History
During medieval times in Europe, many cities and towns issued their own coins, often carrying the face of a ruler, such as the regional baron or bishop. When outsiders, especially travelling merchants, visited towns for a market fair, it became necessary to exchange his foreign coins to local ones at local money changers. Money changers would assess a foreign coin for its type, wear and tear, and possible counterfeit, then accept it as deposit, recording its value in local currency. The merchant could then withdraw the money in local currency to conduct trade or, more likely, keep it deposited and use its clearing facility to conduct trade.
In the market, most large transactions were done not by cash/coins, but by transfer order of funds on the books kept at the local money changer(s). After a market/fair ended, merchants gathered at the local money changers and withdrew their deposit in their own different currencies. The rate of exchange between different foreign currencies and the local one were fixed between the opening and the closing days of the market.
As the size and operations of money changers grew they began to provide a lending facility, hiding the interest rate in foreign exchange rate transaction. Later the Knights Templar provided this service to pilgrims traveling to and from the Holy Land.
Read more about this topic: Money Changer
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