TUESDAY LESSONS IN CIVICS-#12

“Just Hitting Another Brick Wall”

LESSONS IN CIVICS & THE CONSTITUTION – J (Part B)

Tontine Insurance – 1868

Governments frequently resorted to issuing of annuities and child endowments as a means of raising funds and a way to evade the usury laws which had prevented the growth of a funded system of national insurance. The tontine was a later development, having been put into use in France in the year 1689. The name “tontine” comes from the name of its originator, Lorenzo Tonti, a Neapolitan by birth. Tonti was attracted to Paris by the regime of Mazarin. Originally, the tontine was a loan, “In which the premium was never to be repaid, but the entire interest on the loan was to be divided each year among the survivors or the original subscribers.”

The main characteristic of a tontine is that the pool of assets is divided among the survivors, at the options of those subscribers who dropped out, or did not survive until the time for distribution had arrived. Like that of the George Rapp Society, the tontine was a wagering policy. In 1868, the Equitable Life Insurance Company introduced the deferred dividend system, which was nothing more than an application of the tontine principle. The most serious flaw in the deferred dividend system was the inability of the insured to compel an accounting. The general rule is that the policy holder is not entitled to compel the company to account for dividends. Neither can the policyholder “compel the distribution of the surplus fund in another manner or at any time, or in any other amounts than that provided for in the contract.”

In the Armstrong Committee report, it is stated: “the plan of deferring dividends for long periods . . . has undoubtedly facilitated large accumulations, providing apparently abundant means for doubtful uses on the one hand, while concealing on the other the burden imposed upon the policyholders . . .” George L. Armhein, the Instructor in Insurance at the University of Pennsylvania, stated: “. . . deferred payments were prohibited by law in the legislation (PA.) of 1906 and subsequent years. Thus came to an end a system which in 1898 had superseded to a very large extent that of annual dividends, and which in 1915 seemed antiquated.”

John K. Tarbox, the Commissioner of Insurance of the State of Massachusetts in the early 1900s, had this to say about the tontine in his annual report: “The false idea of life insurance as an investment begat the equally false conception of life insurance as a bet, and the latter gave birth to the modern tontine, which is a wager.” “In a tontine, the forfeitures go to enrich the individual survivors of the special class of policy holders who enter the compact, constituting a company liability instead of a company asset, for the protection of its policy obligations. . . The stake played for, rather than the game itself, constitutes the chief offense. Our law condemns, forbids, and makes void the contract of forfeiture. As was truly testified before the committee of the New York Assembly, in 1877, the tontine policy is taken for purposes of investment by a set of men who would not insure their lives at all. The inducement to the investment is the expected profits from forfeitures.”

Tarbox went on to say; “Aside from the moral quality of the matter, -- concerning which I waive controversy, -- the considerations which the public aspect seems to me principally to invite are these; first, whether it is prudent to make our insurance companies great banking establishments, and, second, whether an institution organized as the life insurance system was, for a benevolent and unselfish use, shall be combined with enterprises of selfish speculation as the tontine undeniably is.”

What John Tarbox was clearly saying is that, at that time, there were modern plans to make insurance companies (specifically tontine insurance companies) great banking institutions.

The tontine had been declared unlawful in several states, and those involved with them knew that they had to do something to protect their money. They brought over the son of one of the biggest banking families from Europe, Paul Warburg, from the House of Warburg, which dates back to the Hanseatic League of Merchants.

Next Week, August 14, I will cover the

Federal Reserve Banking System: