First up, Tontines? What’s a tontine? Is it something I just made up? I wish…

… Tontines are an investment plan for raising capital that was developed in the 17th century in France. Tontines combined the features of both, group annuities and lotteries. Unlike annuities that pay off dividends in fixed intervals to either groups or individuals, tontines reallocated the dividend payments amongst the remaining members every time a member died. Tontines came into prominence in the 17th century as the French tried to come up with alternative sources of financing to sustain their various expeditions and wars. (While I’m not advocating for war here, it’s staggering how many innovations can be credited to it. Says something about all of us really) Each contributor paid the government 300 livres as a one-time lump sum payment from which the government would pay out 5% of total capital raised as dividends. Tontines were also structured according to different age classes through which dividends were tailored.

The French found some early and rapid success with tontines, so successful were the French that within four year’s the British issued their first tontine as well. Ironically the major reason for the British to do so was to finance their war (Nine Years War) against the French. The British though, weren’t as successful as the French. While the French provided an increasing internal rate of return as you went up in age classes, the British did the opposite. The British unusually offered above market rates only for younger nominees. The differing rates of return could be put down to the fact that it was extremely hard to calculate the exact dividend payments in the 17th century. One of the reasons the British didn’t mind that tontines weren’t as popular in Britain, was that while the French had an immediate need for capital, they could afford to wait. They could afford to wait, because more often than not the British were part of a bigger coalition while the French fought alone.

The British in the meantime followed in the footsteps of the Swedish and came up with their own central bank. The Bank of England was created in the 1694. While not as earth-shattering as the Swedish Riksbank twenty-four years earlier. The creation of the BOE meant that the British were able to establish a sovereign’s credit. Back in the day, when central bank’s weren’t common, bills of exchange/I.O.U’s were the most common payment exchange mediums. The biggest drawback for a monarchy back then was that BE/I.O.U’s were privately held. Hilaire Belloc once said, that “The control of the production of wealth is the control of human life itself.” Even though Belloc made that statement in the 20th century, it’s something that rings true throughout history. While privately held I.O.U’s worked well up to a point, anytime valuations of coins, and as a result, bullions came under scrutiny, regimes collapsed. The central bank was an ingenious way not only to reorganize public debt, but also establish the sovereign as the sole creator of credit. It made empires more resistant to incessant shocks. The British through the Bank of England were able to maintain that link between the monarchy and its citizens. The French on the other hand did quite well with managing their finances until public debt swooned owing to the various wars. Despite the ballooning debt, the French were still able to raise 47 million livres from fifty thousand people to finance another war (Seven Years) in the 1750’s. Unfortunately, for the French this was also the last time tontines were effective and were used. Immediately after the end of the war in 1763 public debt swelled up, tontines became a major drag on the French economy.

A royal edict in 1763 banned the issuance of any future government tontines and by 1770 tontines were brought to an end. Abbe Terray, the new comptroller general after bringing tontines to an end, froze future payments to 1769 levels and converted them to life annuities. Needless to say, converting tontines to life annuities didn’t solve the crown’s debt problem, because anticipating backlash a flat 10% interest was applied to all age groups. Although there wasn’t that much of difference between dividend payments, public perception had shifted drastically. The French by then had gained somewhat of a reputation when it came to defaulting on loans. They had mastered the art of strategic defaults. Trust in the monarchy had evaporated and the public viewed the conversion of tontines to life annuities as treacherous,… and anticipated a default. To be honest, while the French revolution was the result of great a number of reasons that are much easier to weigh. Reasons which don’t mean tontines would have played an insignificant role. Sometimes betting on a zero-sum game is really all that.

Sources

Weir, David. Tontines, Public Finance, and Revolution in France and England, 1688 1789. (March,1989).http://piketty.pse.ens.fr/files/capitalisback/CountryData/France/Other/PublicDebtFR/Weir89.pdf

Image French Revolution. https://www.britannica.com/event/French-Revolution