The feudal system, as we know it, began to take shape with the decline of the Roman Empire. Land was considered very valuable and was often given as reward for loyal service or honor in military situations. Land was divided up and given to feudal lords who oversaw them and the resources. Sometimes these were divided further into smaller parcels. Each land owner was responsible for yielding crops and taxes to their lord (who in turn gave to his lord, etc). The vassal also owed his lord military service. It became common for manor lords to hire professional knights to go to war in their place.
For more interesting information about feudalism, check out http://honolulu.hawaii.edu/distance/hist151/feudal.htm