According to most, the history of birthstones begins with the ancient Israelites. The Book of Exodus describes a breastplate worn by Aaron, the brother of Moses and High Priest. On that breastplate were twelve stones, typically regarded as the original birthstones.
Each of the twelve stones represented one of the Twelve Houses. These stones eventually became associated with the Kabala, and with the Twelve Houses of the Zodiac. The stones were ascribed a 'personality', and defining characteristics, as well as healing properties that matched the particular vulnerabilities of a Zodiacal sign.
At the same time, other cultures were developing similar traditions concerning gemstones. Indian Ayurvedic tradition has its own system of gemstones for the birth months, as did the Romans and the Arabic. The ancients believed that the powers of a gemstone were held by - and unleashed through - the color of the stone. It wasn't until the mid-1500s that people began to wear gemstones to attract luck, protection and other qualities connected to the gems. In the 1800s it became a tradition to wear the stone for the month of your birth.
In 1912, the American National Association of Jewelers assigned birthstones to each of the twelve calendar months to create the modern birthstone chart that is in use today. Several alternate birthstones have been added in the years since, but it is the general system that most people know.