Chapter 47: The Game of Money (Part 1)
"Forgive me for not explaining myself clearly earlier," Aeg said, waving his hand dismissively. "Let's start anew. I'll use a game to illustrate the viability and benefits of my plan. You're familiar with the Iron Bank, aren't you?"
"Indeed," Tyrion replied.
"How does it operate?"
"It collects the excess wealth of Braavos's citizens and loans it to those in need," Tyrion said, regaining his composure. "But it differs from your scheme; it's overseen by Braavos's rulers, not an individual."
"True, but let's table those differences for now. We'll grasp the mechanics through role-play." Aeg set aside the two certificates on the table and produced a silver coin, placing it before Tyrion. "I'm a common Braavos citizen, and you represent the Iron Bank. Imagine several wealthy Braavos residents have deposited one hundred thousand gold dragons with you."
Tyrion eyed the silver coin, a mere token for one hundred thousand gold dragons, and his disapproving expression softened. Easygoing yet steadfast in his beliefs, he wouldn't support fraudulent actions, not even for a friend. His curiosity was piqued, eager to see how Aeg would persuade him.
***
Aeg's tone turned solemn. "As a Braavos citizen, I plan to open a shop. My calculations suggest I need one hundred thousand gold dragons, which I lack. So, I turn to you for a loan."
Aeg picked up the silver coin and placed it on his side, signaling the start of the game.
"With the loan, I rent a shop, buy tools, and commence operations," Aeg said, moving the coin to an empty spot on the table to represent the expenditure. "The first round ends here. It's straightforward. I owe you one hundred thousand gold dragons, and you owe the depositors the same amount. Now, things get interesting."
"Oh?" Tyrion watched as Aeg took the coin, representing spent money, and returned it to his side. "What does this signify?"
"This is the crucial difference between Braavos and Westeros. In Braavos, people deposit their surplus with the Iron Bank, not hoard it at home. This subtle shift is key in the money game." Aeg couldn't suppress a smile, pleased with his explanation. "After I spend the gold dragons, the recipient redeposits them with you."
"I see." Tyrion seemed to grasp something yet remained uncertain.
"Then, a snag in my business plan emerges. I've opened the shop but haven't purchased raw materials. I need another one hundred thousand gold dragons, so I return to you for another loan."
"But you haven't repaid the first one."
"True, but if you refuse, I'll declare bankruptcy, leaving you with an unfinished shop." Aeg grinned. "The shop's rented, and its contents are useless to the Iron Bank. To recover your investment, you must lend me more, hoping my business succeeds."
"That sounds rather unreasonable."
"Not at all. This is why Braavos is the mightiest and wealthiest of the Free Cities!" Aeg exclaimed, moving the coin back to his side, to an unoccupied corner. "With the new loan, I open and operate the shop. Do you understand what's happening?"
"You're circulating this 'one hundred thousand gold dragons,' opening a shop that would typically cost two hundred thousand?"
"Exactly. With one hundred thousand, I've opened a two-hundred-thousand-gold-dragon shop. Eventually, you'll recoup the principal and interest on both loans, and the depositors will earn interest on their two-hundred-thousand-gold-dragon deposits. Everyone wins!" Aeg posed a question to Tyrion, "But how did this happen? Where did the extra one hundred thousand come from?"
Tyrion pondered before answering cautiously, "It's because I took a risk, lending to you despite owing it to someone else!" He quickly recalled the earlier unresolved issue. "This extra, nonexistent one hundred thousand is the embodiment of the risk I took!"
"Correct. But to your earlier point, if the depositors demanded their money back when I lent you the one hundred thousand, what would you do?"
"The Iron Bank surely has more than just one hundred thousand gold dragons."
"Indeed, your vault is brimming with wealth," Aeg said, placing a handful of silver coins before Tyrion. "So, if someone wishes to withdraw one hundred thousand gold dragons, you simply oblige. Yet, the issue remains: none of the money in your vault truly belongs to the Iron Bank. If all depositors demanded their funds simultaneously, what would you do?"
Tyrion's mind flashed back to their earlier discussion, but now the roles were reversed, with Aeg questioning him from across the table. "Such a scenario is improbable because the Iron Bank actively prevents it."
"How does it prevent this?"
Tyrion realized he had been ensnared in a trap. Known for his wit and love of intellectual sparring, he accepted the challenge.
After a brief moment of contemplation, he offered his response: "Interest and trust. Interest entices depositors to entrust their wealth, while trust in the Iron Bank's might ensures they never fear not being able to withdraw their funds when needed. Thus, unless they genuinely require the money, no one would withdraw out of mere apprehension."
"A sound explanation, but there's a catch. What if my shop fails to turn a profit?"
Tyrion's brow furrowed, and after a pause, he delivered his answer with a hint of frustration: "Then I wouldn't lend to you! Before disbursing any funds, I'd dispatch my agents to assess the situation. If they doubt your shop's profitability, not a single copper would be lent."
Tyrion's response was more precise than Aeg had anticipated. It was no wonder he was regarded as one of the sharpest minds in Westeros, swiftly grasping the concept of risk assessment in lending. This was advantageous. "Then, we can conclude that we've achieved what would typically require two hundred thousand gold dragons with just one hundred thousand, through a series of seemingly complex yet fundamentally simple operations. We've created an additional one hundred thousand gold dragons that doesn't actually exist. This is possible because you believe in my shop's potential and your depositors trust in the Iron Bank's ability to repay their savings with interest."
"Rather than viewing this nonexistent one hundred thousand gold dragons as the embodiment of the risk you've taken, it's more accurate to see it as the manifestation of 'trust' among the Iron Bank, depositors, and borrowers. This trust and confidence in the future enable the Braavosi to construct a vast fleet and a beautiful city far beyond their financial means, making Braavos the youngest yet richest and most powerful of the Nine Free Cities. Other trading cities have attempted to emulate this by establishing banks, but lacking the Braavosi culture of habitually depositing wealth in the Iron Bank, they cannot compete with its capital."
Tyrion was inundated with Aeg's novel vocabulary and unprecedented rules, feeling intellectually challenged for the first time. After some thought, he conceded he could find no fault in the logic.
But Aeg wasn't done. He pressed on: "Do you believe our game is over?"
"Isn't it?" Tyrion looked up, his gaze meeting Aeg's for a few seconds before the realization dawned. "Seven gods, you. intend to borrow more money!?"
*****
If you can't wait for the updates, feel free to read advanced chapters on Patreon.
patreon.com/BoredIdler