From 1876 to 1913 the world operated under a principle known as the gold standard. The currency for each country was tied to the price of gold. If you wanted to exchange one currency for another currency then the price was determined based on the price relative to the price of gold. During this time period the price for currency was fixed. Countries were required to maintain an adequate reserve of gold to back its currency value in order for this system to work worldwide.
The outbreak of World War I interrupted the free flow of trade and the movement of gold between countries whether they were fighting the war or not. For this reason many major countries were forced to suspend participation in the gold standard. During the war I currencies were allowed to fluctuate over wide ranges and were not necessarily pegged to the price of gold. After the end of the war most countries returned to using gold to set the standard for currency prices.
The standard for calculating currency value was interrupted again with World War II. After the end of World War II many countries abandoned the gold standard. The primary reason for abandoning the gold standard was the rise of international trade. Trans-oceanic shipping and the common use of the airplane allowed countries to expand trade to foreign countries. Having to buy gold equal to your country's currency level was impacting a country from expanding their international trade. Countries did not want to limit their ability for foreign trade expansion but were handicapped by the requirements of the gold standard.
Countries needed another mechanism to set the value of currencies without being tied to the price of gold. The American dollar replaced gold as the determination of the price of currency. Through the adoption of the Bretton Woods Agreement in 1944, the value of a country's currency was based on its value to the American dollar. The American dollar was valued at $35 per ounce of gold. This agreement was abolished in 1971.
Today currency is traded based on supply and demand instead of its price being set by governments or other trade agreements. This has resulted in the rise of the foreign exchange market to handle the buy and sell of different currencies. Today market conditions, supply and demand and other economic indicators are used to set the value of a country's currency. This value can fluctuate daily.
