Tontine

In cryptography, a tontine is a secret sharing algorithm which allows n people to share secret data, such that any k of them can reconstruct it by combining their keys.

For the Australian pillow manufacturer, see Tontine Group.

A tontine is a scheme for raising capital which combines features of a group annuity and a lottery.

History

The scheme is named after Neapolitan banker Lorenzo de Tonti, who is generally credited with inventing it in France in 1653. Some sources claim that similar schemes already existed in Italy, but there is no dispute that the wider popularity of the form was due to Tonti.

Concept

The basic concept is simple. Each investor pays a sum into the tontine. Each investor then receives annual dividends on his capital. As each investor dies, his or her share is reallocated amongst the surviving investors. This process continues until only one investor survives. Each subscriber receives only dividends; the capital is never paid back. The proceeds of the subscription were used to fund various private or public works projects. These sometimes contained the word "tontine" in their name, as did the Tontine Coffee House on Wall Street in New York City. Built in 1792, it was the first home of the New York Stock Exchange. In a later variation, the capital would devolve upon the last survivor, effectively dissolving the trust and usually making the survivor very wealthy; it is this version that has often been the plot device for mysteries and detective stories.

Uses and abuses

Louis XIV first made use of Tontines in 1689 (after Tonti's death) to fund military operations when he could not otherwise raise the money. The initial subscribers each put in 300 livres, and, unlike most later schemes, this one was run honestly; the last survivor, the widow, Charlotte Barbier, who died in 1726 at the age of 96, received 73,000 livres in her last payment. The British government first issued tontines in 1693 to fund a war against France, part of the Nine Years' War. However, tontines soon caused problems for their issuing governments, as they would increasingly underestimate the longevity of the population. At first, tontine holders included men and women of all ages. However, by the mid-18th century, investors had caught on how to play the system, and it became increasingly common to buy tontines for young children, especially for girls around the age of 5 (since girls lived longer than boys, and by which age they were less at risk of infant mortality). This created the possibility to produce great returns for the holders, but it proved to be quite costly for the governments. As a result, the tontine scheme was eventually abandoned, and as of the mid-1850s, the tontines had been replaced by other investment vehicles such as "penny policies", a predecessor to the 20th century invention of the pension scheme.

Tontines became associated with life-insurance in the United States in 1868 when Henry Baldwin Hyde of the Equitable Life Assurance Society introduced tontines as a means to sell more life insurance, and meet the demands of competition.

While once very popular in France, Britain, and the United States, tontines have been banned in Britain and the United States, because many of these schemes were little more than swindles. Geneva, in Switzerland, was known for its active market in tontines in the 17th and 18th centuries. Nevertheless, there are underground organizations in the US that still use the tontine.

See also

• Tontines in popular culture

External links

• The Great Tontine Gamble, one of a series of articles by Burton J. Hendrick appearing in McClure's Magazine in 1906.
• The Straight Dope: What's with tontines, the odd annuities in which you benefit when others die?
• The Wild Wild West: The Night of the Tottering Tontine.
• Template:En icon The Tontine Agreement