Money is most often defined as “a medium of exchange with no intrinsic value.” This essentially means that what people accept as money can be used as money. If you go back in history, you will see that people have used a number of different things as money, some that had intrinsic value (such as gold and silver), and many that had no intrinsic value of their own (such as seashells and cocoa beans). Currently, all countries around the world use money that is known as fiat money. From Latin, this term means, “Let it be so.” Essentially, this means that each country prints money on paper (or in some cases, plastic), and that currency is not backed by anything of intrinsic value except the full faith and credit of a country’s Central Bank.
In the past, money was backed by silver (the silver standard) or gold (the gold standard). However, that came with its own set of problems. It meant that you had to have silver or gold equivalent in value to the amount of total money you had in circulation. This made it difficult to increase the supply of money in your economy, since you had to acquire enough silver or gold to back up the additional money you wanted to circulate. So the Central Banks of the world went off the “metal standard” for their currency. The U.S. abandoned the gold standard in 1933 but allowed holders of dollar currency to convert them to gold at the fixed price of $35 per ounce, an arrangement that was eliminated in 1971. The U.S. abandoned the silver standard in 1935.
So, in a way, all paper money is fake! It is, of course, backed by “the full faith and credit” of the country that issued it, but that’s the only thing backing it. That means that unstable countries might end up with currency that cannot be used as payment for oil or food. Even if it is accepted, it is only at a greatly depreciated value. The world’s currencies fluctuate relative to each other according to the rules of demand and supply. For example, if you are trying to understand the exchange rates between the U.S. dollar and the Euro, consider how many U.S. dollars it would take to buy one Euro. If a lot of people who own dollars want to buy Euros but not an equal amount of people who own Euros want to buy dollars, the Euro will appreciate relative to the dollar.