Chapter 47: The Money Game (Part 1)
"Gods, I must apologize for my poor explanation earlier." Egger waved a hand. "Let's start over. I'm going to use a game to explain the feasibility and the merits of my plan. You know of the Iron Bank, don't you?"
"Of course."
"How does it operate?"
"It gathers the surplus wealth of the citizens of Braavos and lends it to those in need." Tyrion collected his thoughts and added, "But it is unlike you; it is managed by the rulers of Braavos, not an individual."
"True enough, but we can discuss those differences at the end. For now, let's use a bit of roleplay to understand how it works." Egger tucked the two certificates back into his pocket and produced a single silver coin, placing it on the table before Tyrion. "I am an ordinary citizen of Braavos, and you represent the Iron Bank. Currently, several wealthy residents of our city have deposited ten thousand gold dragons with you."
The dwarf looked at the silver coin representing ten thousand dragons, and the disapproval on his face softened. He was an easygoing man, but once he set his mind on a principle, he would not easily waver; he would never support anyone in an act of fraud, even a friend he respected. Because of this, he was all the more curious to see how Egger planned to convince him.
Egger's tone became serious. "I, this ordinary Braavosi, plan to open a shop. After some initial calculations, I determine that I need roughly ten thousand gold dragons, but I have no money... so, I come to you and borrow ten thousand."
Egger pinched the silver coin he had just placed before Tyrion and moved it back to his side. The game had begun.
"Then, I use these ten thousand dragons to lease a storefront, buy tools, and get the shop running." Egger moved the silver coin to an empty corner of the table to indicate he had spent the money. "The first round of the game is over. Up to this point, it's all very simple: I owe you ten thousand gold dragons, and you owe the people who deposited their money with you—let's call them the depositors—ten thousand. Next, something interesting happens."
"Oh?" Tyrion stared at Egger as the ranger picked up the "spent" coin from the corner and brought it back in front of himself. "What does that mean?"
"This is the biggest difference between a Braavosi and a Westerosi. In Braavos, people don't hide their surplus wealth at home; they deposit it in the Iron Bank. This tiny change is crucial to the money game." Egger couldn't suppress a smile, feeling he had come up with a brilliant demonstration. "After I spend those ten thousand dragons, the people who earned them from me turn around and deposit that same money back with you."
"Wait..." Tyrion seemed to grasp something, but the mechanics were still fuzzy.
"Then, my business plan hits a snag. I realize that while the shop is open, I haven't bought any raw materials yet. I need another ten thousand dragons, so I come back to borrow from you again."
"But you haven't paid off your first loan."
"True, but if you don't lend it to me, I'll have to declare bankruptcy, and you'll be left holding a half-finished shop." Egger said with a grin. "But the storefront is leased, and the items in my shop are useless to the Iron Bank. This means if you want your money back, your only choice is to keep lending to me, hoping my shop can actually open and turn a profit."
"Isn't that just being a rogue?"
"No, it isn't. This is why Braavos is the strongest and wealthiest of all the Free Cities!" Egger raised his voice and took the silver coin back to his side, then moved it once more to the empty corner. "I use the second ten thousand dragons I borrowed from you to fully open the shop and begin trading. Do you see what happened?"
"You've shuffled these 'ten thousand dragons' back and forth to open a shop that required twenty thousand dragons in capital?"
"Exactly. With only ten thousand dragons, I've opened a shop that should have cost twenty thousand. In the future, you'll be able to collect the principal and interest on a twenty-thousand-dragon loan, and the wealthy men who deposited with you will eventually earn interest on twenty thousand dragons in deposits. All three parties are happy!" Egger turned the question back to Tyrion. "But how did it happen? Where did that extra ten thousand dragons come from?"
The dwarf thought for a long time before answering cautiously, "Because I took a risk. While still owing money to others, I lent their money again to you—who hadn't even paid back the first loan!" Tyrion quickly recalled the unresolved problem from earlier. "This extra, non-existent ten thousand dragons is actually the manifestation of the risk I took!"
"Correct. But back to your earlier question: what if, while you've lent that money to me, the people who deposited it—the depositors—suddenly come to withdraw it? What then?"
"The Iron Bank wouldn't have only ten thousand dragons."
"True enough." Egger fished out a handful of silver coins and dumped them in front of Tyrion. "Your vault has plenty of money. So, if someone wants to withdraw ten thousand, you simply give it to them. But here is the problem: out of all that money in your vault, not a single copper belongs to the Iron Bank itself. If all the depositors demand their money at the same time, what then?"
Tyrion suddenly remembered their previous conversation, except now Egger was the one asking. "That can't happen, because that is exactly the situation the Iron Bank strives to avoid."
"And how do they avoid it?"
How had Egger become the questioner and he the one answering? Tyrion realized he had been led into a circle; the ranger had made him play the role of the Iron Bank specifically to make him think through this problem. However, he always prided himself on his wit and loved mental games, so he accepted the challenge.
After a few seconds of thought, he had the answer. "Interest and trust. Interest makes the 'depositors' willing to leave their money there, and trust in the Iron Bank's strength ensures they never worry about being unable to withdraw it. Therefore, unless they actually need the money, no one would withdraw it merely out of fear."
"Well said. But now for the next problem: what if the shop I opened doesn't make money?"
The dwarf's eyebrows knitted together. After a while, he spat out the answer word by word, like a curse: "Then I wouldn't lend to you! Before releasing a loan, I would send employees to investigate. If my people think your shop is unlikely to be profitable, I wouldn't lend you a single copper."
Tyrion's answer was even more accurate than the one Egger had prepared; he truly was one of the cleverest men in Westeros to grasp the concept of risk assessment so quickly. "Precisely. So, we can draw a conclusion: the reason we can accomplish a task requiring twenty thousand dragons with only ten thousand is because, through a series of operations that look complex but are simple in principle, we have created a virtual ten thousand dragons that doesn't exist. And the reason we can do this is because you believe my shop will be profitable, and your depositors believe you will always be able to return their savings with interest."
...
"Rather than saying this non-existent ten thousand dragons is the manifestation of your risk, it is better to say it is the manifestation of the mutual 'trust' between the Iron Bank, the depositors, and the borrower. It is this trust and confidence in the future that allows the Braavosi to use limited coin to build a massive fleet and a beautiful city far beyond their actual financial capacity, becoming the youngest yet wealthiest and most powerful of the nine Free Cities. Other trade cities later imitated them by establishing banks, but because they couldn't replicate the cultural habit of the Braavosi to deposit their wealth in the Iron Bank, they are completely unable to compete in terms of capital volume."
Tyrion's head was swimming with Egger's barrage of new vocabulary and unheard-of rules. For the first time, he felt his brain wasn't quite enough. It took him a long while before he admitted he couldn't find a flaw in the logic.
But Egger wasn't finished. He decided to strike while the iron was hot. "Do you think our game is over?"
"It isn't?" The dwarf looked up and locked eyes with his adventurer friend for several seconds before the realization hit him: "By the Seven... you... you want to keep borrowing!?"
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