Fifteen Eighty Four

Academic perspectives from Cambridge University Press


The Earliest Bonds Died With You

Moshe A. Milevsky

Portrait of King William III by Sir Godfrey Kneller

King William III by Sir Godfrey Kneller via WikiCommons

In the year 1693 – just a little over a century after Cambridge University Press was established in England — the government of King William III, previously known as William of Orange, needed vast sums of money to finance his war against King Louis XIV of France. This was actually a year or so before the Bank of England was established primarily to finance wars, and parliament was in the early stages of experimenting with new and untested borrowing schemes.

Anyway, parliament decided to borrow the money – in increments of £100 units – from wealthy investors in London and abroad. Today we might call what they issued, a government bond. In fact, it operated in a way that was quite similar to modern day debt instruments, except for one very small but rather chilling feature.

Investors or buyers would receive annual coupons of 7%, paid semi-annually by the Exchequer. Year after year the bond paid £7 to investors who were willing to ‘lend’ King William and his government the £100 in the year 1693.

But – and here is the key – if and when the investor or bond buyer passed away and died, he or she would not be able to bequeath or bestow the investment to a family member or loved one. The investment benefit would extinguish itself upon death. Instead the forfeited 7% coupons would go to those still living. To paraphrase Mr. Goldfinger in the famous movie named after its main villain, the ‘bond’ was ‘expected to die’ with the master.

Houses of Parliament at sunset.

Parliament borrowed from wealthy investors to help fund King William III’s war against Louis XIV of France. Photo: Reddingpa (Own work) [CC BY 3.0], via Wikimedia Commons

If this sort of arrangement seems odd – and you wonder why anyone in the world would buy such an odd thing – think about it carefully from the perspective of those who didn’t have the misfortune to die young. The longer they lived, the more income and cash they received, that is other people’s money. The coupons increased with age; which actually served as an inflation hedge of sorts. After all, living to a grand old age can be rather expensive today or in the 18th century.

In the case of King William’s Tontine – as this scheme was known — the oldest known survivor lived to the amazing age of 100. She earned thousands of pounds per year, which is quite the pension and envy of many retirees today.

Over time this tontine scheme and many others – which were very popular on The Continent and launched about the same time – were superseded by ‘the sturdy bond’ we use today and insurance companies took over the business of selling life annuities, which are based on the same principal. The pension annuity we all know (and hate?) today is a distant relative of the tontine.

Alas, a number of countries banned these tontines outright in the last 19th century, partially under the misguided fear that some of the longer living investors might try to kill each other. (Did you ever see two centenarians dueling?)

Today, tontines are more likely to appear as a plot in a fantastical murder mystery or as punch line of a joke, rather than in serious discussions about government financing. But in fact, there is a strong argument to be made that these sorts of bonds should be resurrected from the dead and re-introduced in the 21st century.

This idea is especially timely given the recent announcements (in the UK) governing pension annuities and the historically low yields annuities are now generating.

Perhaps it is time to look to history for new (or old) ideas.

About The Author

Moshe A. Milevsky

Prof. Moshe Milevsky is the author of King William's Tontine (2015). He is a Professor at the Schulich School of Business at York University and Executive Director of the nonprofit...

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