Chicano is derived from Mexican-Spanish mexicano, in which the x is pronounced as a strongly aspirated h. It is used only of Mexican Americans, not of Mexicans living in Mexico. Chicano was originally an informal term in English (as in Spanish), and the spelling of the first recorded instance in an American publication followed the Spanish custom of lowercasing nouns of national or ethnic origin. However, the literary and political movements of the 1960s and 1970s among Mexican Americans established Chicano as a term of ethnic pride, and it is properly written today with a capital.
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While there is little danger of offense in using Chicano in a context related to Mexican-American politics, demographics, or the arts, it should be used with care by outsiders in ordinary discourse. There are also regional differences in usage throughout the Southwest. When unsure of how Chicano will be received, you should use either Mexican American or the more general Latino or Hispanic.