by Lisa Black
We’ve all heard of Ponzi schemes, the shorthand often (but not always) deserved. The name comes from Charles Ponzi, born in Italy in 1882, intelligent and educated (he apparently attended the university of Rome) and charming—oh, so charming. He came to America with big dreams, worked odd jobs, moved to Canada and worked in a bank. Unfortunately the bank went bankrupt and Charles, without funds, passed bad checks. Like any dutiful son he wrote his mother, but told her he was working at the jail rather than incarcerated there.
Afterwards, he came up with his first scheme, one that may sound a bit confusing to those of us who don’t do a lot of international mailing. ‘International Reply Coupons’ are coupons to cover the cost of return mail to the country of origin. These were designed by the Universal Postal Union, a grouping that has officially existed since 1874, and today is a division of the United Nations. (I’m a lifelong mail junkie, and I’d never heard of it.) Like an economic union, it establishes systems and rules so that mail can flow between countries without having to set up a separate agreement between each one. The IRCs were enclosed so that the recipient could send a reply without having to obtain foreign stamps or worry about sufficient postage. This practice only died out in the 2010s. Point is, Charles figured out he could get people in other countries to buy IRCs there and send them to him, he could exchange them for more valuable stamps, and then sell those. Doesn’t sound too exciting, but profit margins topped 400%. Charles warmed to the race in a white-hot blaze.
He could do more with more, so he recruited investors, promising them 50% profit in forty-five days, or 100% in ninety. (Of course, 12% is considered a healthy rate of return, and that’s over a year!) Did they know they were investing in mail fraud? Were they more co-conspirators than victims? It’s uncertain—the scheme sounds legal, and Ponzi most likely told them it was. The happy investors told others, and more came, and more. But Ponzi paid out those profits with funds coming in from new investors, not with funds generated from the stamps scheme, a pyramid doomed to crumble. But in the meantime, man, life was good for Charles Ponzi.
Of course it couldn’t last, and it didn’t. The Boston Post (yay, investigative reporting!) heard tales of wild profits and came to check it out, spooking investors who then tried to pull their money back out. The pyramid collapsed, and on August 12 one hundred years ago, Ponzi was arrested for eighty-six counts of mail fraud. He pled, went to jail for fourteen years, and died penniless in Rio de Janeiro in 1949. The scheme’s collapse deprived his investors of $20 million (nearly $26 million today) and ruined six different banks.
He even stole credit for the scheme, though he probably didn’t mean to. Twenty years before Ponzi’s reign, New York bookkeeper William Miller promised investors 10% per week, and defrauded investors of over a million dollars. And they continue well into the new millennium with people like Bernie Madoff, Tom Petters, and Lou Pearlman, the mogul who created NSYNC and the Backstreet Boys.
What an interesting bit of history here! On the subject of financial scandals, I'm reminded of the British author, Jeffrey Archer who also went to jail and (for a while) and was bankrupt after a scandal. Having served in Parliament and other offices, he later recouped his losses (and then some) when his financial thrillers sold 330 million copies worldwide. Thanks for a great post, Lisa.
Funny how we all know what a Ponzi scheme is, but I doubt many knew about Ponzi. I didn't. Any idea what makes this different than a pyramid scheme, or is just a different name for the same type of scheme?
I’ve read Jeffrey Archer but I did not know this!
I believe a Ponzi scheme is a pyramid scheme. I think that refers to anything where the base has to keep expanding while the few at the top take their money and go.