Long ago, the world's economy was based on the bartering method. The value of a particular item, was measured by it's worth in exchange for other items. But, this system had it's obvious limitations. If you had nothing of value to exchange, you had no way of obtaining items you needed. This created the need to establish a more acceptable way of buying and selling early in history.
In various cultures and economies, anything could be considered valuable as long as there was a need for it. In some cases items such as animal pelts, corn, wheat and even hand made items were exchanged to obtain other much needed items.
Eventually, the monetary standard became precious metals such as gold and silver. These metals not only served as a widely accepted method of payment, they've also became one of the most popular methods of investment.
Coins were originally simply minted from the metal that was preferred at the time. But, during the Middle Ages, the introduction of paper forms of money gained wide acceptance. Although, paper forms of currency were more successfully introduced by force that by choice, they still served as the basis of modern day currencies.
Before the beginning of World War I, many of the major banks allowed their currencies to be converted to gold. But, while paper currency could be converted to gold at any time, very few people took advantage of this practice. For this reason, many often felt it was unnecessary for the government to stock a full reserve of gold in their central banks.
However, with an ever increasing supply of paper currency entering circulation and not enough gold to cover it, inflation occurred which resulted in an instable government. More and more foreign exchange controls were instated to protect the national interests and prevent the market from plunging. In July of 1944 during the latter stages of World War II, the Bretton Woods agreement was signed that established a fixed rate for the exchange of currency that was linked to the U.S. dollar.
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