The Wise Investor
The problem of the two currencies remained, and was a
stumbling block to the expansion of trade between the two
valleys. So, the goldsmith decided to offer a new service to
the customers of his bank.
He would offer to exchange one currency for the other.
His agents would take goods to the second valley, sell them
for the second valley's currency, and return with the
currency to the first valley. This would be kept in the
goldsmith's bank, and anyone planning to travel to the second
valley could come into the bank and exchange some notes
between the two curencies.
The goldsmith calculated how much of each currency
was needed to buy similar items. These figures were then
used to determine how many notes of one currency would
be swapped for the other currency.
Of course, the goldsmith intended to make a profit, so he
charged a fee for the conversion. Over time, prices in each
valley changed by different amounts, and so the conversion
ratio between notes changed as well. As long as the same
value bought the same goods in each valley, people were
happy to freely convert their notes from one currency to the
other, as they needed.
This, Kate, was the beginnings of foreign exchange, and
it is a system that we still live with today."