Tontina

Since the new decade is branded the ‘roaring twenties’, let’s jump right in and talk money.

In 1641, a Belgian merchant called Nicolas Bourey presented a proposal to the senate of the Lisbon câmara, or council. His document was entitled Proposta de criação de uma ‘tontina’, sistema de apostas sobre a vida—proposal for the creation of a ‘tontine’, a system of bets on life.

On life? For a betting man such as Mr. Wibaux, this sounds like the ultimate pari mutuel—but before we get to the nitty-gritty, let’s take a brief tour of stocks, bonds, perpetuities, and annuities.

When you buy stock, you secure a share in a company, and therefore your financial fate becomes inextricably tied to theirs. A bond, on the other hand, is a loan on your part—all going well, after a fixed period of time you will recover your capital, to which interest has been added on a regular basis.

A perpetuity, on the other hand, guarantees perpetual income, but the capital investment is irredeemable. Although by definition the payments never end, this is an example of the time value of money—despite appearances, the investment is finite, because payments into the far future have a negligible value.

In 1900, you could buy a gentleman’s dress shirt for one dollar; or a toddler’s tricycle; or my favorite: nine bottles of cocaine toothache drops.

Sold over the counter until 1914, these drops were a great way to clear your nasal passages. Fun fact? They still are! And if you worked out that 9 X 15 is more than a buck, your financial future is assured.

Today, that dollar would be worth about three cents—so much for your perpetuity.

And finally, there’s the annuity, where you also forfeit your capital investment in return for a fixed annual income until your death.

As people live longer, that becomes an attractive financial instrument. Say you pay an insurance company eighty thousand dollars when you retire, in exchange of an annuity of four or five grand? The insurer bets on an average life expectancy, but guarantees your payment—that means you don’t run the (very real) risk of outliving your savings.

Appealing as it might sound, society has very little uptake for this product. Perhaps because the fixed nature of the annual income is disappointing, and perhaps because people feel that if they die early, the insurance company essentially ‘steals’ money that would otherwise be bequeathed.

Enter the tontine.

The proposal is dated January 1st, 1641, only one month after Portugal regained its independence from Spain, following sixty years of occupation. The document presented before the Lisbon senate by Monsieur Bourey was short and sweet—twelve articles in all, and this was the first.

…the means through which to obtain one million cruzados, which my petition proposes, consists of having this Senate establish a company with 10,000 members who will contribute each 100 cruzados, which makes one million, and having the interest set at 5%,which amounts to 50,000 cruzados and will be distributed equally, beginning the first year and continuing for each following year of each person’s life, because as soon as they die they will not gain any more dividends and will lose the 100 cruzados they originally invested, so that the surviving investors each year enjoy increasingly higher earnings because the dividends of 50,000 cruzados will always be divided among the surviving investors until 50 years of age and therefore those who live will divide the 50,000 cruzados among themselves and this Senate will be released from the original one million investment as well as the payment of dividends.

And here is the bet on life. Literally, those that live longest will see the most.

The fact that this scheme was proposed a month after Portugal regained independence from Spain is highly relevant—King Joao IV of Braganza was desperately in need of cash—the Portuguese Restoration War lasted almost thirty years, until the treaty of Lisbon was signed in 1668. And Portugal’s timing was pretty good, since Spain was involved in the other thirty years war over the same period.

There are lessons here for America as we enter the new decade—all empires decline, and proliferation of pointless wars on multiple fronts is a key sign of decadence. Now the United States has its own equivalent of Commodus, Nero, and Caligula, history is moving inexorably into a new cycle.

Bourey is long forgotten, much like the decision on his proposal—the tontine, however, lives on.

In 1653, an exiled Neapolitan businessman proposed the same idea to the French king. The Neapolitan was called Lorenzo de Tonti, and the financial scheme bears his name—like Amerigo Vespucci, Tonti named something he never discovered, and the name stuck.

Tonti ended up in the Bastille for his troubles, but shortly thereafter Louis XIV used the tontine to finance the Nine Years War.

A very different Europe in the year 1700, only thirteen generations ago.

In Europe, tontines became a resounding success and were used by many governments to fund war. Why were they attractive to ordinary citizens? Perhaps because we are eternal optimists about our lives, and the appeal that we will benefit more as others disappear is powerful.

Where an annuity is boring, the notion that every time one of the members of the ‘company’ passes my income increases, made the tontina a winner. It also resonates with the concept of not outliving your savings—on the contrary, if you outlive your peers, your income goes up, instead of down, since you may eventually become the grim reaper—of everything.

As the United States shifted to an industrial economy in the late XIXth century, the tontine became a key insurance instrument—first started by the Equitable Life Assurance Society, later to become AXA.

The agricultural society of the US provided a family safety net for the elderly based on a common abode and on the distribution of tasks across generations. As more people migrated to factory work in the cities, that support system disappeared, generating a necessity for other ways to provide for old age.

The tontine was a solution to that problem, releasing children from the encumbrance of their ageing parents. By 1905, six billion dollars were held in tontines, 7.5% of US wealth.

As with every good idea humans ever had, perversion and evil soon appeared on the scene—by the early XXth century, tontines were illegal in many American states.

The concept of betting on life was also widely seen as betting on death—of others. As a consequence, a number of murder mysteries, novels, and movies were spawned by the tontine—all shared a common plot, where members of the company were disposed of to enrich the survivors.

If all this sounds tricky, just remember the tontine is a special sauce—a culinary supremo of greed and fear.

And if you live long enough, you’re guaranteed to win the lottery.

The India Road, Atmos Fear, Clear Eyes, and Folk Tales For Future Dreamers. QR links for smartphones and tablets.

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