twelve and half cents, hence two bits equaled 25 cents.

(Source: Oxford English Dictionary, 2nd Edition)