Chapter 59: Night's Watch Bonds (Part 1)
Following a brief respite and a confirmation from Yoren that their departure for the Wall was postponed, Aeg and Tyrion ventured forth together, their conversation laced with intricate details as they rode side by side.
"The foundation of any fundraising endeavor is nothing," Aeg explained, "The distinction between legitimate finance and a financial scam lies in the intent behind the deception. For us, it is merely a means to an end, not the end itself. We aim for the former. or at least, we hope to. To achieve this, we must establish a formal and comprehensive system. This is not just for appearances but to ensure its functionality."
"Very well, proceed," Tyrion interjected, his curiosity piqued. "I'm all ears and will offer my insights where necessary."
"Alright," Aeg responded, his thoughts organized from the preparations made in his room. "A mature financial system encompasses stability, order, and development. However, given our nascent stage, let's focus on stability. This primarily concerns the stability of the financial chain, with borrowing as our primary source of funds. To maintain stability, we must ensure that creditors, or bondholders, cannot demand repayment at their whim."
Tyrion, inundated with new concepts and terminology, could only nod, absorbing the information while echoing, "You mentioned interest."
"Yes, interest, or returns," Aeg continued. "I casually suggested one percent per month, and upon reflection, that figure is quite reasonable. The lower the return rate, the lower the risk of the scam collapsing. This rate can be considered moderate to low, so we need supplementary rules. the method is simple. We agree on the repayment time at the time of borrowing, continue calculating interest for overtime, and impose penalties for shortfalls."
"Penalties as well?" Tyrion questioned, his tone disapproving. "If that's the case, who would dare to lend us money?"
"Don't worry," Aeg reassured, signaling for Tyrion to remain calm. "There's a bottom line we must guarantee: the creditors' principal will never diminish. The 'penalty' only applies to the returns."
He paused, then elaborated, "What are we truly doing here? We're orchestrating a scam, but only we are privy to this. On the surface, we're fundraising on behalf of the Night's Watch, backed by the Hand of the King, to procure supplies and equipment for the Wall. Our mission is to combat the wildlings beyond and defend the realm. It's a serious and noble cause. Despite our autonomous management and the partial diversion of funds, the debtor. is the Night's Watch, not me."
Aeg emphasized, "This is crucial. I represent the Wall's garrison, albeit on my own initiative. Despite the organization's decline and the disdain from southerners, legally, the Night's Watch is an entity on par with the Seven Great kingdoms. This is sufficient. The organization is 'officially' borrowing money for a righteous cause. As its representative, I must maintain a professional facade and never appear to abuse my authority. On the premise of ensuring zero risk to the creditors' principal, we must establish some tough, seemingly overbearing, but ultimately beneficial principles. The most fundamental is our refusal to allow bonds to be redeemed before the agreed time."
"Your logic is sound, but few in this world are willing to be reasonable," Tyrion countered, shaking his head. "I'm not sure how things are done in Caina, but in Westeros, such rigidity could incite panic."
"True, rules are rigid, but people are flexible," Aeg conceded. "If creditors are in dire need of funds, we can't adhere strictly to the rules and deny repayment, but penalties are non-negotiable. If the money has been with us for over two months and the creditor demands early withdrawal, a one percent handling fee is deducted, equivalent to a month's interest. For borrowing periods under a month, where interest doesn't cover the fee, we adhere to the principle of not diminishing the creditor's principal. In such cases, other penalties apply, like disqualifying the creditor from future Night's Watch bond purchases."
"Disqualifying them from future purchases?" Tyrion was amused but saw the seriousness in Aeg's expression. "That's rather arrogant, don't you think? Who would beg to lend us money?"
"It may sound arrogant," Aeg said confidently, buoyed by Tyrion's involvement. "Let me rephrase it more humbly: they will lose the privilege to invest in Night's Watch bonds unless they compensate for the handling fee from their last premature withdrawal. It may seem incredible, but reality is often stranger than we imagine."
Tyrion, ever cautious, mused, "I want to believe it, but I can't."
The dialogue between Aeg and Tyrion was enriched with the tension of their clandestine operation and the vivid imagery of their surroundings. The crisp air of the evening enveloped them as the sun dipped below the horizon, casting long shadows that danced along the path. The clop of their horses' hooves on the cobblestone road provided a rhythmic backdrop to their conversation, adding an air of urgency to their plans. The atmosphere was thick with the weight of their deception and the potential consequences of their actions, yet there was an undercurrent of excitement at the prospect of pulling off such an audacious scheme.
"Indeed, a one percent monthly return rate lacks a certain allure," Aeg conceded. "Therefore, in addition to penalties, we must introduce rewards. Reward one: after more than three months, redemption no longer incurs a handling fee. Reward two: interest rates escalate. for instance, the interest for the third month is 1.5%, for the sixth month it's 2%, and so on. By the ninth month, it's 2.5%, and by the twelfth month, it's 3%. This increase occurs every three months, with the monthly interest rate rising by 0.5%."
"Isn't that a bit excessive?" Tyrion queried.
"It's for that specific month, not every month," Aeg clarified. "Upon calculation, it's not as much as it seems. Thus, for a creditor lending to me for three months, the interest is 3.5%, for six months it's 7.5%, for nine months it's 12%, and for twelve months, it's 17%. This return rate is sufficiently enticing. Consequently, creditors will naturally form the impression that the longer their money remains with me, the higher the return. Consider this: the same 100 gold dragons, left at home for a year, will still be 100, but lent to me for a year, will grow to 117. What would you do?"
***
A 17% annual interest rate, by modern standards, nears the threshold of usury when doubled, which seems astonishing. However, one must acknowledge that in less developed societies, interest rates for loans are often higher. Take Westeros, for example, where at the beginning of the year, borrowing livestock for rearing requires repayment of double by year's end, and borrowing seeds for planting in spring demands an extra half by autumn. These practices result in annual interest rates nearing or reaching 100%.
This situation arises because in societies with underdeveloped productivity and lower civilizational levels, what is lent is not merely "idle money," but vital production materials, the family's next month's food, or even savings for a funeral. Additionally, the high risk of default due to an unsound credit system necessitates high interest rates to balance the risk.
Aeg is now borrowing money in an official capacity, with debts secured by the taxes (unknown to southerners that not much can be collected) and the land of donated territories. Given that "the Night's Watch can flee, but the Wall cannot," interest rates need not be as exorbitantly high as those of private loans, where one borrows one and returns two, or borrows two and returns three. Yet, without a return of several dozen percent, no one would be willing to lend, considering the credit is not as dependable as that of the Iron Throne or nobles with fertile fiefs.
***
"Seventeen percent. barely attractive enough," Tyrion acknowledged. Arithmetic had always been his forte, but compared to someone steeped in decades of exam-oriented education, he felt inadequate. He struggled to match Aeg's pace and was unconsciously persuaded. He realized he had been convinced more times since meeting Aeg than in the past twenty years combined: "I understand. Not only that, but those who lend money to you will gradually adopt the mindset that the longer they leave their money, the more it will earn. unless they are truly in urgent need of funds, they will try not to redeem it."
"Correct, think deeper. If you were a creditor and you lent me. no, let's say lent to the Night's Watch. 100 gold dragons for eleven months, or even eleven and a half months. An emergency arises at home, and you're in urgent need of money. If you redeem it now, the return is calculated based on eleven months, which is 114 gold dragons. If you just wait another half a month, 114 will become 117, but you really can't wait. What would you do?"
"Hmm." More mental gymnastics? Tyrion relished the challenge. After a moment's thought, he had an answer: "I would transfer the bond to someone else at a price of 115 or 116 gold dragons. This way, I solve my immediate problem, and the new bondholder can also earn a gold dragon or two in just a few days."
"Precisely, what does this imply?"
Tyrion continued to ponder and soon grasped the significance: "At this juncture, the Night's Watch bond you issued can be used as 115 or 116 gold dragons! In a sense, it has. the function of 'paper money' you mentioned!"
"Exactly, but that step requires the entire society to recognize the reliability of the Night's Watch bonds, which is a long way off. It would be fortunate if we could witness it in our lifetime. More likely, the king sees the potential of finance and issues national bonds, encroaching on my market." Aeg chuckled, "Real finance is thousands of times more complex than this, but we've only just begun, so let's not delve that far yet. Well, which way should we go at this intersection?"
The conversation between Aeg and Tyrion was laced with the intricacies of finance and the subtleties of human psychology. As they discussed the finer points of their scheme, the world around them seemed to fade into the background, the only reality being the numbers and strategies that danced between them. The cool evening air did nothing to quell the heat of their intellectual exchange, and the setting sun cast long shadows that seemed to dance in time with their words. The road ahead was uncertain, much like the path they were carving in the financial landscape of Westeros, but for now, they were content in their shared vision and the potential it held.
*****
A/N: I encourage you to take a peek at my other literary endeavors. I'm confident that you'll find them captivating. They're waiting to whisk you away on new adventures.
Also, a gentle reminder: "Don't forget to vote with your Power Stones. It will be a tremendous help in getting my works noticed by a wider audience. Your votes are like beacons in the night, guiding others to the stories we've built together."