What Is The Origin Of (183)?…
Tontine
Many moons ago when I lived in Shropshire, I occasionally visited the Tontine Arms in Melverley, an institution which after a bit of chequered history has gone the way of many a pub and has closed down. The story behind its name involves a trip into the murky world of financial engineering.
Volume 60 of the Gentleman’s Magazine from 1790 provides us with some useful background information and introduces us to Lorenzo Tonti, a Neapolitan banker. The journal directs the reader to the catalogue of statesmen prefixed to Voltaire’s Life of Louis XIV. There we find that after Emeri was appointed as superintendent of the French finances in 1649, “an Italian, named Tonti, employed by him, then invented a new loan upon life annuities, chargeable on the national revenues, and divided into shares and classes; the income of each proprietor that died to be shared among the survivors. Hence similar loans came to be named after the inventor.”
The first Tontine scheme was introduced into France in 1753 but it is thought that there were earlier manifestations of the scheme in Italy, perhaps devised by Tonti or from which he derived the idea. In essence, the scheme was particularly attractive to investors who thought they had a good chance of outliving the other contributors. They were invited, in investment parlance, to go long on their own life and short on the others. For those blessed with longevity, there were considerable rewards as the interest raised on the principal was divided periodically between those investors who were still alive. The last person standing would scoop the lot.
Louis XIV launched a tontine scheme in 1689 to raise money to finance military operations, each subscriber investing 300 livres. The last survivor, Charlotte Barbier who eventually shuffled off this mortal coil at the age of 96 in 1726, received 76,000 livres as her last payment. Ironically, the first tontine launched in Britain, in 1693, was used to raise the funds necessary to fight the French in what was known as the Nine Years’ War. This way of raising money became very popular and soon there were variants whereby the capital, as well as the interest, was shared between the surviving investors.
The schemes were fraught with moral hazard. The organisers were notoriously poor at estimating the probable longevity of their subscribers, increasing the risk that there would not be enough money to meet the fund’s obligations. Investors became increasingly smarter, often buying shares on behalf of youngsters who had survived the mortal hazards of infancy, thus increasing the prospects of their returns and compounding the losses to the organisers.
The biggest problem, though, was that tontines introduced the temptation to some investors of murdering some of their fellow investors to enhance their financial return, a plot line used to good effect by Robert Louis Stevenson in his story The Wrong Box, co-authored with Lloyd Osbourne and published in 1889. The passing of the Life Assurance Act in 1774 in Britain and, by amendment, in the States banned tontine schemes because they encouraged mischief against the lives of the insured.
Nonetheless tontines lingered on in France until they were abandoned in the 1850s. They had a good run for their money and were often used to fund public works and private buildings. It is entirely possible, although I have not been able to verify it, that the building of the erstwhile pub in Shropshire was funded this way. Be that as it may, it is a memorial to a long forgotten piece of financial engineering.
