The Story of Life Insurance/Chapter IV

ONE of the most conspicuous hangers-on of the early court of Louis XIV was a certain Lorenzo Tonti, a Neapolitan banker. Tonti was one of that numerous brood of spculators who found so fruitful a field for exploitation in the European courts of the seventeenth century. Of an adventurous disposition, unlimited personal resource, and unbounded confidence in himself and his schemes, he readily wormed his way into the royal favor, became a confidential secretary to Cardinal Mazarin, a pensioner of the crown and a valued adviser on all financial affairs. He abounded in ingenious devices for increasing the national revenue, paying off the debts of the clergy, erecting great public works, and building up the foreign trade, especially in the East Indies and the South Seas. At one time he aroused much speculative interest in a plan for stimulating the growth of silk worms, by planting mulberry trees on all the highways of France. His fame rests almost entirely upon the fact, however, that he was the inventor of that scheme of gambling on human lives now generally known as Tontine.

Tonti first proposed this plan to Mazarin in 1656. Like Mazarin, however, he was an Italian and therefore personally unpopular. Parliament refused to register the undertaking; and the public, in a spirit of ridicule, gave it its present nickname of Tontine. Tonti himself soon forfeited the royal patronage; lost his pension, and, for some reason now unknown, landed as a prisoner in the Bastile. Thence he indited many appealing letters to the King and Colbert, describing his misery and poverty and continually harping upon the advantages of Tontine. Tonti's death, which took place toward the end of the seventeenth century, is another of the many mysteries enveloping the Bastile. One of his sons was that Chevalier Tonti, whose adventures among the Indians of the Northwest with La Salle and Iberville is one of the romances of early American history.

King Louis, although he neglected poor Tonti himself, never entirely abandoned his scheme. In 1689, when surrounded by a European coalition, harassed for money and unable to borrow further from the bankers or to wring another penny in taxes from his exhausted peasantry, he raised 1,400,000 livres on the Tontine plan. He followed precisely the program mapped out by Tonti more than thirty years before. He invited subscriptions, at 300 livres each, to a general fund. He agreed to pay the total interest on this fund to all surviving subscribers. Each member's share of the income was to cease at death and revert to those who still lived. Each member's income, that is, increased in proportion to the deaths of his associates. It was clearly a lottery in annuities, in which the prizes went to the long-lived members. It acquired popularity because of this gambling feature, and because it apparently promised a provision for old age. Its essential advantage to the King was that the capital fund itself need never be redeemed. It was a state loan, that is, upon which interest only was paid, and which was entirely liquidated when the final survivor died.

King Louis' first Tontine apparently had a successful career. It met all its obligations fairly and continued until 1726. The solitary survivor was a widow, one Charlotte Barbier, who died in her ninety-sixth year. At that time she drew an annual income of 73,000 livres, in return for an original subscription of 300. King Louis and his successors frequently utilized this method of supplementing the public funds. In the eighteenth century private speculators also established a large number of Tontines; in France there was little less than a Tontine craze. Nearly all these private undertakings, however, ended disastrously. In most instances the Tontine managers were dishonest. The greatest private Tontine, the Caisse La Farge, cheated the public out of nearly 60,000,000 francs. Dishonesty was inherent in the plan itself. Tonti did not devise his original scheme in the interest of the people, but of the government. "I believe this is an easy way," he wrote to Colbert from the Bastile, "whereby the King may get several millions from his people which would never be subject to redemption. The King might use them to redeem his domain, and for the execution of other designs. This might be done without its being known. It transforms France into a gold mine for the monarchy." Private capitalists adopted the plan in an identical spirit; to get a large capital fund which they might use for their own immediate purposes; and which they never need pay back. Their swindlings became so outrageous that ultimately the state prohibited Tontines by law. In England and America the idea was chiefly utilized as a method of raising money for public buildings and hotels. In this case the property was held intact and ultimately divided among certain nominated survivors. The Tontine Coffee House, in New York, at Wall and Pearl Streets, was financed on this basis. These enterprises also usually failed of complete success. Toward the close the eighteenth century there was no more odious word in Europe than Tontine.

Hyde Adds the Tontine System to Life-Insurance
About 1868 some ingenious person directed Henry B. Hyde's attention to the career of this same Lorenzo Tonti. We might not inappropriately compare the Equitable Society in 1868 with the French government in 1689; and Hyde's financial position with that of Louis XIV. Like the French king, Hyde had outlined a long and expensive campaign of conquest. He sought to humble all his competitors; to give the Equitable the leadership among American life-insurance companies. Like Louis, too, he had deeply invaded his treasury by bitterly contested wars and needed money supplies for their further prosecution. Hyde was thus in a mood to adopt almost any new insurance scheme, especially when, in addition to these purposes, it seemed likely to increase his own annual income.

In 1868, therefore, the Equitable announced, with much expensive advertising, a new "discovery in life-insurance." It flooded the country with circulars duly setting forth the "greatest reform thus far promulgated by any life-insurance company," Up to that time the Equitable had dealt only in straight, conventional life-insurance. It had issued only life, endowment, and term policies. Now, however, it radically changed its program, and began to handle an entirely novel brand. It offered a new form of policy, and named it Tontine, in honor of the Italian adventurer whose theories it embodied. This policy combined two distinct principles: the payment of a definite sum in the event of death, and the chance at a money prize in case the insured survived a stipulated period. The insurance indemnity was, of course, a fixed sum—the face of the policy; the amount to be won by the survivors, however, was indefinite, or depended upon several contingencies. Hyde did not call this ultimate payment to survivors, however, a "prize"; he called it an "investment return,"

In order to add a Tontine attraction to the regulation life-insurance policy, Hyde necessarily had to make important modifications. According to the original French idea you subscribed a stipulated amount and reaped incommensurate rewards if you outlived your associates. Your income began coincidentally with your entrance into the pool; its increase only depended upon continued survivorship. Hyde, however, proposed to adopt arbitrarily a certain period during which the Tontine fund should accumulate. Each year he grouped the Tontine policy-holders in three separate classes—those who elected to remain in the pool ten, fifteen, and twenty years. In 1870, for example, Hyde may have had 15,000 Tontine policy-holders. Of these perhaps 5,000 entered the ten-year class. This group would have a separate Tontine fund, which would be divided among all who were alive in 1880, and kept up their premium payments. Another 5,000 may have adopted the fifteen-year class. For them also would be accumulated another Tontine fund, divisible among the survivors in 1885. The last 5,000 may have chosen the twenty-year class. These would divide up their Tontine prizes in 1890. Meanwhile, if any member in good standing—if he had regularly paid his premiums, in other words—died at any time, his family received the amount for which he had insured; if he lived until his period expired, he got his share of the Tontine winnings; if he failed to pay the premiums, he got nothing at all. Ostensibly the purpose of arranging ten, fifteen, and twenty year classes was to accommodate the periods to the ages of the insured. A young man might reasonably enter the twenty year class, because of his natural hopes of survival; an old man the ten or fifteen, because his chances of survival were not so promising.

Herein, therefore, we have three separate classes each year. In reality Hyde proposed an even more bewildering number of groupings. He added his Tontine feature to all kinds of policies; endowments, ten payments, fifteen payments, and so on. Had he actually maintained his program, he might have had in the neighborhood of 200 classifications in a number of years. In practice, however, Hyde ignored these distributions. All Tontine policy-holders on all plans he grouped together, and distributed the winnings among them practically as he pleased.

Tontine Fund Heaped up from Forfeitures
The essential feature of the plan was the abandonment of the annual dividend system which the Equitable had adopted in 1866. Tontine policy-holders, instead of receiving back the excess cost of their insurance every year, agreed to forego it for ten, fifteen, or twenty years, according to the particular class they elected to enter. Under the original Tontine plan, there were two great sources of accretion to the Tontine surplus; the amounts usually paid as "surrender values" to retiring members, and the amounts popularly known as "dividends." In other words, Hyde fed the Tontine fund from the two great life-insurance accumulations: "reserve" and "surplus." The reserve has already been described as the deduction made from the premiums paid in the early years to cover the increased insurance cost of the later. It is the inevitable consequence of the modern level premium system, the only one which has thus far proved practically successful. In order that one may pay the same sum every year and not one annually increasing, the actuaries "average the matter up." At age forty, the usual net price charged per $1,000. for straight life insurance is $23. Its actual cost at that age is about $9. The difference, $14. is the amount you contribute to the insurance expense of those later years when the actual cost exceeds the premium charged. This excess is called the "reserve," If you drop the policy you are thus in this position: You have paid the full cost of your insurance for the years it has been in force, and have contributed a reserve which, in part, is to meet the expense of later years. If you drop your policy, obviously, justice demands that you take this reserve cost with you. If it is not paid back, clearly you have contributed money for which you have received no insurance equivalent. Inasmuch as a mutual company ostensibly seeks to furnish insurance at its actual cost and give value received for every penny paid in, surrender values are an essential part of its structure.

Up to 1861 most companies ignored this simple principle. For generations this fact has been the standing reproach of life insurance. In England, especially in the first half of the nineteenth century, the managers of life companies had waxed fat and wealthy by forfeiting the reserves of their retiring members. In America, thanks to the sleepless work of Elizur Wright, their claims had for the first time received general recognition. He had secured the passage of the first non-forfeiture law in 1861; and had gradually educated policy-holders to demand, in case of withdrawal, a certain percentage of what they had paid in. The Massachusetts companies, because of the non-forfeiture features of their policies, became widely popular. New York State had passed no non-forfeiture law, but competition had compelled the New York companies, including the Equitable, to adopt a modified non-forfeiture system. The lapse rate In the latter sixties, however, was enormous. Of every 100 policies issued, only about 10 per cent, expired by death or maturity. The rest were surrendered or lapsed for non-payment of premium. Herein Hyde found his great opportunity. He proposed to stop paying surrender values to his lapsing Tontine policy-holders, and to contribute the amounts which lapsing members would ordinarily have received to his Tontine fund.

Let us consider in some detail precisely what this meant. Below is given a table of surrender values and their equivalents in insurance now paid at various periods upon a $10,000. ordinary life policy issued at eges forty and fifty:

In other words, if you insure at age forty for $10,000., pay for twenty years and then drop out, you are entitled to a cash value of $3,830,, or a paid up policy of $5,750. If you insure under similar conditions at age fifty, and discontinue after twenty years, you take either $4,980. cash or a paid-up policy for $6,410. These are your mathematical equities, under contract, after the company has deducted the cost of carrying your insurance for twenty years. The payment of these equities is no more than life-insurance justice; anything else, in a mutual company, is little better than robbery,


 * 1 The figures are those paid at present by the Equitable.

Family Protection a Stake in a Huge Gamble
Under the Tontine plan you forfeited, on lapse, your whole money interest in the policy. This surrender value was usually paid, not in cash, but in insurance. Thus, if forced out, you obtained, in addition to the insurance during the period the policy ran, a paid-up policy which was the insurance equivalent of your reserve accumulation. If you remained in for any considerable period, that policy, as we have seen, might represent a considerable amount. It was the only financial protection your family held against your death. Hyde now calmly proposed that you place this insurance in jeopardy; make your family protection a stake in his Tontine lottery. If you lost in this game—dropped out, that is, before the Tontine period expired—you left your wife and children absolutely unprovided for; if you won—stayed in until the end—your family received the insurance for which your own premiums had paid, and its proportion of the insurance paid for by the premiums of those who had been closed out. Manifestly the odds stood strongly in favor of the rich. Those who discontinued their payments usually did so through poverty. The richer policy-holders, however, had no difficulty in keeping up their premiums. Obviously, therefore, Tontine was merely a plan by which the more affluent policy-holders could appropriate the insurance of their less fortunate associates.

All "Dividends" diverted to the Tontine Pool
Hyde also heaped up his Tontine fund by generally forfeiting "dividends." Again we must keep clearly in mind precisely what this "dividend" is. The word, as explained in a previous article, is an unfortunate misnomer. If it could be eliminated from the nomenclature of life-insurance, the situation would clear immensely. Life-insurance prices are based upon two fundamental assumptions: that a certain number of people will die every year, and that the money laid aside as reserve will earn a certain rate of interest. To the premium thus ascertained, the company adds a certain percentage for expenses, called the loading. If the anticipated deaths occurred precisely as indicated; if exactly the expected interest on reserve were earned; if the managements spent for administrative purposes and commissions the sum provided by the premium loadings—the cost of the insurance would be identically what was charged. Inasmuch as all these elements vary, the actual cost of insurance varies also. In order to safeguard itself against fluctuations, however, the company always charges an excess price. Thus, at the end of every year, it finds itself in possession of a certain sum of money over and above the actual cost of that year's insurance and reserve. This excess cost is the so-called surplus; its repayment to policy-holders the "dividend," The dividend, therefore, it cannot be too frequently insisted upon, is not a dividend at all, but merely the return of an overpayment.

In Hyde's early Equitable days these "dividends" or overpayments were accumulated for five year periods, and then returned. In the early years, Hyde unquestionably largely drew upon them to pay agents' commissions, percentages, and other management expenses. In other words he brought in hia new policy-hodeers at the expense of the old. He could safely do this so long as the dividend distributions were postponed for considerable periods, inasmuch as his practice would not be readily detected. But, in 1866, competition with the Mutual Life compelled him to return these overpayments every year. The small "dividends" then paid clearly showed that he had drawn upon them heavily for acquisition expenses of new business. "Mr. Hyde frequently told me," said John A. McCall, in effect, at the recent New York insurance investigation, "that he had to abandon the annual dividend system simply because he could not meet the competition of the Mutual Life." The Equitable's great lapse rate for the years from 1866 to 1868—its annual dividend period—clearly reflects the existing dissatisfaction. Manifestly the honest practice would have been a general retrenchment of expenses, and the return to all policy-holders of their annual overpayments. That, however, did not coincide with Hyde's ambitions. Instead, he decided to drop the annual system entirely, and to add these dividends, or overpayments, to the Tontine fund. If you died before your Tontine period expired, you obtained no "dividends" at all; if you lapsed you also forfeited them. Your "dividends," in either of these events, went into the Tontine surplus for division among the survivors.

Briefly, therefore, the theory of the Tontine program may thus be summarised:
 * A. If you died before the end of the Tontine period, your beneficiaries received the face of the policy; but no "dividends." 
 * B. If you lapsed, you got no "dividends" and no "surrender value." You lost every cent you had paid, and the insurance which it would have purchased. 
 * C. If you lived to the end of the Tontine period and regularly paid your premiums, you got your own dividends and your share of (a) the "dividends" of those who had died, and (b) the "dividends" and surrender values, or reserves, of those who had lapsed—all accumulated at compound interest.


 * 2 The Tontine policy must not be confused with an ordinary endowment. An endowment is a perfectly legitimate, though somewhat expensive, form of life insurance. It guarantees the payment of a particular sum in case of death or the survival to the end of a particular period. The amount, in both cases, is clearly specified in the contract. A Tontine policy specifies the amount to be paid at death; but makes no guarantee concerning the amount to be paid on survival. The Tontine feature had absolutely no connection with life-insurance; it was a special fund, devised as described above, for division among those who remained in the pool. It was added to endowment policies as well as to ordinary life. Endowments also accumulate reserves and dividends; Tontine funds were accumulated from them and divided among the surviving endowment policy-holders, precisely as in the case of ordinary life.

Only One Out of Three Could Win
In this great gamble Hyde had carefully calculated the chances of success. He presented figures, professedly based upon general experience, showing the expected number of lapses and deaths. He declared—and, in fact, recommended his new insurance on this ground—that, of every 1,000 at age thirty-seven who began the game, and elected the twenty-year period, only 353 would survive to divide up the profits. That is to say, only about one man in three could possibly win. His leading actuary apologetically said that, in all probability, not even this many would survive; that his estimates had been extremely conservative, and based upon figures "less favorable" than those experienced by other companies. By "less favorable" he meant that more lapses would probably take place than he had counted upon; that is, that more families would forfeit their insurance; and that the prizes for the persistent members, consequently, would be larger.

In this lottery, moreover, you played for an indefinite stake. In other gambling games you usually know what, in case of success, you are to receive. You put dollars on this horse; you lay twenty on the turn of a particular card. If your horse wins, you get your ten dollars; if your card turns up, you pocket your twenty. Any other policy would be an incitement to riot. In Tontine, however, you laid down a specific sum every year; but, even though fortune went your way, you hadn't the slightest idea what the prize would be. It was a blind pool with a vengeance. Hyde guaranteed no winnings. He stipulated in every contract—every policy, that is—that, at the expiration of the Tontine period, each survivor's share "should be equitably apportioned by the company." In other words, the company—that is, Hyde himself—could give you just as much, or just as little, as they chose. If it handed over nothing at all, the policy-holder had absolutely no redress. As we shall see, many disgruntled prize winners, when their bonuses fell so far below their anticipations, appealed to the courts for a more "equitable" share. The learned judges informed them that the company had absolute jurisdiction over the distribution; that the policy-holders may have made a foolish and one-sided contract, but that they had made a contract all the same. Any gambling-house conducted "on the level" assumes direct obligations to the winners, but the Equitable did not. Hyde held the advantageous position of a stakeholder in a bet, who had secretly arranged the program so that he could himself manipulate the money in hand, and pay over to the successful gambler precisely as much, or as little, as he willed. Many policy-holders, finally waking up, attempted to retire. Then they discovered that Hyde had safely locked them up for anywhere from ten to twenty years. Their only revenge was to cease paying premiums. That was precisely what the Equitable above all desired; for then, everything they had paid was immediately swallowed by the Tontine pool.

One Half the Policy-Holders Deprived of Paid-for Insurance
Hyde's Tontine scheme thus ostentatiously deprived one-half of his policy-holders of their paid-for insurance. Its success depended upon the number of widows and children it left unprovided for. The more lapses Hyde secured; the more helpless families he despoiled, the greater company the Equitable became. He accompanied his Tontine announcement with certain estimates as to possible Tontine profits. Eminent mathematicians have calculated the amount of suffering which he thus proposed. He figured, for example, that every policy-holder aged thirty who insured for $10,000. and who managed to live and keep up his premiums for twenty years, would receive a cash prize of $7,120. If 10,000 men insured on that basis, precisely 6,882 would have to forfeit all their insurance in order to give the remaining 2,498 that additional bonus. This minority would divide up some $7,400,000. cash, forfeited by those forced out of the pool. That $7,400,000. would have provided at least $17,000,000. of paid up insurance. As the amount of the average policy was about $2,000. that would have provided insurance protection for 8,500 helpless families. For the last few years the Equitable has written in the neighborhood of $300,000,000. of insurance a year. To realize the expected Tontine profits on that amount, Hyde would have confiscated at least $57,000,000. of paid-for insurance—or, on the basis given above, the insurance protection of 25,500 families. Precisely what was the lapse rate on Tontine policies we probably shall never know. On this subject, Henry B. Hyde was questioned at length at the New York Insurance Investigation of 1877. Did he know the number of Tontine policies which had been forfeited in 1876? No, sir, he did not. Did he know the number and amount of Tontine policies which had been forfeited since the system began? No, sir, he did not. Had he any intention of making public these facts? No, sir, he had not. In 1885 the New York and Ohio legislatures appointed committees to discover this and other facts concerning Tontine; but without result. The lapse rate, however, must have been enormous. From 1870, when the Tontine scheme began, until 1885, when the issuing of full Tontine policies ceased, the Equitable wrote $613,000,000. of new insurance; in the same period it lapsed $400,000,000.—or 65 per cent of the whole. Probably at least two-thirds of this was Tontine.


 * 3 620 would die.

The Tontine Fund Drawn Upon for Agents' Commissions
What was Hyde's purpose in thus disregarding the very purpose of life-insurance itself? In the first place, as we have seen, he wished to escape comparisons, as to dividends earned, with other companies. By postponing them for long periods he cleverly concealed the real situation; and meanwhile talked loudly as to what they would be, when those periods expired. Again, he needed a large surplus upon which he could draw for management expenses, especially in his war with the Mutual Life. Hyde, as has been proved, neatly escaped all responsibility for these Tontine dividends. Thus he had a huge reserve war chest, which he could draw upon as occasion required. He could use it in paying excessive agents' commissions, salaries, bonuses, and prizes; in reckless advertising and in other expensive methods of insurance propagandism. In other words, that he might build up a great institution and kill off his competitors, he proposed to pay part of his policy-holders' dividends and the surrender values of lapsing members to his faithful agents. He made this surplus serve other purposes. He found it extremely useful as an advertisement. As its size increased year by year, he pointed to it as a sign of impregnable financial strength. He compared it with the smaller surpluses heaped up by annual dividend companies, omitting all reference, of course, to the salient point—that he had a large surplus because he withheld his dividends; and that his rivals had proportionately small ones because they distributed them every year. He found his campaign cry, "Surplus is Strength," an eloquent enticement to new business. Here once more he contradicted himself. On the one hand he declared again and again that his surplus all belonged to present policy-holders and could not be used for other purposes. On the other he sedulously cultivated the idea that the surplus, in case of necessity, could be drawn upon to strengthen the Equitable's reserves. Again, he made new policy-holders believe that here was a huge dividend fund in which they might participate; while, according to his original theory, the surplus represented accumulations on the funds of old policy-holders, among whom it must be eventually divided.

A Source of Private Gain to Hyde
From the very first, the surplus proved a source of personal gain. The Tontine system automatically increased the annual compensation of the Equitable's chief executive officers. In addition to his salary, Hyde received 2½ per cent of the surplus every year. James W. Alexander, at the same time, received one-half of one per cent; and George W. Phillips, the actuary, an identical amount. Manifestly, the larger the surplus, the larger this annual percentage. If Hyde distributed this surplus annually, however, his profits would never be abnormally large, because the surplus itself would be comparatively small. But if he accumulated it for twenty years, what limitless possibilities of gain! Hyde proposed for all his policy-holders a ten, fifteen, or twenty year division; but intended, as usual, to take his own percentage every year. He wished to place his insured upon the deferred dividend basis; but the annual system was still good enough for him. Observe how this Tontine system increased his annual earnings. Under the annual system, for example, you received, perhaps, a first year's dividend of $100. Hyde would get 2½ per cent, of that, or $2.50. That ended his participation. But if you took a twenty year Tontine, that $100. remained in the pool for twenty years, and Hyde got his $2.50 every year. In the second year you received a dividend of $125. Under the annual system Hyde could get just a single percentage, or $3.12. But under the Tontine scheme, he would get that $3.12 for nineteen years. Thus every year Hyde, Alexander, and Phillips appropriated together 3½ per cent, of the surplus. As the Equitable earned only a little more than 5, this left only about 1½ per cent of the interest increase for the insured. And yet one of the chief sources of Tontine winnings, according to Hyde's representations, were the "wonderful results accomplished by compound interest." In fact, Tontine did very largely increase Hyde's annual income. His "extra compensation" jumped, under the Tontine stimulus, from $6,000. to $50,000. per annum. Its ultimate discovery, and the great scandal caused thereby, led to its abandonment. Actually, however, Hyde never gave it up; it was ostensibly in exchange for this "surrendered contract"—which, as we have seen, was never a contract, but a "verbal understanding"—that his wife received, after his death, her $25,000. pension. This "contract," if in force now, would entitle the President of the Equitable to $1,000,000. a year. Thus may be traced the genesis of the deferred dividend system to a percentage on the surplus secretly enjoyed by Henry B, Hyde. Hyde personally profited by the surplus in other ways, as will duly appear; but, at the very beginning, it was thus immediately identified with his private fortunes.


 * 4 Testimony of Henry B. Hyde at the Insurance Investigation of 1877. Page 38 (Manning's edition).
 * Q. That was on the basis of 2½ per cent of the surplus? A. Yes, sir.
 * Q. In the hands of the company at the end of each year? A. Yes, sir.

Why the Tontine Surplus was Made an Asset
Others have detected, in the Tontine scheme, an even more far-reaching plan. They have declared that Hyde aimed at heaping up a huge surplus, the ownership of which would ultimately vest in the holders of Equitable stock, that is, in Hyde himself.

This interpretation is apparently supported by the fact that the Equitable for many years has carried its Tontine surplus not as a liability, which, of course, it is, but as an asset. The present writer does not believe that this was Hyde's original idea. Temperamentally he was incapable of any such far-reaching plan. He lived entirely in the present, and never mapped out a program more than a year ahead. He was essentially an opportunist. He adopted Tontine—to sum up the situation—to save the Equitable from threatened bankruptcy, to avoid unfavorable comparisons with other companies, to obtain a large fund for expenses, to get a basis for glittering promises of profits and thus entice new business; and also, unquestionably, to increase his own annual income. These were the immediate necessities of the moment; beyond that, Hyde seldom gave a thought. Afterwards the Equitable management also found it a convenient protection against their own dishonesty. Had it not been for the Tontine surplus the Equitable unquestionably would have gone to the scrap-heap years ago. Scores of other companies which imitated Hyde's agency methods failed in the '70's; had they adopted Tontine they probably would have weathered the storm. Some strangely perverted casuists advance this as an argument in favor of Tontine. But these companies became embarrassed because of wild extravagance and dishonesty; and went down because they could not recoup with the forfeited dividends of their insured. The Equitable's management also became extravagant and dishonest, but Hyde made good the hiatus with the Tontine accumulations. Manifestly the cure really demanded was not Tontine, but the reform of the original abuses. Hyde made this surplus an asset, in order to save the Equitable from insolvency.

This change was made in 1877. That was a terrible year in life-insurance history. Almost every month some company collapsed. The Equitable's policy-holders lived in daily dread. The society was investigated three times in as many months; once by the insurance committee of the New York Senate, once by its own policy-holders, and once by the insurance department. "I can't transact any business," said Hyde, "I spend all my time being investigated." John A. McCall, then deputy superintendent, made the official examination. The Equitable's liabilities, according to the rigid Massachusetts standard, were $29,425,650. Its assets were $30,872,374. Included in the latter were the New York and Boston buildings, grossly overvalued at more than $5,000,000., and the stock of the Mercantile Trust Company at $1,525,405. The value of that stock at that time was problematical; a year or two before the Mercantile Trust Company had been on the brink of insolvency itself. Even accepting New York liberal standard of valuation, which placed the liabilities at $26,231,141., the showing was not at all favorable. In order to make the society solvent beyond dispute, Mr. McCall quietly transferred the Tontine surplus, then amounting to $2,193,577., from the column of liabilities to that of assets. It has remained there ever since.

Hyde found several obstacles in the way of his reform. His own charter, as we have seen, required the distribution of surplus once in every five years. Hyde succeeded in getting through a law which changed all that. No one at the time suspected his purpose; his law seemed the perfection of innocence. It was entitled: "A law authorizing the payment of annual dividends," It was thus a sneak bill; it provided that any life-insurance corporation "which, by its charter, or articles of association, is restricted to making a dividend only once in two or more years may hereafter, notwithstanding anything to the contrary in such charter or articles, make and pay over dividends annually, or at longer intervals," etc. Thus Hyde, in a law which on its face authorized annual dividends, interjected a clause which apparently permitted him to declare them at such intervals as he chose—and, for that matter, not at all. The influences back of this measure are obscure. The insurance papers of the day make not the slightest comment on it; the insurance report of 1869 has only a perfunctory reference. No insurance law, however, has had more far-reaching and unfortunate consequences; it has been appealed to for years as the legal support of the deferred dividend system. Eminent authorities, however, have always questioned whether it actually authorized Tontine; many still maintain that the Equitable and other New York companies, in deferring dividends, have persistently violated their own charters.

Hyde's first Tontine plan, proposed in 1868, was a little too complicated, and the public did not readily catch on. Not until 1871 did he begin to make great headway. In that year he recast and rechristened it. He announced, with a great flourish of trumpets, his celebrated "Tontine Savings Fund Policy." His pamphlet for that year is one of the curiosities of life-insurance literature. In this Hyde boldly announced his abandonment of all conservative life-insurance principles, "It will be seen," he said, "that the Tontine principle is precisely the reverse of that upon which Life Assurance is based. In the former case the motive is essentially selfish; in the latter, it is the result of one of the noblest and most unselfish aspirations which can animate the human breast—the desire for securing a provision for those who are dependent upon our exertions for support when death shall have called us away." And yet Hyde now proclaimed his abandonment of this high ideal; and his adoption of the system which was "essentially selfish" and the "reverse" of "the principles upon which Life Assurance was based." His arguments were ingeniously specious. Under his Tontine plan, he declared, the great end of life-insurance was achieved; that is, in case of death, the actual face value of the policy was paid. He simply proposed to withhold from those who died early all dividends, and to pay them, together with the accumulations from lapses, to those who survived the Tontine period. Thus, said Hyde, he equalized the burdens of life-insurance. The injustice of the old system rested upon the fact that those who died early paid very small amounts for the benefits their families received; while those who lived long frequently paid in more than the face of the policies. By withholding all surplus from the former and paying it to the latter he thus secured a fine balance of justice. Hyde knew, of course, the fallacy and absurdity of this argument. As has previously been explained, no one ever cheats a life-insurance company; whether he dies ten minutes after obtaining his policy, or fifty years afterwards, he pays the company precisely what it costs to carry his insurance. In making up its rates the company figures upon so many deaths the first year, so many the second, and so on. It makes no difference whether you die that first year, or I; the company has simply realized the death it had prepared for and upon which it has based its charges. Hyde, however, saw the great popular value of this argument; it met the vulgar objection to life-insurance that "you had to die to win." Hyde had more difficulty in excusing the greatest iniquity of his system: his wholesale confiscation of the reserves of lapsing members. By stigmatizing these as "deserters," as renegades, who, having abandoned their policies, had no claim upon the company's consideration, he even blinded the public on this score. These deserters, however, as has already been said, formed more than 90 per cent of all policy-holders of the time, and were the unfortunate classes who were usually forced by unexpected poverty to cease their payments.

"Expert" Endorsements of Tontine
Hyde gathered to his support the most influential people in society and finance. He widely advertised the endorsement of twenty-one of the leading merchants and bankers of New York City. He also backed up Tontine by much actuarial authority. He had annexed Sheppard Homans to the Equitable after the latter's quarrel with the Mutual Life. Homans' reputation stood high; next to Elizur Wright, he was probably the foremost American authority. Homans had much to do with formulating the original scheme; and from the first remained its warmest sponsor. The New York Life, which immediately followed the Equitable, retained Elizur Wright as a possible defender. Wright gave a characteristic opinion. He endorsed the mathematical accuracy of the computations, but followed this with a whole-souled condemnation of the plan. The New York Life never published this "endorsement." In public Wright denounced Tontine as "life-insurance cannibalism." "Its sole and only function," he added, "is to make the richer part of the company richer by making the poorer part poorer. It is as if a temperance society should endeavor to promote its cause by establishing a liquor saloon under its lecture-room, or a church should support its minister by a lottery." Others, however, Hyde found more amenable. He early enlisted the support of William Barnes, the New York Superintendent of Insurance. "The Tontine system," said Mr. Barnes, in a letter which Equitable agents extensively used in soliciting Tontine business "seems so natural and applicable to certain classes of policy-holders, that like many important discoveries in science and art, the wonder is how it could have remained so long dormant and undiscovered. Especial credit is due to the man, or men, who conceived the thought of collecting the Tontine tendencies of men and applying this momentum to the development and spreading of Life Assurance." Mr. Barnes was the son-in-law of Thurlow Weed, and high in the councils of the Republican party. He is now more than eighty years old, but has never lost his interest in insurance or politics. He has lately acquired much notoriety as the defender of modern life-insurance methods, and is as strenuously the champion of the deferred dividend system as he was thirty-eight years ago.

Hyde fortified these arguments by the most extravagant estimates of what the Tontine winnings would be. He baited in thousands by making promises which he never fulfilled, and which, at the time, he must have known he never could make good. No patent medicine was ever more extravagantly advertised. Our old friend, Charlotte Barbier, the fortunate widow who under Louis XIV's first Tontine obtained an annual revenue of 74,000 livres in return for a subscription of 300, was pushed to the front, in Equitable literature, on all possible occasions. Men who had taken Tontines, with satisfactory results, wrote letters which were widely published as advertisements—another adaptation of a popular patent medicine device, Hyde called the Tontine policy "endowment insurance at life rates." He asserted, that is, that, for an ordinary life premium, the accumulated surplus and reserve, at the end of the period, would equal the face of the policy—that is, be the same as an endowment. He declared that this same surplus would purchase an annuity large enough to pay all future premiums and a life income besides! Under a Tontine policy, that is, you ceased paying after twenty years; but your insurance still went on, and you got an income in addition. "After the dividends arrived," said an official Equitable circular, "there would be the requirement of no more premiums, the assurant receiving, instead, a considerable annuity commencing just at the time when age begins to impair the faculties!" Hyde declared again and again that a Tontine policy was safer and more profitable than a United States gold bond. He claimed that the Tontine dividends would be three or four times as large as those paid on the annual plan. He especially recommended a Tontine policy to those who had mortgaged homes. Insure, he said, for the amount of the mortgage; if you die, the policy will pay it off; if you live, the dividends will not only pay the interest, but a fair size annuity.

The "Blue Books" of Estimates
Even more mendacioua were the famous "blue books" which Hyde placed in every agent's hands. He originated that practice, since become so general, of showing prospective policy-holders' written estimates of "investment" returns. Hyde's actuaries had worked the whole thing out in detail, and formulated precise figures for every age and every period and every form of policy. Hyde had sufficient shrewdness, however, never to guarantee these figures; and guardedly informed the agents that they were only "estimates." On this ground the Equitable sought to escape responsibility when the actual dividends fell so far below Hyde's glowing anticipations. That, however, has never been accepted as a satisfactory excuse. Here was a great life-insurance company; on its surface, a great trust institution, whose every word should have been honor and truth and justice; and now it placed in the hands of thousands of agents, many ignorant, many untruthful, most having in view only a single end—a commission—a book containing in detail the most extravagant promises. Was it to he expected that, competition being what it was, they should inform their clients that these figures were only "estimates"? Of course they carefully avoided this particular point. Conservatism has never been a striking characteristic of Equitable agents; and their clients almost invariably regarded the figures furnished them as actual guarantees. They did not know that these estimates were never incorporated in the policy; that the agent's glib promises in no way legally bound the company; and that, far from receiving the promised bonuses, the Equitable had not contracted to pay them anything at all. Neither did they know that the agent had been admonished to sell nothing but Tontine policies; that he was paid extravagant commissions for doing so; and that these commissions usually exceeded these paid on old line Insurance. As always, the agent was some particular friend, and was relied upon implicitly for advice as to the most desirable form of policy. In this country to-day are thousands who were taken in by this glowing propaganda of the early 70's; many are probably reading these very lines. Leading experts warned them time and time again, but unavailingly, that their expectations could never be realized. Eminent actuaries, here and in Europe, riddled the "blue books," demonstrating their bad faith. The life-insurance surplus, as already explained, is derived from three sources—excess interest on reserve, excess loadings for expenses and decreased mortality. In the old Tontine days the profits from lapses also went in. Hyde based his Tontine estimate on a 6 per cent interest rate; at that time the Equitable earned something more than five—and regularly earned less in the succeeding years. Hyde figured upon the usual number of lapses, ignoring the fact that the Tontine scheme, by so heavily penalizing withdrawals, would tend to keep people in. Above all, he based his great profits upon expected retrenchments in management expenses! He figured upon a 12½ per cent expense rate; at that very time the Equitable spent 16 per cent, of its premium income and, in succeeding years, ran it up to 25. Sheppard Homans is generally credited with having prepared these estimates. In this one act he irretrievably ruined his reputation. He became, afterwards, merely a hanger-on of Hyde; his widow, up to a few months ago, drew a pension from the Equitable. Homans' original estimates were much larger than those actually published, and were cut down at the suggestion of J. G. VanCise, at that time a clerk in the Equitable's actuarial department.

Three Different Blue Books in One Year
That these estimates could never have been honestly made is evident from the fact that in 1886 the Equitable had three separate blue books in the agents' hands. On January 1, 1886, Hyde issued an entirely new volume of estimates. This made so considerable a reduction that the agents raised a great howl. As a result it was withdrawn, after having been in circulation less than a month, and the agents directed to solicit business on the estimates of 1883. In the fall Hyde withdrew this book and issued another, giving entirely new estimates. For example, in January the Equitable informed a prospective $10,000. policy-holder, aged forty, that in twenty years his cash profit would amount to $3,795.70. "We can't get business on so low an estimate as that!" shouted the agents. The Equitable, therefore, authorized the promise of a cash bonus of $7,166. In October, the society split the difference between these two estimates and placed the figure at $5,925.70.

Appealing to the "Tontine Tendencies" of Men
We must thank William Barnes for one telling phrase, which, in itself, sufficiently explains the Equitable's success. Hyde had "collected the Tontine tendencies of men." He had appealed, that is, to their gambling instinct. Into every hamlet went his agents with their "blue books," selling not primarily family protection but possible prizes in a great insurance lottery. They always tellingly appealed to the individual man. "Take a Tontine policy," they said. "Look at the enormous returns if you survive this Tontine period. You will get not only your own profits, but part of the profits of all that die! You will not die; you are strong, in good health—you will be sure to live. But thousands in your class will die, and by every one of those deaths you will profit. Moreover, look at the enormous number who will lapse their policies. Do you know that nine out of every ten who purchase life insurance drop out? Under our Tontine scheme these poor devils won't get a cent; everything they have paid goes into the surplus to be divided among the survivors. Of course you won't drop out. You are well-to-do; and will have no trouble in meeting all your payments." This appeal took like wild-fire. As long as human nature retains its gambling instinct, it always will. Thousands willingly staked their own chances of living and paying against the similar chances of their fellow-insurers. They readily risked all their own life-insurance for a possibility of getting a part of that of their less fortunate associates.

Thus Hyde placed in the hands of hundreds of agents his "blue books" and sent them forth to preach the gospel of Tontine. He raided the leading offices; got away the best men, paying them unheard of commissions—made possible, of course, by this Tontine fund. He astounded the public by his lavish avertisements—the money also drawn from the Tontine fund. Into every state and territory his "blue books" found their way. In the early '70's he invaded Europe. His "blue books" appeared in every English parish and every French and German village. Foreigners opened their eyes at this speculative insurance; and, in spite of the frantic protests of the home companies, purchased Tontine policies by the thousand. Thus, in twenty years, by virtue of Tontine, Hyde made the Equitable the biggest life-insurance company in the world. He had accomplished the revenge of his boyhood—had built up a larger company than the Mutual Life. Frederick S. Winston, who shut his door upon young Hyde that eventful March night in 1859, finally died in 1885, disappointed and embittered. At Hyde's own death in 1899 he had accumulated assets of more than $304,000,000.; a surplus of more than $65,000,000.; and had more than a billion dollars worth of insurance in force. He could hardly find a spot on the world's map where the Equitable Society was not known. Americans, Englishmen, Germans, Spaniards, Chinamen, Japanese, and Malay Islanders—all entered the mad race for Tontine. He had erected his tremendous monument on the basis of misrepresentations. By this time, too, he had debauched the whole life-insurance system in this country. For how many disappointed lives; how many desolate homes Henry B. Hyde was responsible; how many millions of dollars he diverted from the hands of their owners into his Tontine pool—these things can never be accurately told. For his influence extended far beyond the Equitable. He corrupted not only his own company, but scores of others. He pursued his scheme so successfully; he accumulated such enormous funds which he used in propagating his own ideas, that the great majority of companies were forced to follow his example. Twenty years after he first adopted the Tontine system, four-fifths of all the other companies had followed suit. The New York Life fell into line immediately, in 1871; the Mutual, after attacking for years what it called the "Tontine game," ate its own words after President Winston's death and became a Tontine company itself. The Northwestern of Milwaukee fell into line in 1881; the Penn Mutual about the same time. The smaller New York companies—the Home, the Washington Life, the Manhattan, the Germania—these were all forced, many of them say against their will, to become Tontine companies. Under all sorts of names—reserve dividend, life rate endowment, dividend investment, dividend endowment—Tontine became the predominant idea in American life insurance. Hyde did not win this great triumph, however, without a hard battle. There were a few companies and a few men who kept the faith; who fought, against overwhelming odds, his demoralizing innovations; and who maintained the old ideals until the end. Only three companies kept themselves entirely free from Tontine; the Mutual Benefit of New Jersey, the Connecticut Mutual of Hartford, and the Provident Life and Trust of Philadelphia. How bravely these opponents struggled; what they suffered; how they had to wait, for their complete justification, until this year of grace 1906—this story will be told in the succeeding article.