After a nap, and confirming with Yoren that he wouldn't be leaving for The Wall in the next few days, Aegon and Tyrion left together, discussing the details as they rode.
"Any fundraising starts with nothing but empty talk. The difference between real finance and a financial scam is that for the former, 'scamming' money is just a means and a start, not the goal and the end. We are, or at least hope to be, the former... If so, we must establish a formal and complete system that not only looks the part but also actually works," Aegon explained. "This requires a lot of rules and regulations to constrain the behavior of all participants—not just yours and mine. Now, I'll start discussing the details with you, just as you wished."
"Very well, you speak, and I will listen and provide suggestions."
"Okay." Aegon had already drafted everything in his room, so his thinking was naturally quite clear: "A mature financial system needs to consider quite a lot of things: stability, order, development... But we are just starting now, so we only need to consider stability for the time being. Stability mainly refers to the stability of the capital chain, and our main source of funds is borrowing... To maintain stability, as long as the creditors, or bondholders, do not arbitrarily demand repayment."
Faced with whole chunks of new knowledge and terms coming at him, Tyrion couldn't interject at all. He could only nod, trying to absorb everything while responding, "You mentioned interest."
"Right, interest, which is the return... I initially said one percent per month offhand, but thinking about it carefully, this number is quite reasonable. The lower the return rate, the lower the risk of the scam collapsing. This number is moderately low, so we still need to add other rules to cooperate—the method is also very simple: agree on the repayment time when borrowing, continue to calculate interest if overdue, and have penalties for insufficient time."
"Penalties too?" Tyrion questioned disapprovingly, "Borrowing money is already asking for help. If you say this, who would dare to take out money?"
"Don't worry, first, there's a bottom line we absolutely guarantee: the creditors' principal will never shrink. The 'penalty' only applies to the profit part." Aegon motioned for the other party to calm down, "What are we doing? Scamming money. But only we know this. On the surface, we are raising funds on behalf of the Night's Watch, under the guarantee of the Hand of the King, to purchase grain and equipment and send it to The Wall to fight the Wildlings Beyond the Wall and protect the Kingdom. This is a serious and noble matter. Although everything is actually being handled by the two of us, and only a portion of the funds are used where we claimed they would be, the debt entity... is the Night's Watch, not me."
He paused before continuing, "This point is quite crucial. I represent the organization Night's Watch. Although it's my own decision and this organization is indeed very weak, and southerners look down on it, legally the Night's Watch is an independent organization on par with the seven ducal strongholds. That's enough. This organization is 'officially' borrowing money to do serious business. As a representative, I must act in a professional manner and absolutely not let anyone see that I'm making a big deal out of nothing. On the premise of ensuring zero risk to the creditors' principal, we must establish some tough principles that seem very overbearing and are indeed beneficial to ourselves—the most basic one is that our bonds refuse to be redeemed before the agreed time."
"What you said makes sense, but after all, only a minority of people in the world are willing to be reasonable." Tyrion shook his head, "I don't know how you did it in China, but in Westeros, this not only won't work, it might also cause panic."
"Indeed, rules are rigid, but people are flexible. If the creditors are truly in urgent need of money, we certainly cannot stick to the rules and not repay, but penalties are essential—if a creditor requests to withdraw money early, when this money has been in our hands for more than two months, early redemption requires paying a one percent handling fee, which means the repaid interest is reduced by one month. However, if the loan period is less than one month and the interest is not even enough to cover the handling fee, based on the principle of not letting the creditor's principal suffer losses, the handling fee naturally cannot be collected—but there can be other penalty methods, for example, I will refuse to borrow money from this person again."
"Refuse to borrow money from this person again?" Tyrion was amused, but looking closely at Aegon's expression, he found that his adventurer friend was not joking: "Don't be silly, would anyone still beg to lend you money?"
"Sounds a bit arrogant, doesn't it? Let's put it in a slightly more low-key way. This person will be disqualified from purchasing Night's Watch Bonds." Aegon said confidently, his confidence greatly increased by Tyrion's participation: "Unless he first pays the handling fee for the previous default... Maybe you'll find it incredible, but sometimes reality is that bizarre."
The Dwarf maintained a cautious attitude as always: "Heh, I really want to believe it, but I can't."
"Indeed, a one percent monthly return rate doesn't have that much magic." Aegon admitted, "So, with penalties, there must also be rewards. Reward one: after three months, redemption no longer requires paying a handling fee. Reward two: interest increases—for example, the interest for the third month is 1.5%, the sixth month is 2%, and so on, the ninth month is 2.5%, and the twelfth month is 3%. Every three months, the interest for that month increases by 0.5%."
"That's too much."
"It's for that month, not every month. It's not much when calculated." Aegon corrected, "This way, the interest for a creditor lending me money for three months is 3.5%, for six months it's 7.5%, for nine months it's 12%, and for twelve months it's 17%... In this case, the return rate is attractive enough. This way, creditors will naturally form the impression that the longer the money stays with me, the higher the return. The same 100 golden dragons, if kept at home, are still 100 after a year. If lent to me, they become 117 after a year. What would you do?"
***
A 17% annualized interest rate, in modern times, doubling it would be close to the usury red line, which seems incredible. But a rule that must be faced is: the less developed a society is, the higher the lending interest rate... Take Westeros now as an example, borrowing young livestock at the beginning of the year to raise means returning double at the end of the year. Borrowing seeds in the spring to plant means returning half more in the autumn... The annualized interest rate reaches or approaches 100%.
The reason this happens is that in a society where productivity is not yet developed and civilization is not high, what is lent out is often not 'idle money', but crucial means of production, the next month's food money for the whole family, or even burial funds. Not only that, but there is also a very high risk of absconding and losing everything when the credit system is not sound... High risk must be balanced with high interest.
Aegon is now borrowing money in an official capacity, and the debt can be guaranteed and mortgaged with the taxes from The Gift (southerners certainly don't know that not much money is actually collected) and land. In a situation where 'the Night's Watch can run, but The Wall cannot', the interest rate naturally doesn't need to be as frighteningly high as private lending where you borrow one and return two or borrow two and return three... But even so, given that the credit is not as reliable as the Iron Throne or nobles with fertile fiefdoms, without more than ten percent, no one would be willing to pay.
***
"Seventeen... Indeed, it's barely attractive enough." Arithmetic has always been Tyrion's strength, but compared to a science student who received over a decade of exam-oriented education in China, he seemed quite weak. He tried his best to keep up with Aegon's pace, and then was unconsciously persuaded. He felt that he had been persuaded more times since meeting Aegon than in the past twenty years combined: "Understood, not only that, people who lend you money will gradually form the habitual thinking that the longer the money is held, the more it grows—unless they are truly in urgent need of money, they will try not to redeem."
"Exactly, let's think a bit deeper. Suppose you are a creditor, and you lend me 100 golden dragons—no, you lend it to the Night's Watch—for eleven months, let's say eleven and a half months. Something happened at home, and you are in urgent need of money. If you redeem now, the return is calculated based on eleven months, which is one hundred plus eleven months of interest, 114 golden dragons. You only need to wait another half month, and 114 will become 117, but you really can't wait. What would you do?"
"Hmm..." Time to think again? Tyrion liked it. He thought for a while and had the answer: "I would transfer this bond to someone else for a price of 115 or 116 golden dragons. This way, I solve my urgent need, and the person who takes over this bond can also earn one or two golden dragons in just over ten days."
"Exactly, what does this mean?"
Tyrion continued to think, and soon he was deeply shocked: "In this operation, the Night's Watch Bond you issued can be used as 115 or 116 golden dragons! That is to say, that thing has, in a sense... the function of 'banknotes' you mentioned!"
"That's right, but for that step, the entire society needs to recognize the reliability of the Night's Watch Bonds, which will take a long time. It would be great if we could see it in our lifetime. It's more likely that the King sees the potential of finance and issues national bonds, squeezing out my market." Aegon smiled, "Real finance is thousands of times more complex than this, but we are just starting, so let's not think that far ahead... Well, which way should we go at this intersection?"
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