Currency and money are ultimately concepts established by the government. It only has value when both parties, the giver and the receiver, agree on its value. The government helps create political stability and the population enables economic stability. However, currency can be backed up in many other ways.
In the 20th century, the world began to become more connected, and a standard needed to be created to guide this global connection. Seeing that each country had its own form of money, it was difficult to agree on a standard exchange rate. The world soon agreed on the Gold Standard, a way of giving value to money based on how much gold each country had.
In the early 1900s, Britain was considered a leading empire. With London as the financial center of the world and with its gold reserves from its colonies, Britain grew wealthy with the Gold Standard. However, with the start of World War I, countries had to stop the convertibility of currency into gold. With the need to buy resources for war, it was difficult to find a substitute to back up money. As the war came to an end, gold became overvalued and a series of payment problems involving devaluation occurred.
In the 1930s, the global standard was to tie currency to the pound. However, due to the instabilities that occurred in the past decades, this system could not be held up. By the time World War II began, Harry Dexter Whiter, the Chief Economist of the US Treasury and John Maynard Keynes, a British Economist, devised a new post-war economic system. In 1944, towards the end of the war, the Bretton Woods Agreement was proposed to establish economic cooperation. The US was finally stepping away from its ideas of isolationism, and the world accepted a system adjusting the gold peg to the US dollar. This allowed the option to either peg to gold or the US dollar. Currency was easily convertible and had a reliable system.
This soon changed when the Vietnam War began. By 1971, the US had to print more money to fund the war. International confidence began to drop in the US dollar and with more physical money in the system, many questioned the amount of gold the US truly had. This system soon came to an end in 1971 and a free floating currency without a fixed system was accepted.
Without a fixed standard, the world settled on a system where the markets would ultimately decide the value. The IMF would step in and help countries peg their currency to whatever they wanted.
As you can see, the world went through a series of changes to shape the exchange rates we use now. Could your international business take advantage of the current currency rates? It’s also important to bear in mind any fluctuating rates that might have an impact on your enterprise.