VIII Международная научно-практическая конференция

«Эффективные инструменты современных наук»

27 апреля – 05 мая 2012 г. Чехия

Секция: Экономические науки/ 3. Финансовые отношения.

Post graduate student Mogylko L.V.

Kyiv National Taras Shevchenko University, Ukraine

Tontine as a historical form of government borrowing

The existence of the state is inextricably linked to its financial activities and participation in credit relations. Virtually every state periodically has budget deficit. That’s why, government borrowings are carried out, providing timely coverage of budget deficits and full implementation of main state functions. The study of historical aspects of the development of government borrowing revealed that one of the first forms of government borrowing is tontine.

A tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases. On the death of the last member, the scheme is wound up. In a variant, which has provided the plot device for most fictional versions, on the death of the penultimate member the capital passes to the last survivor.

The word ‘tontine’ is derived from the name of Neapolitan banker Lorenzo de Tonti. He proposed the original tontine to Jules Cardinal Mazarin in the early 1650's as a means for French King Louis XIV to raise revenue. The French treasury, battered by the Thirty Years War and the rebellions within France known as the ‘Fronde’, needed to raise money. The tontine scheme reputedly evolved from similar offerings in Italy, albeit on a smaller scale, to raise income from a broad spectrum of the population. As envisioned by de Tonti, tontine subscribers would buy a special kind of annuity at 300 livres a share. Investors could name a third party, often referred to as the nominee, as the life in interest for their stake in the tontine. Participation was structured in groups of equal size according to the age of the nominees: e.g. 0 to 7, 8 to 14, all the way through the age of 63.7. Each beneficiary was to receive an annual payment based on the interest earned by the combined initial capital contributed of investors in the applicable age cohort. The rate of interest increased with the age of the nominee. As nominees died, the share related to that nominee became worthless and the payments based on each of other surviving nominees would increase. The subscriber represented by the last nominee in each group would get all the interest generated by the capital within that band. On the death of the last subscriber, the capital would revert to the government.

The first operating tontine was established by the city of Kampen in Holland in October, 1670. The cities of Amsterdam and Groningen followed within the same year. There were almost 200 local Dutch tontines offered by 1700. City-States in a still un-unified Germany followed suit. While de Tonti’s original proposal had royal support, it was not registered by the Parlement of Paris, a court-like institution, which had the effect of killing the proposal. Undeterred, de Tonti continued to press his tontine idea and various other grand schemes such as a national lottery. At some point, de Tonti offended someone in power. French Finance Minister Jean-Baptiste Colbert, the successor to Mazarin as de facto Prime Minister of France, possibly issued the 1668 royal warrant which sent de Tonti to the Bastille. He remained there until he was released in 1675. Unfortunately, de Tonti died around 1684, five years before the first French national tontine was finally created in 1689. An additional nine French national tontines were created at irregular intervals through 1759. The later French tontines tended to be fully subscribed [2].

The British experiment with tontines, in contrast to France, was rockier. The English established seven tontines between 1693 and 1789. One tontine offering, in 1757, was cancelled due to a lack of subscriptions. Ultimately, only the three tontines established by the Irish parliament, in 1773, 1775, and 1777, were fully subscribed. Even the tontine initiated in 1777 was not completely ‘issued’ until 1781.

The later European national tontines appealed to speculators, who formed syndicates in attempts to make the payouts last as long as possible for the participants. Geneva, in particular, was the site of ingenious schemes by investors who paid much more attention to the life-expectancies of nominees than the tontine issuing governments of France or the United Kingdom. One group of Genevan speculators formed investment ‘clubs’ for the 1777 Irish Tontine and sought out the guidance of a doctor who helped the investors identify a number of local families with particularly long life expectancies. The Genevan clubs invested 50,000 in the issue. The fate of the clubs investment was tied to the life expectancies of 50 girls, ranging in age from three to seven years old, identified by the doctor. The overall tontine offering was comprised of three classes of nominees: those under twenty years old, twenty to forty, and forty and above. Forty years later, 64% of the youngest group of Genevan women was still alive, compared to only 42% of the under-twenty class for the tontine at large.

A tontine was also one of the options proposed by U.S. Treasury Secretary Alexander Hamilton as a means to reduce the national debt at the beginning of the American Republic. Hamilton’s tontine was roughly modeled on the 1789 British version and incorporated an unusual payout structure which froze investor payments to the final beneficiaries at the level reached when the survivor pool was reduced to 20 % of the original group. These beneficiaries would still receive a dividend, but it would no longer increase as their co-beneficiaries died off. Hamilton's tontine proposal, one of several elements of a multipronged approach to tackling America's financial problems, was ignored by Congress. The administration of tontines was a headache in a quill and paper environment. Documentation of identity and death was a constant problem in a world where records of such information were nonstandard and scattered. Forgery of documents, intended to maintain the flow of income to the agents of a dead person, was a common problem. Other aspects of tontine administration would ultimately prove successful. The information gathered to administer the tontines created some of the first truly reliable data in the development of modem mortality tables. Unreliable actuarial tables led early tontine promoters to persistently underestimate nominees’ life expectancies. The gradual increase in the average lifespan during this period may have also worked to undercut the accuracy of the tontine promoters' math [1, p. 492 – 496].

By the end of the 18th century, the tontine had fallen out of favour as a revenue-raising instrument with governments, but smaller-scale and less formal tontines continued to be arranged between individuals or to raise funds for specific projects throughout the 19th century, and, in modified form, to the present day.

The principle of the tontine, which is applicable throughout the world, appears straightforward: members join forces to create a kitty for their contributions and each person in turn receives the money collected. Study of the tontine auctions show that the way it works can be very complex and sophisticated since its reliability depends on both rigorous financial management and an unfailing collective organization.

Tontines are used almost everywhere in the world. In general, tontines consist of a group of people who are co-opted and who meet up periodically to exchange goods, services or money. In Africa, a tontine is extremely common, facilitating a friendly exchange of goods in kind, meals, mutual aid to help build a roof or cultivate a field, and so on. In Europe, even though it does not go by the same name, one can also find tontines of goods in kind: for example, we ‘contribute’ throughout our working lives to farewell retirement drinks parties of others until the day comes for us to host our own party. As far as the exchange of money is concerned, the principle is simple: members make contributions of money into a communal fund, and each person, in turn, receives the money which has been collected. Sometimes, the president of the tontine has to make a decision when consensus has not been reached as to whose turn it is to collect the money. The Chinese resolve this issue by each person making an offer for the amount in a sealed envelope [3, p. 2].

Also, in England and America the idea about tontine was chiefly utilized as a method of raising money for public buildings and hotels. In this case the property was held intact and ultimately divided among certain nominated survivors. The Tontine Coffee House, in New York, at Wall and Pearl Streets, was financed on this basis. These enterprises also usually failed of complete success. Toward the close the eighteenth century there was no more odious word in Europe than Tontine.

So, tontine is an investment scheme through which shareholders derive some form of profit or benefit while they are living, but the value of each share devolves to the other participants and not the shareholder's heirs on the death of each shareholder. In an era in which the range of retirement schemes is matched only by the uncertainty of the returns, the virtual guaranty of growth in a tontine is also attractive as long as the reasons for the growth are not found obnoxious.

REFERENCES

1. A Short History of Tontines by Kent McKeever // Fordham Journal of Corporate &Financial Law, 2009 – Volume 15, Issue 2, article 5, pp. 491 – 521. [Electronic resource] – Available: http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1108&context=jcfl&sei-redir=1#search=%22fordham%20tontines%22. – Name from the screen.

2. The Story of Life Insurance by Burton J. Hendrick // Chapter IV The Great Tontine Gamble / McClure's Magazine, Volume 27, August 1906, pp. 401 – 412 http://en.wikisource.org/wiki/The_Story_of_Life_Insurance/Chapter_IV. – Name from the screen.

3. Using Tontines to Run the Economy by Alain HENRY // French development agency, June 19th, 2003, p. 11. [Electronic resource]. – Available: http://ecole.org/seminaires/FS3/SEM105/VC190603-ENG.pdf. – Name from the screen.