New financial System

The next morning, Arthur woke up at sunrise. After completing his regular exercise routine in the open area within the castle grounds, he returned to his room to take a shower. Once refreshed, he instructed the servant outside his door to bring his breakfast to his room. While the servant went to fetch his meal, Arthur opened the drawer of his desk and took out the notes he had prepared about the financial reforms he planned to propose to his father. He carefully reviewed them, ensuring he hadn't forgotten anything important.

Just as he finished his final checks and gathered the papers back into a neat pile, there was a knock at his door. "Come in," Arthur said. The servant entered, carrying a plate of sausages, boiled potatoes, and two slices of cheese. After finishing his breakfast, Arthur picked up his notes and made his way to his father's chambers.

Upon arriving, he knocked on the door and waited. When he heard "Come in," he entered. Arthur immediately noticed how the recent tensions between the kingdoms of Aragon and Fas had taken a visible toll on his father. The stress of work and constant worry had left Cedric looking tired and overburdened.

"Welcome, Arthur," Cedric said, briefly glancing up from the papers on his desk. "I'm very busy today, so let's get straight to the point."

Arthur nodded and said, "Father, as you know, the nationwide railway project had to be postponed due to the government's lack of funds. I believe I've found a solution to this problem."

Leaning back in his chair, Cedric replied, "I'm listening."

Arthur stepped forward and placed the papers he had prepared on Cedric's desk. While his father skimmed through them, Arthur began explaining. "The first thing we need to do is establish a new type of institution I call a bank. Simply put, this institution would take deposits from individuals in exchange for a fixed interest rate. The bank would then lend out that money at a higher interest rate to businesses and individuals. Currently, wealthy merchants and nobles lend their money at inconsistent and often exorbitant interest rates, which makes borrowing inaccessible for many. Banks would organize this process, making loans more predictable and accessible."

Cedric nodded thoughtfully. "Bringing capital owners together into a formal institution could indeed make borrowing more organized and widely available."

Arthur added, "And since banks would generate annual profits like any other business, we could tax their earnings to create an additional revenue stream for the government."

Cedric stroked his chin. "In that case, couldn't we also tax the money borrowed by individuals?"

Arthur shook his head. "No, Father. Borrowing itself must remain tax-free."

Cedric frowned. "Why not?"

Arthur smiled, recognizing the opportunity to explain what he considered one of capitalism's most ingenious strategies. "By keeping borrowing tax-free, we encourage individuals and businesses to take loans. These loans will be invested in businesses and infrastructure, leading to increased production across all sectors. As the volume of goods and services increases, the government will collect more revenue through sales taxes and other channels. A tax-free borrowing system fuels growth and prosperity for everyone."

Cedric considered this for a moment. "But wouldn't this lead to everyone borrowing without restraint?"

Arthur shook his head. "Not quite. As it stands, wealthy lenders require collateral—like property or assets—as security for loans. If a borrower fails to repay, the lender seizes the collateral. Banks would operate similarly, requiring borrowers to provide sufficient collateral and ensuring they are capable of repaying. This creates a natural check on reckless borrowing."

Cedric nodded in understanding.

Arthur continued. "In addition to banks, I'd like to introduce a new type of company: the joint-stock company. As you know, the current system holds business owners personally liable for all debts if their company fails. This discourages risk-taking and stifles innovation. Joint-stock companies, however, are recognized as separate legal entities under the law. If a company fails, its debts do not transfer directly to its shareholders, thus protecting their personal assets. This system encourages investment and entrepreneurship."

Arthur leaned forward. "These companies would pay a corporate tax of 20% on their net profits. If the company's managers choose to distribute dividends to shareholders, those dividends would then be subject to individual income tax. This system incentivizes reinvestment into the business, promoting faster growth, increased production, and more job creation."

Cedric raised an eyebrow. "Wouldn't this reduce overall tax revenue?"

Arthur shook his head. "Not at all. By reinvesting profits, companies expand faster, which leads to higher production and employment. The government benefits from increased sales taxes on goods and higher income taxes from newly created jobs. Eventually, when the company has matured and investors withdraw their profits to invest elsewhere, they'll pay taxes on those withdrawals."

Cedric leaned back, impressed. "What if investors avoid taxes by using their shares as collateral to secure loans for new investments?"

Arthur smiled, surprised at how quickly his father had grasped a common strategy from his previous world. "That would be even better," Arthur said. "By borrowing against their shares, they keep the funds circulating within the economy, promoting further growth. Besides, when they pass away, their estates will be taxed through inheritance taxes, ensuring that the deferred taxes are eventually collected. This system also encourages charitable donations, as individuals can reduce inheritance taxes by leaving portions of their wealth to public causes, thereby reducing the government's spending burden on healthcare and education."

Cedric clapped his hands together and said, "Arthur, this is brilliant!"

Arthur smiled. "Lastly, I propose the creation of a stock exchange. This would serve as a marketplace where individuals and businesses can buy and sell shares. It would connect companies in need of funding with investors, making capital more accessible and fostering growth. All transactions would be facilitated by intermediary institutions, which would earn profits from each trade. These profits would be taxed, creating another revenue stream for the government."

Arthur pointed to a section in his notes. "The stock exchange would also solve our current problem with funding the railway project."

Cedric raised an eyebrow. "How?"

Arthur explained, "We would issue government bonds under the name 'state bonds.' These bonds would have a five-year maturity period and offer a 2% annual interest rate, paid in installments over five years. Most of these bonds would be sold to banks, as they accumulate large deposits but have limited opportunities to lend to creditworthy borrowers. Lending to the government is far less risky than lending to individuals or businesses. Banks would gladly buy these bonds, earning a steady profit while providing the funds we need to build the railway network."

Cedric leaned back in his chair, staring at Arthur. "This entire system—the banks, the joint-stock companies, the stock exchange—is truly ingenious. Just when I think you can't surprise me any further, you do it again."

Arthur smiled. "Thank you for your kind words, Father."

Cedric nodded. "I'll instruct Henry to begin drafting the laws necessary to implement these reforms."

Arthur thanked his father, bid him farewell, and left the room. With no pressing matters for the rest of the day, he spent his time in the palace library, deepening his knowledge about this world.

As night fell, Arthur had dinner in his room and read a book on the history of this world that he had borrowed from the library. Feeling tired, he changed into more comfortable clothes and went to bed, satisfied with the progress he had made.