kscans

Chapter 20 - Chapter 3: Part Two, Savings vs. Debt

"I plan to make money with a new confection called French toast. French toast can be made with bread, eggs, milk, sugar, and honey. These will be the raw materials. Let's say the ingredients for one slice of French toast cost ten copper coins. You buy the ingredients for ten coppers, cook the French toast, and sell it for twenty coppers. What would be the basic structure of this business?"

I retracted the silver coin and placed ten copper coins to the right of the frying pan, and twenty to the left. Two thousand yen for a slice of French toast is a reasonable price. If we weren't using our own honey, it might even require a silver coin.

Incidentally, even city dwellers in this world can do basic addition and subtraction. Many people can also handle multiplication, though you'd be considered an expert if you knew your multiplication tables.

"Earning twenty coppers from ten... no, ten copper coins... But you can't make it with just the ingredients, can you?"

A questioning look appeared on Alfina's face. Aside from momentarily failing to register the 'copper coin' unit, she was doing splendidly. The results of the last three days Mia had spent drilling her on the prices of things necessary for business were showing. The lesson had been framed in terms of how much honey profit would be lost if she broke something. I still had a fresh memory of her shocked expression at the price of paper and cloth.

"That's right. In reality, there are costs like rent for the space, firewood, and the frying pan. And of course, there are my own living expenses for cooking the French toast. If we roughly estimate those at five copper coins, the essence of this business becomes earning twenty copper coins from an initial fifteen. We're selling French toast, but it's really about the relationship between money."

Alfina looked back and forth between the remaining French toast in the pan and the copper coins.

"I think I understand a little now. But it sounds a bit frightening."

Of course it does. We're converting all value into money. The potential and the limits of measuring things in money. First, she needs to understand the former. It's not a matter of facing reality or anything like that, it's just that the former is far simpler.

"However, costs fluctuate greatly depending on the number of products you sell. The easiest to understand is the rent. Let's say the rent for one shop is three silver coins a month. If you only sell one slice of French toast a day, the rent portion for that one slice comes to ten copper coins."

I added ten more copper coins to the right of the frying pan.

"If the ingredients cost ten coppers and the rent is ten coppers, that's twenty coppers. With other expenses, you'd be taking a loss."

"Correct. But if you were to sell ten slices of French toast a day, the cost per slice drops to one copper coin. That brings the cost to eleven coppers. The cost of firewood also becomes cheaper as you make more, since there's less waste. In business, the larger the scale, the lower the cost per item."

I removed nine of the ten copper coins.

"Let's assume the ingredient cost is ten copper coins per slice. The monthly overhead for rent and my living expenses combined comes to nine silver coins. If we assume we can sell ten slices a day, the total cost for ingredients is ten coppers, times ten pieces, times thirty days, for a total of 3,000 copper coins. The overhead, converted to coppers, is 900 coins. So before you can even start the business, you need 3,900 copper coins. This is the equivalent of a full year's living expenses for an average citizen of the Royal Capital."

"So, I work desperately to save up 3,900 copper coins and start my business. My profit, if I sell ten slices of French toast for twenty coppers each for thirty days, is 6,000 copper coins. In other words, I turned 3,900 coppers into 6,000. I've made a profit of 2,100 copper coins. For a common citizen, that's enough to live on for more than half a year."

"Business is quite amazing, isn't it?"

Alfina looked at me, impressed. There now. That golden confection you were eating so happily a moment ago must be starting to look less like a gold coin, but maybe like a silver one. But from here on, things get even less sweet.

"However, just as I'm raking in the profits, an enemy appears to stand in my way."

This was a story of battle, in the name of commerce. I looked at Mia.

"Alright, Mia, you're the rival merchant. What do you do?"

"I just need to crush Senpai's shop, right?"

"That's right."

"What!?"

Alfina was shocked by my exchange with Mia. I guess she wouldn't understand being told something like that so suddenly. Actually, the scary one is Mia for understanding it so well. That's not some latent desire of yours, is it?

"Ahem. So, I am the son of a great merchant. I hear about an impertinent... no, a troublesome merchant who's making a killing selling a rare confection in the capital recently. I investigate disguised as a customer and smirk to myself, thinking that this French toast seems like an easy way to make money. As it happens, I have 39 silver coins in my pocket, which is 3,900 copper coins worth of allowance. I decide to crush this impertinent little merchant and monopolize the profits. Now, what do I do?"

Mia, getting into it, enthusiastically turned the question to Alfina.

"W. Well... would she do something dishonest? Um, like buying up all the ingredients..."

Oh, she came up with cornering the market. Come to think of it, Dorefano did that to me. Though it was jars, not ingredients, and it wasn't him directly but a subsidiary of a subsidiary of a subsidiary of his.

"No, I will compete using perfectly legitimate means. Specifically... debt."

"D. Debt?"

Alfina tilted her head. She probably found it hard to understand why someone wealthy would take on debt. But a rich person's greatest advantage is their ability to borrow money. In the capitalist economic system of modern Earth, business was a game of competing over the ability to take on debt.

"I use my 39 silver coins and my family's credit as collateral to apply for a loan. I then secure 390 silver coins, ten times the capital of Senpai's shop. However, the interest is ten percent a month, so the 39 coins I had will be gone in a month."

Mia gleefully explained her plan to crush my shop. Alfina listened, completely engrossed.

"Now, with ten times the capital, I'll get a shop three times bigger than Senpai's, hire three times the people, and buy a massive amount of ingredients. And I will sell ten times the number of French toasts at 15 copper coins each."

"Ricardo-kun's shop sells them for 20 copper coins a slice, right? I can see how that would be a problem for Ricardo-kun, but will you be okay?"

"Please recall what we just discussed. The larger the scale of business, the lower the cost per item, the original cost. Even with a shop three times the size, the rent won't even double. More importantly, this principle also applies to those who sell me ingredients. I can lower my material cost per slice of French toast to a much cheaper price than Senpai, down to five copper coins."

"R. Really, by that much?"

It wasn't a particularly strange assumption. For the ingredient seller, the labor cost for a single transaction doesn't change even if the volume is ten times larger.

"Now, let's compare the two businesses. The cost per slice of French toast at Senpai's shop is 13 copper coins. My shop's cost, including overhead, is 6 coins. This means the profit per slice for Senpai is 7 coppers, while mine is 9."

"Even though you're selling it for less, you're making more money, Mia-san. But you have to pay interest on your loan, don't you? Ricardo-kun is using his own money, so he has no interest."

Alfina was following along perfectly. Of course, that's what she'd think. Debt is a loss, it's bad. That's the normal way of thinking.

"Yes, but my profit is 9 copper coins times 3,000 slices, which is 27,000 coppers a month, or 270 silver coins. I can easily pay the monthly interest of 39 silver coins. Now, what will you do, Senpai?"

"I have no choice. I'll lower the price of my French toast to 15 copper coins. Now our prices are the same."

"I'll lower mine to 14."

"Grk. 13 then."

I continued a fight I knew I would lose. Sympathy was blooming in Alfina's eyes as she watched me.

"Mia-san can lower the price even more, can't she?"

"That's right. The moment the price war hit 13 copper coins, my profit became zero. Of course, my living expenses are included in the costs, so I can survive. But Mia would mercilessly drop the price to 12. Even with 39 silver coins of interest on the loan, it's only a cost of 1.3 copper coins per slice of French toast. Mia can sell her French toast for 8 coppers a slice and still secure a profit. There's nothing I can do. In fact, since my French toast isn't selling, my cost per slice will actually increase from 13. Any unsold stock becomes a loss."

I said as much and raised both my hands. I couldn't win against the rich man.

"B. But wait. Then, if Ricardo-kun also took out a loan..."

"No one would lend money to a humble small merchant like me. Even if I found someone by some miracle, I wouldn't be able to borrow at a ten percent interest rate with my credit. And of course, an amount like 390 silver coins would be impossible."

And so, the bad ending was complete. It was a simplification, but it wasn't far from the truth. If anything, it was still too lenient.

"That's not fair. It was Ricardo-kun's idea."

Alfina's cheeks puffed out. She shot a complicated look at Mia. Hey now, it's a bit of a problem if you get emotionally invested in my side of the story.

"This is the other meaning of making money with money."

I brought the conversation back to the theory.

"You should think of procuring money as a cost, just like procuring ingredients. The interest on the loan is that cost. In other words, Mia's business is..."

I rearranged the copper coins in front of the frying pan.

"It's about procuring 390 silver coins by paying 39 silver coins in interest, and turning that into 600 silver coins. In other words, using money obtained by paying ten percent interest to generate a profit of over fifty percent. This means that as long as you can earn more than the interest rate, debt is power."

In this case, no matter how much profit is made, the principal is never paid back. Why? Because the capital borrowed at a ten percent interest rate continues to generate a profit of more than ten percent. Paying it back would be a loss. It's the same as not killing a bird that lays more eggs than the cost of its feed.

"By the way, once Senpai's shop goes under, I'll raise the price and make even more of a killing."

"Y. You'd go that far?"

Mia presented an even harsher reality. Alfina was now completely terrified of Mia, the villainous merchant. Well, at any rate, thanks to Mia's compelling performance, the lesson seemed to have gotten through loud and clear. Even I was a little scared.

"W. Well, anyway, did you understand that since business is about making money with money, the one who can prepare more money has the advantage? In business, money isn't just something that's nice to have. A lack of it means you will be destroyed."

"Yes... It sounds like you're talking about war funds."

"That's exactly what it is. I'm glad you caught on so quickly."

No matter how gentle she seemed, she was still one of the ruling class, as expected.

Actually, both Mia and Alfina are probably naturally smarter than me. Now then, let's return to why I brought up such an ominous topic with such excellent students.