It's generally accepted that Jack Kerouac created the term 'Beat Generation' in a 1948 conversation with novelist John Clellon Holmes, who went on to write a New York Times article about it, 'This Is The Beat Generation.' This is true, but it doesn't explain what the term 'Beat' actually meant.
In fact the original word meant nothing more than 'bad' or 'ruined' or 'spent.' We all use the word this way. When somebody is trying to get one last hit out of a bowl of weed and there's nothing but ashes left, you say 'Don't bother, it's beat.' Or when you're tired: 'I'm beat.' There's beaten-down, beaten-up and beaten-out. The connotation is defeat, resignation, disappointment.
That kind of beatness is what Kerouac was describing in himself and his friends, bright young Americans who'd come of age during the Second World War but couldn't fit in as clean-cut soldiers or complacent young businessmen. They were 'beat' because they didn't believe in straight jobs and had to struggle to survive, living in dirty apartments, selling drugs or committing crimes for food money, hitchhiking across the country because they couldn't stay still without getting bored. The phrase 'Beat Generation' was meant to echo Ernest Hemingway's description of his own crowd (which came of age during the First World War) as the 'Lost Generation,' a phrase Hemingway picked up from an off-hand remark made by Gertrude Stein.
But the term 'beat' has a second meaning: 'beatific' or sacred and holy. Kerouac, a devout Catholic, explained many times that by describing his generation as beat he was trying to capture the secret holiness of the downtrodden. In fact, this is probably the most central theme in Kerouac's work (think of the saintly hobos and lonely truck drivers of 'On The Road' and 'The Dharma Bums').
On April 2, 1958, after the 'Beat Craze' had influenced a flood of alienated young men and women to converge on the North Beach neighborhood of San Francisco, columnist Herb Caen of the San Francisco Chronicle wrote a column in which he created the term 'Beatnik.' The 'nik' suffix evoked Yiddish slang ("nudnik", etc.) but was actually borrowed from 'Sputnik,' a satellite that had just been launched by the Soviet Union, striking fear into the hearts of many Communist-fearing Americans.
'Beatnik' was a perjorative term, of course. Maynard Krebs on the 'Dobie Gillis Show' was a beatnik, but he was never Beat.
While 'Beat' connoted hobos and exhausted proletarians, the term 'Hip' came from 'Hipster,' which referred to the fancy-dressing, drug-and-drink-addled sex-fiend characters that hung around Times Square at night. Kerouac and Neal Cassady and William S. Burroughs were all fascinated with hipsters, and they even included a true degenerate hipster in their crowd, Burroughs' junkie friend Herbert Huncke, who appears as Hassel in 'On The Road' and Herman in 'Junky.' Allen Ginsberg tips his hat to 'angel-headed hipsters' in his poem 'Howl.' It seems there were two ways to be beat in this era: the country-mouse beatnik could be a hobo, hopping freight cars and sleeping in parks, but the city-mouse beatnik had to play the part of hipster to survive.
I don't know the derivation of the term 'Hipster' (hey, what am I, fucking William Safire over here?), but I could make a totally uninformed guess that it originally referred to hip flasks -- that is, that a 'hipster' carried liquor on his hip instead of hidden in his boot like a 'bootlegger.' I may be totally wrong here, though. I've also heard that 'hip' started with 'hep,' which would mean that my hip flask theory is wrong, and I have no idea where 'hep' came from. I've heard that Ken Kesey has a theory that the word came from Chinese opium smokers who reclined on their hips while they smoked. I've also heard that the word comes from West Africa via the Gullah dialect spoken in the Sea Islands off the coast of South Carolina. A hipicat denotes a person attuned to his environment, literally with 'eyes open.' Somebody else emailed me that it comes from the military-march utterance "Hup!" as in "Hup-two-three-four," but I don't get what the connection would be here.
In any case, 'hip' turned to 'hippie' just as 'beat' had turned to 'beatnik.' I'm sure there's a lot more to be said about these etymological matters -- please contribute any ideas or knowledge you may have.