When goods were first traded between the two areas, they exchange goods, so many minerals or barrels of wine for so garments. But as the years passed they had began to exchange goods for currency. At first the societies agreed that Tropicana pello would be worth one Westerns dollah. They also agreed that each government would support its currency by buying its own currency when the other nation wishes to sell. For example, if West accumulated a surplus of pellos beyond what it needed, the Tropicana Central Bank would buy them back. But what would they buy with if they did not have dollahs? They agreed to use gold, which was a very scarce commodity mined to about the same degree in each nation. It was very hard to find in the ground, and had long been highly prized by both nations. This currency arrangement worked for a number of years, but Tropicana was concerned that its gold reserves were diminishing. Trade was favoring West and it seemed that whenever there was some accounting to be done, it was an exchange of surplus pellos in West for Tropicana gold reserves. Tropicana had what they called an unfavorable trade balance.
One Friday afternoon the Tropicana government announced that they were devaluing their currency, that they would now give two pellos for each dollash. West and its producers did not like this. West officials said it was a "beggar by thy neighbor" policy, that it attempted to correct a domestic problem by causing harm to one's neighbor. Immediately goods from Tropicana became more attractive to buyers in West, and some goods from West were now too expensive for Tropicana buyers to consider. But over time, West became more efficient and imbalance in its favor occurred once again. This time Tropicana did not devalue. It was nearly out of gold. It decided that it would no longer exchange gold at a fixed rate for its own pellos. And it would not support the pello. It would allow the currency to float, and if there was no confidence in the pello, it would drop in value compared to the dollah. That is what began to happen. The pello had become a "soft" currency. The dollah was "hard".
Sellers in West now wanted only Western currency for their goods. Tropicana pello were not worth anything in West. Western workers making goods to export to Tropicana would not accept pellos. They could not longer take the pellos to the Western bank and be assured of receiving dollahs in exchange. And of course they had to buy their food and other items with dollash. So when a Western seller agreed to sell to Tropicana buyer, the buyer was required to obtain dollahs. Dollahs were available from the Central Bank of Tropicana, but often the supply was low. Sometimes the Tropicana buyer received dollahs for selling goods to West. It may have seemed strange to some observers, but Tropicanos were more willing to accept Western dollahs for the sale of Tropicana goods, than were Westerns sellers willing to accept Tropicana pellos for the sale of Western products.
After a couple of years the Bank of West discovered that it had many pellos which it had received from its producers, who had exchanged the pellos for dollahs. One day the Central Bank of Tropicana said it did not have any dollahs to give to the Bank of West in exchange for the pellos the latter bank had accumulated. There had never been such a problem before. So the government of West began to loan dollahs to the government of Tropicana. In time the amount of dollahs owed by Tropicana to West became very high, and Westerns were concerned that they might never be paid. Some Tropicano politicians suggested that the nation should default, but most believed that would be very harmful to the country and that extensions should be sought for paying the debt. West agreed, but demanded that Tropicana take certain steps to diminish the prospects that the same problem would arise in the future.
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