Who Was Charles Ponzi?

Many people have heard of ‘Ponzi schemes,’ and most are aware they usually refer to at best immoral and, at worst, fraudulent schemes that don’t entirely promise what they deliver.

The term ‘Ponzi’ to refer to a dubious investment or business scheme is named after Italian Charles Ponzi who, as part of a rather colorful business and working career, developed a scheme that at one point was making him and selected investors millions of dollars but leaving many others out of pocket.

Arrival in America and a life of crime

Ponzi arrived in America in his early 20s in 1903 having gambled nearly all of his money away on the voyage over and, after a few odd jobs, worked at a bank but earned his first prison sentence through forging a check - something businesses can prevent easily enough now thanks to security advances in tamper proof check technology but was much tougher to overcome then.

He then turned his hand to smuggling Italian immigrants into the US but was caught and imprisoned once again.

The Ponzi scheme is born

After release from prison, and having various menial jobs, he formulated the idea that would make him - at least for a while - extremely wealthy and secure his place in history.

It all started when he received a letter containing an international reply coupon (IRC) - a common way for people sending mail to provide a means for a reply by the recipient exchanging them for air mail stamps.

Ponzi realized he could make a profit by buying IRCs in one country and exchanging them for more expensive stamps in another based on the differences in postal rates between some countries.

The Ponzi scheme in action

Ponzi’s scheme worked as follows: he’d send money to agents he recruited abroad who would buy IRCs and send them to him in the US. Ponzi would then exchange the IRCs for stamps worth more than he’d paid and sell them - it’s claimed at times he made more than 400 per cent on some transactions.

In order to realize even higher money gains he wooed investors with promises of huge profits over small time frames. The immoral part of this is Ponzi paid his investors with money from newer investors - not from profits. The success of his and other subsequent ‘Ponzi schemes’ relied on a constant flow of new investors providing returns to established ones.

At the height of his scheme’s success Ponzi was reputedly generating $250,000 a day.

The downfall

Ponzi’s cash machine scheme fell apart when ‘The Boston Post’ investigated his activities, with the result that there was a run on his company with investors rushing to withdraw their money.

He was arrested in August 1920 and charged with several counts of mail fraud and, owing some $7 million, found himself in prison again - this time for 14 years.

He died in 1949 in Brazil reportedly without a penny to his name.

The Ponzi legacy

Charles Ponzi may not have thought his name would live on after him as a term to describe dubious money schemes, or that his ‘business model’ would endure, but it has albeit having been adapted through the use of new technology.

Many years later in 2008 another famous scheme using the principles of Ponzi’s original fell apart when its creator Bernie Madoff - an American financier - was convicted of various crimes including wire and mail fraud, money laundering and perjury.

His scheme had, it was revealed, run for decades and made billions of dollars under the veneer of being a respectable trading strategy. Like Ponzi all those years before him, Madoff simply paid investors from money flowing in from new entrants.

Beware of dubious schemes

There are various investment and business opportunities around and some are still based on Charles Ponzi’s model all these years later. Check carefully if you think you’re being offered a Ponzi type scheme; if it sounds too good to be true it probably is.

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