Tontine is the name of an early system for raising capital where individuals contribute to a pooled fund and receive dividends based on their share of returns from investments made with the gathered funds.
Following the death of members, the proceeds were distributed among fewer remaining members, creating profit opportunities for those surviving. This feature led to some controversies due to its macabre nature.
Key Takeaways
- Tontine is an innovative capital-raising system where individuals contribute to a common pool of money.
- Popular in the U.S. during the 1700s and 1800s, tontines’ popularity diminished in the early 1900s.
- Investors paid a lump sum initially and received annual dividend-like payments until death.
- As members died, their shares were distributed among surviving members, increasing the shares for the remaining participants.
The Storied Past of Tontines
Although rare today, tontines have a rich history dating back at least half a millennium. The practice is named after Lorenzo de Tonti, a 17th-century Italian financier. Tonti is credited with proposing this scheme to the French government in the 17th century to help King Louis XIV raise funds, although he himself didn’t invent it. The proposal originated from Italy and took hold there first.
In later years, tontines became a predominant financing tool across Europe’s royal courts, particularly in the late Middle Ages. As an alternative to onerous taxation, European monarchs funded their wars substantially through tontines.
In the U.S., tontines reached they peak in popularity in the early 1900s. By 1905, tontines represented almost two-thirds of the life insurance market and more than 7.5% of the wealth in the country; an estimated nine million active tontine policies existed at the time.
However, tontine insurance policies were banned in 1906 due to a series of well-publicized scandals that tarnished their reputation. In contrast, in Europe, tontines are still in use, particularly in France, under strict regulations such as Directive 2002/83/EC of the European Parliament.
The Tontine Mechanism
In a tontine, participants pay a lump sum at the outset and receive annual “dividend” payments as long as they live. When one participant dies, their shares are redistributed among the remaining members.
In this way, tontines share characteristics with group annuities and lotteries. The longer an individual survives, the larger their annual payment becomes, culminating in the last surviving participant receiving all remaining dividends.
When all participants have passed away, the tontine concludes, with any residual funds typically reverting back to the government. While the legality of tontines remains affirmed in most parts of the U.S., enforcement tentacles in specific states keep misconceptions lingering about their prohibition nationwide.
Tontines in 19th Century America
Throughout the 19th century, tontines were pivotal in boosting life insurance sales in America. Many historians attribute the rise of the U.S. insurance industry to the use of tontines. Their embedded mystery inspired many popular authors, including Agatha Christie, Robert Louis Stevenson, and P.G. Wodehouse, who wrote gripping tales featuring tontine-related conspiracies.
Alexander Hamilton, the U.S. Treasury Secretary, famously considered using tontines to lower national debt. His idea involved untraditional payouts, freezing dividend payments once the survivor pool dwindled to 20% of the original group. However, Congress ignored his proposal.
Despite their soaring popularity, the downfall of tontines was rapid, following notable embezzlement scandals around the 1900s that marred the tontine approach.
Revisiting Tontines: A Modern Perspective
Today, financial experts, academics, and fintech firms are advocating a return to tontines. One such proponent is Moshe Milevsky of York University’s Schulich School of Business. Milevsky believes tontines can provide comparable regular income like annuities but with generally higher yields and lower costs.
Milevsky also asserts tontines could mitigate longevity risk—the danger of outliving one’s funds. Additionally, modern technological solutions like blockchain offer promise in ensuring transparency and reducing fraud. The contemporary needs of aging populations, such as baby boomers, might find revived value in tontines to replace lost pension systems.
Reviving Historical Finance
Middlemen for pensions now significantly reduce regular income; however, through disciplined societal revival, tontines might uplift retirement financing once more.
Examples of Real-World Tontines
The First Freemasons’ Hall, London, 1775
In 1775, a tontine funded the construction of the first Freemasons’ Hall (Freemasons’ Tontine) in Great Queen Street, London. This project raised £5,000 at a 5% annual interest rate, leading to a £250 annual dividend. Notable for its meticulous records, these details survived until the tontine dissolved in 1862.
The Tontine Hotel, Ironbridge, Shropshire, 1780
Architect John Hiram Haycock used a tontine to finance the Tontine Hotel near Ironbridge in 1780. The hotel was primarily built to provide accommodations for tourists visiting the Iron Bridge. Today, it continues to serve travelers and maintains a steady reputation devoid of historical macabre affiliations.
The Tontine Coffee House, New York City, 1793
The New York Stock Exchange traces its roots to the Tontine Coffee House, funded in 1793 through a tontine of 203 shares at $200 each. This Coffee House became one of New York City’s bustling sites for business transactions and was the origin point for what would grow into today’s NYSE.
This historical building shaped early American financial mechanisms and influence remains fondly remembered in financial narratives and edifices.
Related Terms: dividends, returns, annuities, life insurance, blockchain.
References
- Kitces. “Could A Tontine Be Superior To Today’s Lifetime Annuity Income Products?”
- The Washington Post. “It’s sleazy, it’s totally illegal, and yet it could become the future of retirement”.
- Columbia Law School. “A Short History of Tontines”, Page 19.
- School of Advanced Study - University of London. “Invested in identity: the Freemasons’ Tontine of 1775”.
- UGLE. “United Grand Lodge of England”.
- Institute of Historical Research - School of Advanced Study University of London. “Risk or reward? An eighteenth-century tontine”.
- Ghost Club. “Investigation Report The Tontine Hotel, Ironbridge, Shropshire”.
- English Heritage. “History of Iron Bridge”.
- Frommers. “The Tontine”.
- Mapping the African American Past. “Tontine Coffeehouse”.
- New-York Historical Society Museum & Library. “Guide to the Records of the Tontine Coffee-House 1738-1879”.
- SSRN. “A Recount of the Early Joint Stock Companies and Securities Trading in the United States (1620s - 1850s)”, Page 27.
