Great Song Dynasty Writer

Chapter 265 The Method of Entering the Middle and the Method of Seeing Money

"The students thought so."

Meeting Zhang Fangping's gaze, Lu Beigu no longer hesitated over the strategy he had been brewing in his mind for a long time.

"To break this deadlock, we should emulate the essence of the 'money-based method' and make better use of the benefits of tea permits. The core of this method is to 'use money and tea permits to attract merchants to strengthen the border; increase their value and save costs for the people!'"

Lu Beigu said, "We should request the court to allocate several tens of thousands of bolts of silk from the Imperial Treasury, and raise several tens of thousands of cash. We should also select several top-quality tea plantations in Huainan and Jiangnan, and use their aged tea to convert its value into 'real-value tea certificates' that can be redeemed on the spot. All of this silk, cash, and tea should be stored in the Salt and Iron Bureau and made public."

"As long as the total value of these silks, coins, and tea is enough to cover one-fifth of the grain and fodder needed in Hebei, this method can be implemented."

"Subsequently, a notice was posted in Tokyo to publicly recruit merchants willing to transport grain to Hebei. Those who wished to apply had to pay cash to the Salt and Iron Bureau's Trade Office as a deposit. After the merchant paid the money, the Salt and Iron Bureau's Trade Office would increase the value according to the amount paid and the distance to the chosen delivery point in Hebei, and issue a receipt on the spot."

"With this certificate, merchants can organize their own transportation capacity to deliver millet, beans, and fodder to the designated granaries of the border states and armies of Hebei Province. After the delivery and acceptance are completed, the merchants hand over the certificate and receive a receipt. They can then use the receipt to exchange for tea permits at the Salt and Iron Bureau in Tokyo. Merchants can choose to put the tea permits they can exchange for on the market or exchange them directly for aged tea on the spot."

The night was deep, and the charcoal fire crackled in the hall.

Lu Beigu's core idea seems to be only targeting the military supplies and provisions in Hebei, but in fact it is an attempt to solve a financial problem that has plagued the Song Dynasty for decades. The root of the problem lies in the dispute between the old law "Entering the Central Law" and the new law "Seeing Money Law" which was abolished but ultimately could not last.

The so-called "Ru Zhong Fa" refers to a method implemented by the imperial court since the reigns of Emperor Taizong and Emperor Zhenzong to meet the huge demand for provisions and supplies for the border troops. Merchants would transport grain and fodder to the border prefectures and armies in Hebei and Shaanxi, where local officials would appraise the value of the goods. This was called "Ru Zhong Fa". Subsequently, the local officials would issue a certificate called "Jiao Yin".

Merchants with this certificate must travel a long distance to the designated state military training ground to exchange it for monopolized goods such as salt and spices. If they are lucky, they may also receive a small amount of cash.

The original intention of the "Entering the Central Plains" method was to save the imperial court the trouble of transportation, but due to loopholes in the system, it quickly bred two major problems.

One problem was that border officials colluded with merchants to overestimate the value of grain and fodder to an absurd degree, thereby pocketing huge kickbacks and causing heavy losses to the country.

Secondly, in order to make up for the deficit and raise military funds, the three departments often issued excessive amounts of trading certificates, which caused their value to depreciate severely. Merchants holding these certificates would line up outside the Salt and Iron Bureau's monopoly offices, waiting for years without being able to redeem them in full. Or the value of the goods they received would be far lower than expected. Meanwhile, the big merchants who controlled the trading certificate shops in Tokyo would take the opportunity to buy up the certificates at low prices, exploiting the merchants who were actually transporting grain. This resulted in the supply of grain to the border areas being intermittent, inefficient, and costly.

In order to eradicate the abuses of the "Entering the Central Court Method," as early as ten years ago in the third year of the Jingyou era, Li Zi, the then Minister of the Three Departments, strongly advocated the "See Money Method."

The core of the "cash payment method" is very clear: abolish the false valuation, greatly simplify the process, and pay with hard currency, copper coins!

When merchants transport grain to the border, border officials must assess the price based on a price close to the actual market value and pay the full amount in cash on the spot or within a short period, thus eliminating potentially problematic steps such as guarantees and verification of documents.

Because the "cash-on-deposit method" directly addresses the core issues of inflated valuations and the devaluation of currency, Yang Xie, the transport commissioner of Hebei, submitted a memorial strongly advocating "three arguments and twelve harms, and twelve benefits of the cash-on-deposit method," which enabled it to be piloted in parts of Hebei and other regions. Its effects were immediate. Merchants were able to quickly and reliably obtain copper coins, a hard currency, with clear profits and significantly reduced risks, thus greatly increasing their enthusiasm.

However, the "cash payment method" soon encountered an almost insurmountable obstacle: the Song Dynasty's treasury reserves of copper coins were simply insufficient to support such a huge amount of cash payments in the long term.

The Song Dynasty was already suffering from a "money shortage," and the war between the Northwest and the Western Xia suddenly exacerbated the financial pressure. The three ministries, which were already stretched thin, had no choice but to compromise in the face of strong opposition from vested interest groups such as border officials who relied on the old laws for profit, officials in charge of trade, and large merchants who controlled the trading shops, when there was no better solution.

As a result, the "cash payment method" was quickly abolished and replaced by a reform called the "moderate payment method." The court was forced to reinstate the use of "virtual goods" such as salt certificates and spices in payments and to increase preferential treatment for merchants. For example, more certificates could be obtained by reducing the amount of money paid. In essence, this was a regression to the drawbacks of the old method in another form.

In the decades that followed, the "cash-on-delivery method," due to its advanced principles of "paying according to market price, using hard currency, and guaranteeing credit," was repeatedly mentioned and attempted to be partially restored by Han Qi, Xue Xiang, and others. However, it always faced difficulties in its implementation due to the reality of "insufficient national funds" and strong opposition. In short, the current predicament of the three departments lies in the fact that implementing the "cash-on-delivery method" requires neither sufficient copper coins nor a way to circumvent the various drawbacks of the "entry into the central government's system."

Lu Beigu's method essentially takes the essence of the "cash on delivery" approach, which is to protect the interests of merchants and ensure payment credit.

However, he used a few common modern financial innovation techniques.

That is to "amplify credit".

First, the payment process was moved from the various monopoly commodity markets to the prosperous city of Kaifeng. By utilizing the resource allocation capabilities of the three departments, hard currency, including tea, money, and silk, was raised as a "reserve fund" to establish credit. At the same time, aged tea from the Huainan and Jiangnan tea plantations was used to replace cash payments under the "cash payment method," thereby revitalizing the accumulated tea profits and alleviating the cash pressure on the national treasury.

Once we have hard currency and establish credit, we can play the "five bottles and one cap" game, multiplying the credit of these reserves fivefold to meet Hebei's actual grain and forage needs.

This is much more sophisticated than the previous practice of the three companies dragging their feet and refusing to pay the bonds, which was simply a way of cheating people.

However, it is also more dangerous.

Financial innovation is undoubtedly a dangerous game because human nature is always greedy. When people discover that one penny can be used as five, they will think about whether one penny can be used as ten or a hundred. Eventually, this system will collapse.

But that's something that will happen "one day" eventually, isn't it?

At present, it solves the most pressing problem.

The three departments only need to move out their stored copper coins and borrow some silk from the inner treasury of the palace. Aged tea can be directly obtained from tea farms in Huainan, Jiangnan and other places.

When making the payment, copper coins and silk were not involved; only the old tea was paid out.

In this way, from a financial perspective, it's essentially the same as not spending any cash to resolve the thorny issue of military supplies and provisions in Hebei.

Not only did they not spend cash, the Three Departments also recovered some cash because merchants in Kaifeng were required to pay copper coins as a deposit.

If you go even further, you could treat this deposit in copper coins as a "reserve fund" to further amplify credit, and the money would snowball into even greater amounts.

In other words, Lu Beigu's method is to use the stockpiles of hard currency such as tea accumulated in the past, and to leverage credit to overdraw the future, in order to solve the problem that the three companies are facing at the moment: "they have no money but want to get things done".

However, there is no perfect solution in this world.

Lu Beigu's method actually has two key problems.

(End of this chapter)