William Nelson Black.

Ultimate finance : a true theory of co-operation online

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against which property is protec
by the payment of premiums, thoi
a source of profit to the underwri
is ordinarily thought to be onl;
precautionary measure of not mi
influence on the total accumulat
of wealth.

This may be the true view in ri
tion to property insui-ance. 1
total of wealth secured through
derwriting against fire may S€
considerable when estimated with
regard to the total of accumulatii
in other fields, but when i
comparison is made it will be fot
quite inconsiderable. It does
compare with the amount of wea
accumulated through commerce, a



«even combined with the banking
operations, through which insurance
companies are. largely sustained, it
would not begin to equal the accu-
mulations drawn from the market
proceeds of many small industries.
But when we come to life insurance
we reach a j)owerful factor in the
creation of wealth, potentially, per-
haps, when we take into "view the de-
struetibility of products and the need
for continual reproduction to avert
the ravages of time, the most power-
ful of all the agents. We have only
to look around us to see the evidence
that the payment of premiums on
life insurance policies becomes the
foundation for an immense capitaliza-
tion, which, under the prevailing
feeble methods in finance, seems al-
most startingly large. Witness the
huge assets of some of the more suc-
cessful of our life insiu-ance com-
panies, their palaces that serve for
general offices, and their ability to
make loans on securities of every
description. But these evidences are
only the visible tokens of their
opulence. Add to the amount of their
corporate accumulations the private
fortunes created through dividends
on stock, and their tables of disburse-
ments credited to the account of life
policies paid, and the total is some-
thing well worth considering even
among the larqe wealth creating

Life insursance seems to be more
firmly grounded in the principles of
banking than fire insurance. The
same process of capitahzation on pre-
miums is of course witnessed under
the operations of both systems, but
in fire insurance the policy, which
rejDresents the newly created value,
can be said to have only a provi-
sionail value. Before a property
which will fall to the policy holder
can be created by the j)ayment of the
premiums there must be a destruc-
tion of property at least equal to the
amount of the policy, and sometimes
considerably greater than the amount.
A policy may be carried for gener-

ations, and in a majority of instances
is probably carried for this length of
time, without contributing anything
except the profits of the underwriter
to the total of wealth. In fact it can
never be a contributor to this total.
It must be limited to the service of
preventing the destruction of wealth.
But a sustained life insurance policy
creates a property with unerring cer-
tainty ; and though the period of its
erection into objective wealth
may be deferred there can be no
question that it will finally contri-
bute to the total of resources.
Measurably, it contributes from the

But here it will be necessary to
become critical. We will admit all
that may be claimed in favor of the
beneficent character of life insurance,
and give it full credit for all its
achievements in the creation of wealth.
It owes much to the banking system
as a wealth producing agent, a sys-
tem of which all insurance companies
are largely exponents ; but this can-
not be permitted to detract from the
credit due. It only entitles such
companies to be held in better
esteem. But after making these
concessions it cannot be said that life
insurance, in the present stage of its
growth, is more than a germ. We
may be told that it is an exceedingly
well develop'ed germ from the finan-
cial point of view; and were it
possible to conceive of no more
vigorous growth it would be neces-
sary to admit the claim. But it
happens that life insurance has a
mission, which, if not transcending
finance, compels us to recall the fact
that the best services of finance are
rendered in the field of benevolence,
or produce results that may properly
be called benevolent. From this
point of view it cannot be admitted
that the system has reached a very
high state of perfection.

The very causes of the financial
success of life insurance have been
the causes of its failure to bring
general security to society. It costs



too much money to carry a policy for
any considerable amount, and it is
carried in sucli manner that the
insured person derives no benefit
from the payment of the premium
during his own life time. Unfortu-
nately, therefore, only a few men are
found who are willing to sacrifice
themselves for the benefit of
posterity. Men rarely look upon
death as imminent untU they have
become so old that they can only
obtain insurance by the payment of
an enormous premium, and up to
that time they usually prefer to
pursue fortune with all their resour-
ces at their own command. They
believe that they can make their
means fruitful in bringing returns at
least equal to the final returns
accruing from a policy, and that
they themselves, as well as their
posterity, can enjoy the benefits.
They are often deceived. It com-
monly happens that aU their efforts
to obtain much more than a sub-
stance ends in failure ; and they often
die and even leave their families in
distress. But hope is a leading
impulse in human conduct, and it
follows men even to the portals of
the grave. It is probably not
possible to ever make life insm-ance
through the agency of what are
known as the legitimate companies a
truly beneficent force for any except
those who have comparatively little
need of beneficent agencies. The men
who could see most reason for
insurance" are the men who from
physical disability, old age, or
poverty are unable to place their
families under its protection.

The advocates of co-operative in-
surance may intrude here, and point
to the excellence of some of their own
j)ecuUar and varied systems. They
wUl endeavor to show that they have
reduced the cost of company admin-
istration to a minimum; that they
are satisfied with little and sometimes
with no profits; and that they are
willing to give insurance for the mere
cost of carrying the policy, a trifling

cost when able-bodied and robust,
men are selected as beneficiaries. But-
in the first place it is not alone the
families of robust men and women
who are likely to need iasurance ; and
in the second place the career of co-
operative companies, including mu-
tual benefit, or friendly societies, has
failed to show that any large propor-
tion of men are willing to accept
insurance on even the easy terms
offered. In truth there seems to be
some difficulty in convincing men
that death has entered into the
economy of nature, or that its advent
can entail serious consequences to
their famUies. It is not possible,-
therefore, to admit that insurance,
though potentially a financial force-
that seems to have been created ta
supplement the banking system, and
to enable one generation to con-
tribute enormously to the wealth of
succeeding generations, can be called,
at its present status, more than a
germ. Let us see if its inefSciency
in the creation of wealth cannot be-
made clear.

The total of pohcies paid by all th&
life insurance and benefit companies
in the United States during the past-
generation has been large. It will
seem startlingly large to men who-
have never had occasion to look into-
insurance statistics. It may be
roughly stated at $2,000,000,000.
But during the same period the na^
tional wealth has more than quad-
rupled, or increased, approximately,
by $30,000,000,000. It will be seen,
therefore, that while $1 has been,
contributed to the general fund by
hfe iasurance, $15 have been con-
tributed by the resources of capitali-
zation working through the agency
of industry, and by natural increment.
True, this estimate takes no account
of the total of private fortimes
created or increased by the profits on
insurance during the same time. The
total of this amount would no doubt,
be found considerable, enough, pos-
sibly, to half equal the sums paid to-
the policy holders, But the twoi



combined, it -will be seen, make a
small total ■when compared with the
material increase of the nation from
all other sources.

Now, to still further illustrate the
weakness of insurance, and at the
same time its possible power when
working under easily formed combi-
nations, let us make another calcula-
tion. Let us suppose a system that
would enable every man to carry in-
surance to the amount of $5,000, the
enabling feature of the system rest-
ing on the provision that the person
paying the premium shall obtain the
money at once, under proper re-
strictions for its protection, and in-
vest it for his own benefit. On this
supposition it is not to be presumed
that any person, unless idiotic or
feeble minded, would neglect insur-
ance. Men have rarely such a poor
opinion of their judgment that they
think themselves incompetent to take
care of $5,000 if they only had the
money. They are more prone to be-
lieve that they could even make it
bring good returns. We will pre-
sume, then, that the practice of in-
sming would become universal under
such a system, and that all men would
soon seek its protection. Let us see
the result at the end of a generation.

First, we must estimate the
average adult male population of the
country for the period named. The
present total is probably about
20,000,000, but a generation ago it
was not more than half so great, or
10,000,000. We may then fairly
place the average at 15,000,000, and
estimate on this number. Let us
suppose, then, that during the life of
the past generation there had been
15,000,000 adult male inhabitants in
the United states carrying insurance
for $5,000 each, and estimate the
amount that would have gone to
their children, the end of the gener-
ation having now been reached. The
estimate is easily made. It will be
obtained by simply multiplying the
total number of insured persons by
the amount of insurance carried by

each person, and the product will
represent the total of wealth added
to the national estate. It will reach
the truly magnificent sum of
$75,000,000,000. This is nearly
double our estimated total of wealth
at the time of the publication of thfe
census report for 1880, all the past
contribution of life insurance in-
cluded. But this amount, surpris-
ingly large as it may seem, is only
the product of a minimum calcula-
tion. The estimate takes no account
of the large number of women
engaged in gainful occupations, large
already and constantly increasing,
who could very well afford to
contribute to the general security.
Neither does it take any account of
the fact that the system of bond
insurance, as proposed in Part First
of this treatise, could be made self-
supporting soon after its adoption,
if not, indeed, from the beginning.
When it had become self-sustaining
there would be no restrictions on
the amount of the insurance carried,,
no matter what the income of the
contributors to the fund, and the
combined increase, caused by the
larger average of insurance and the
increased number of insurers, might
soon double the product. In this
calculation it will be seen that
insurance can be made the chief
factor in the creation of wealth, sur-
passing even the resources of bank-
ing and credit.

But we shall be met by objections.
We shall be told that the calculation,
is merely ideal ; that in the first
place it is impossible to conceive of
a system that will enable more than
a comparatively few men to carry
insurance to the amount of $5,000 ;.
that in the second place only a small
proportion of these few can be-
induced to assume the obligation,,
and that, finally, it is idle to make-
estimates which are not justified by
experience. The life insurance sys-
tem has been growing painfully into
being during the past four centuries ;
and we can only judge of its possibil-



ities by the results. If it must be
admitted that those results are
comparatively purile, then we have
no reason to dream of doubling the
national resources in a single gener-
ation through the agency of any
system of insurance,

This sounds rational, but from the
suggestions ah-eady made the reader
will draw the inference that the re-
sources of the insurance system are
not thought to be yet exhausted. It
is possible even that we have not
more than reached the threshold of
the temple, and have all the gilded
interior yet to explore. True, life
insurance has not proved itself capa-
ble of adding greatly to the general
wealth ; and while it is prosecuted
simply for the benefit of jposterity it
is possibly tnxe, also, that it will not
become highly efficient. The ob-
structions in its way are many and
various. They are not confined to
those already suggested, but com-
prehend the obstacles raised by the
mismanagement of companies, to say
nothing of occasional dangers spring-
ing from dishonesty. But the chief
obstructions, after the lack of human
foresight and prudence, spring from
a doubt if the system is economically
sound. After paying hundreds and
thousands of dollars on the account
of premiums, too many men are heard
reflecting that they would have been
better off had they x^ut their money
in a savings bank, or in some paying
investm.ent, and received interest or
profits. " See !" they exclaim, " my
payments after all these years equal
the amount of the policy, and it wiU
never personally be of any use to me.
Surely this cannot be a wise use for
money." Such reflections are too
common, and seemingly too rational,
to leave a perfectly free field to the
insurance broker. The complainants
are generally in the wrong where
their investments are made in a per-
fectly reliable company. In such a
depository their money will not only
be exempt from the casualties of
trade, but the insured person will

practice an economy which few men
have the self-denial to practice unless
it is somewhat enforced. But the com-
plaints will nevertheless be heard, and
the complainants will be reinforced
by observers who will point to the
number of policies constantly for-
feited through the non-payment of
premiums, the failure having gener-
ally been due to the inability to meet
obligations. These complaints and
criticisms it must be admitted offer
obstacles which will forever prevent
the complete success of a strictly life
insurance system. They are obstacles,
too, which it would be idle to attempt
to underrate.

But will it be possible to adopt a
system of insurance that can be turn-
ed to the direct and immediate ad-
vantage of the person who pays the
premiums 1 This is a pertinent ques-
tion, and it cannot be expected that
any man who makes the inquiry will
be satisfied by inferences. He will
want the answer made specifie and in
detail. He will wish to know by just
what process insui'ance can be man-
aged so that it will bring either
easier living conditions, the chief
boon demanded for the security and
happiness of society, or direct per-
sonal profit. Unquestionably, at
first thought, such a system would be
deemed impossible. Wealth has al-
ready been defined as something due
to an exchange of service. It is
measured by its capacity of control-
ling exchanges ; and it will be found
impossible to create it by virtue of a
decree. You cannot receive unless
you have first given, or stand ready
to give ; and the total of any large
fund is but the product of a great
number of small contributions. To
hope to create an insurance fund,
therefore, vsdthout the sacrifice of
personal resources, seems not unlike
the effort of a man at lifting himself
over an obstacle in a tub. But the
resources of finance are almost in-
finite. It may be called the science
of expedients ; and it is hard to say
if there are any impossibilities when



all its resources in making combinsi-
tions are brought into service. It is
undertaking a Herculean task when
it tries to meet all the demands of
society with an overwhelming ma-
jority of men refusing to recognize
its principles, or to contribute to its
work. But its labor will reach a
better fruition when society has been
taught that the creation of wealth is
a finally financial exploit, and that aU
men who expect to share in its bene-
fits must learn to become financially
contributors to the general fund. Let
us see, first, if it will not be possible to
carry insurance not, indeed, without
cost to the bearer but without any
cost that cannot be recovered.

It can hardly have escaped obser-
vation in the course of this discussion
that the practice of placing money at
interest is held to be the chief secret
of accumulation in all the ordinary
transactions of production and ex-
change. The money thus loaned
sometimes represents a surplus which
would lie idle and unproductive were
it not for the arrangement through
which it is put to use ; but it is often
only the terms of money which are
in use, the substance finding its true
form in convertible property such as
lands, houses, stocks, bonds, or notes.
The amount of so-caUed money upon
which interest is drawn is therefore
enormous and incalculable. It lies
at the foundation of all the industrial
and mercantile operations of the com-
munity. But observe what follows.
It is an agent performing a double
service. It serves both the borrower
and the lender. But it is not neces-
sarily a condition of the arrangement
between these parties that it should
serve them equally. Whatever the
circumstances of the lender he will
be satisfied with smaller returns
than he would expect to derive from
more active operations. This is the
first condition demanded for money
lending, indeed, for there would be
no borrowers, except among men in
absolute distress (who find it diffi-
cult to borrow), were it not possible

to make a profit on the loan. There
will generally be found a margin,
therefore, between the profits drawn
from the market for commodities and
the interest drawn from money, and
in this margin lies the most wonder-
ful possibihties. To say truth, .all
business men are habitually perform-
ing a feat which looks like success-
fully trying the experiment of the
obstacle and the tub. They are even
lifting themselves by turning to their
advantage the very forces that seem-
ingly bind them to the earth.

The road, then, to a system of in-
surance where the burden may be
carried without cost, or without any
sacrifice that cannot be turned to
gain, will be found in putting into
operation the resources of interest
and profits, and making the latter a
contributor to the fund from which
the insurance is drawn. In such a
system life insurance, as it is com-
monly comprehended, wiU be only
incidental. The real object insured
must be the capital which the con-
tributor to the fund will be enabled to
create and use for his reHef or profit,
the product to go unincumbered to
his family after his death should he
not himself be successful in relieving
it of all liens during his life time.

The alternative to life insurance,
then, must be bond insurance. In-
surance companies most broaden into
large combinations of men whose
personal income, drawn from what-
ever trade, profession, or pursuit
they may happen to follow, can be
made a basis for capitalization. In
these companies the common words
that belong to the ritual of banking
must take the place of such terms as
policies and premiiuns. A policy
must be simply a bond which may
be deposited in bank and checked
against for the benefit of the de-
positor, a premium a certain percent-
age reserved from the income of the
same person and paid as interest to
the bank by which the bond is held.
The money thus obtained will, of
course, be held subject to investment



at the option of the bond giver.
Considered simply as a question of
insurance, this seems to be the sys-
tem demanded to overcome the v?eak-
ness of prevailing methods. The
mere suggestion that it will enable
men to carry insurance without loss,
a suggestion that will be justified by
the most cursory examination, should
be sufficient to recommend it to gen-
eral favor. But it may stiU be doubt-
ed if the system can be made a
source of possible profit. The illus-
tration of the obstacle and the tub
may stUl be floating in the imagina-
tion of the reader. In estimating on
the death rate for a system that
would undertake the protection of
every member of the community,
the sick not less carefully than
the well, it will not be safe to make
calculations on less than fifteen
deaths annually for each one thou-
sond members in a company. This
would make the payments due to the
insurance fund $15 per annum for
each $1,000 ref)resented in the bond.
One thousand persons, that is to say,
each paying $1.5 per year, would
make a fund of $15,000, enough
to give to the heirs of each person de-
ceased during the year $1,000. This
payment would be one and one-half
of one per cent, on $1,000; and
in some cases it might rise slightly
above this percentage. The cost of
company administration, too, would
be something. It would not be
large ; but it would amount to a
quarter or a half of one per cent.,
which united to the percentage on
insurance, makes nearly or quite two
per cent. This must be added to
the interest on the bond ; and it will
be presumed, off hand, that the rate
will be six per cent., or the legal rate,
which is approximating six per cent,
in all the States. The total charges
against the insm-ed bonds would,
therefore, be eight per cent., a charge
which few investments of the day
can be made to cover. We may be
asked, then, to indicate the sources
of profit in a system of bond insur-

On this calculation the obstacles iit
the way of profit seem considerable.
But there are many points to be con-
sidered; and when they have been,
studied apparent obstacles will be
found to greatly diminish. In the
first place the chief cause at this time "^
for the narrow margin of profit on
investments is to be found in the in-
tensity of competition. It seems to
be the deliberate purpose of almost
all operators to beat their rivals, not.
only in the magnitude of their enter-
prises but in the reduced price at
which their services shall be rend-
ered. The general public, too, with
its usual discrimination in economic
affairs, either looks on applaudingly
at the spectacle, or finds fault be-
cause the services are not given at a
still more ruinous sacrifice. A dis-
position to reflect on the conse-
quences of a too reckless indulgence
of this spirit has been recently ob
served; but it is still generally preva^
lent, and while it lasts the rates of
interest, stimulated by the demand
for money for investment, will nat-
urally rise, while the margin of profit
on operative transactions will fall.
But the circumstances will change
when all men have become investors.
A different spirit will then prevail.
Money will be found in abundance
for all the investment uses to which
it may be turned ; and the chief solic-
itude of each person making an in-
vestment will be for large mai-gins of
profit. In this case, the work of the
wrecker, as all men should be called
who deliberately undersell the mar-
ket, would be found both difiBcult
and unpopular. It would be foimd
so exceedingly unpopular that a man
would be likely to be displaced fi'om
a managing position if he failed of
making the property imder his man- \^
agement bring good returns. It is
easy to see, therefore, that a day
might come when the absurd spectacle
of to-day, the spectacle of interest
rivaling profits in magnitude, would
be seen no more.

But the hopeful prospect is not



bounded by the probabilities of bet-
ter commercial management.. It
rests, also, upon a financial prin-
ciple. It cannot have escaped obser-
vation that certain low interest bear-
ing securities, such as government
and. municipal bonds, are eagerly
sought by banking institutions. This
is commonly thought to be due to
the trustworthy character, of those
securities. But this does not tell the
whole story. It may not be the only
reason for seeking the investment.

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Online LibraryWilliam Nelson BlackUltimate finance : a true theory of co-operation → online text (page 13 of 19)