Chapter 59: Night's Watch Bonds (Part I)
After a midday nap, Egger checked with Yoren to confirm he wouldn't be heading back to the Wall for at least a few days. Then, he and Tyrion set out together, discussing the finer details as they rode.
"At the start, any fundraising is essentially 'to gain valuable things with little or no investment.' The difference between legitimate finance and a financial scam is that for the former, 'tricking' people out of their money is merely a means and a beginning, not the goal or the end. We are—or at least hope we are—doing the former... If that's the case, we must establish a formal and complete system. It shouldn't just look the part; it actually has to function," Egger explained. "This requires many rules and regulations to constrain all participants—not just your behavior and mine. Now, I shall begin discussing the details with you, just as you wished."
"Very well. Speak, and I shall listen and offer my counsel."
"Mm." Egger had already drafted the plan in his mind back at the inn, so his thoughts were quite clear. "A mature financial system must consider many things: stability, order, growth... but since we are just starting, we only need to worry about stability for now. Stability mainly refers to the stability of the capital chain, and our primary source of capital is loans. To maintain stability, we simply need to ensure that the lenders—or rather, the creditors—do not demand repayment at will."
Faced with a sudden barrage of new knowledge and terminology, Tyrion couldn't find an opening to interject. He could only nod, struggling to absorb it all while chiming in, "You mentioned it before: interest."
"Correct. Interest, or the return on investment. I initially threw out a figure of one percent per month. Thinking it over, that number is actually quite reasonable. The lower the rate of return, the lower the risk of the scheme collapsing. This figure is moderate to low, so we must supplement it with other rules. The method is simple: agree on a repayment time when the loan is made. There will be continued interest for going over time, and penalties for withdrawing early."
"Penalties as well?" Tyrion questioned disapprovingly. "Borrowing money is already asking a favor. If you put it that way, who would dare hand over their coin?"
"Don't be in such a hurry. First, there is one bottom line we must guarantee: the creditors' principal will never shrink. The 'penalties' only apply to the profit portion." Egger signaled for him to stay calm. "What are we doing? Swindling money. But only we know that. On the surface, we are representing the Night's Watch, fundraising under the Hand's guarantee to procure supplies and equipment for the Wall to defend the realm against the wildlings. This is a serious and noble cause. Even though the two of us are actually running everything and only a portion of the funds will go where we claim, the debtor... is the Night's Watch, not me."
He paused before continuing. "This point is crucial. I represent the organization of the Wall's defenders. Though I'm acting on my own authority, and though the organization has indeed fallen into decay and is looked down upon by Southerners, legally, the Night's Watch is an independent entity on par with the seven Great Houses. That is enough. This organization is 'officially' borrowing money for serious business. As its representative, I must maintain an air of professional formality. I cannot let people think I'm just waving a chicken feather as a command arrow. On the basis of guaranteeing zero risk to the creditors' principal, we must establish some firm, seemingly overbearing principles that are actually in our favor—the most basic being that our bonds cannot be redeemed before the agreed time."
"Your logic is sound, but those willing to listen to reason are a minority in this world," Tyrion said, shaking his head. "I don't know how your people did things, but in Westeros, this will not only fail to work, it might cause a panic."
"True. Rules are dead, but people are flexible. If a creditor truly needs the money urgently, we obviously shouldn't hold stubbornly to the rules and refuse to pay, but a penalty is essential. If a creditor demands an early withdrawal after the money has been in our hands for more than two months, they must pay a one percent transaction fee—meaning their interest shrinks by one month. If the loan has been held for less than a month and the interest doesn't even cover the fee, we naturally can't collect it, as we must adhere to the principle of not losing the creditor's principal. However, there can be other penalties—for example, I would refuse to borrow money from that person ever again."
"Refuse to borrow from them again?" Tyrion was amused, but looking closely at Egger's expression, he realized his adventurer friend wasn't joking. "Don't be ridiculous. Is anyone going to be begging to lend you money?"
"Sounds a bit arrogant, doesn't it? Let's use a more low-profile phrasing then: that person would be disqualified from purchasing Night's Watch Bonds," Egger said confidently. Tyrion's participation had bolstered his resolve. "Unless they first pay the breach-of-contract fee from their last purchase... You might find it hard to believe, but sometimes reality is just that bizarre."
The dwarf maintained his usual skepticism. "Heh. I'd love to believe that, but I can't."
"True, a one percent monthly return doesn't have that much magic," Egger admitted. "So, where there are penalties, there must also be rewards. Reward one: redemption after three months no longer requires a transaction fee. Reward two: incremental interest. 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 full months, that month's interest rises by 0.5%."
"That's too much."
"That's for that specific month, not every month. It doesn't add up to as much as you think," Egger corrected. "Calculated this way, the interest for someone lending to me for three months would be 3.5%; for six months, 7.5%; for nine months, 12%; and for twelve months, 17%... In this context, the rate of return is enticing enough. This way, the creditors will naturally form an impression: the longer the money stays in my hands, the higher the return. The same 100 gold dragons left at home for a year is still 100; lent to me for a year, it becomes 117. What would you do?"
A 17% annual interest rate would be nearing the red line of predatory lending in the modern world, which seems incredible. However, one must recognize a fundamental law: the less developed a society, the higher the lending rates. Take present-day Westeros as an example: borrowing a livestock cub at the start of the year requires returning two by the end; borrowing seeds in the spring to plant requires returning an extra half in the autumn... annual rates often reach or approach 100%.
The reason for this is that in a society where productivity is low and civilization is less developed, what is lent out is rarely spare cash. Instead, it is crucial means of production—next month's food for the family or even burial money. Furthermore, one must face the extremely high risk of the borrower vanishing or the investment being a total loss in a system without established credit... High risk must be balanced with high interest.
Egger was now borrowing in an official capacity. The debt could be secured by the taxes of the Gift (though Southerners didn't know those were worth almost nothing) and the land itself. Given that the Watchmen might run, but the Wall isn't going anywhere, the interest naturally didn't need to be as terrifyingly high as the 'borrow one, return two' rates of private lending. Even so, since their credit wasn't as reliable as the Iron Throne or a lord with fertile lands, no one would be willing to part with their coin without a return of at least ten-odd percent.
"Seventeen... indeed, that is just barely enticing enough." Calculation had always been Tyrion's strength, but compared to a science student who had endured over a decade of exam-oriented education, he seemed a bit lacking. He had to use all his effort just to keep up with Egger's pace, and he found himself unconsciously persuaded. He felt that since meeting Egger, he had been persuaded more times than in the past twenty-odd years combined. "I see. Not only that, but the people lending to you will gradually form a habit of thinking that the longer the money stays, the more it grows. Unless they are truly desperate for coin, they will try their best not to redeem it."
"Exactly. Now think a step further: suppose you are a creditor. You lent 100 gold dragons to me—no, to the Night's Watch—for eleven months. Let's say eleven and a half. Something happens at home and you desperately need money. If you redeem it now, the return is calculated at eleven months, which is 100 plus eleven months of interest: 114 gold dragons. If you wait just another half month, that 114 becomes 117. But you simply cannot wait. What do you do?"
"Hmm..." Thinking again? Tyrion liked it. He pondered for a moment and found the answer. "I would transfer that bond to someone else for a price of 115 or 116 gold dragons. That way, I solve my urgent need, and the person taking over the bond makes one or two dragons in just a dozen days."
"Exactly. And what does that imply?"
Tyrion thought further, and a terrifying realization quickly dawned on him. "In that single maneuver, the Night's Watch Bond you issued could be used as 115 or 116 gold dragons! That is to say, in a sense, it gains the function of... what you called 'banknotes'!"
"Exactly. But that step requires the entire society to recognize the reliability of Night's Watch Bonds. That will be a long road; we'd be lucky to see it in our lifetime. More likely, the King will see the potential of finance, issue National Bonds, and squeeze me out of the market." Egger laughed. "Real finance is a thousand times more complex than this, but we are just starting. Let's not think that far ahead for now... Now, which way do we turn at this intersection?"
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