Charles Ponzi Scheme


We all know the term Ponzi Scheme.
Rob Peter to pay Paul
Now you can learn how it all began.

Have I got a deal for you! I can double your money in just ninety days, guaranteed. While most Americans today might not care to invest in this offer many did during the 1920s when Charles Ponzi promised he could double investor’s money within 90 days. The idea behind this later dubbed “pyramid scheme” was immigrant Charles Ponzi had the idea to start an export magazine and wrote and sent a letter to a potential investor in Spain. When the Spaniard replied he included a postal coupon to be cashed in and used for American stamps so the magazine could be shipped back to him. However, when Ponzi went to cash in the coupon he realized the coupon cost less than 1 US cent in Spain and when he cashed it in he received the equivalent to 6 cents in coupons.

Ponzi’s mind began racing because if he could buy stamps in a weak economy, cash them in for American stamps, and then sell them to a third party for cash he could easily make hundreds of percents of returns on his investments. After working 14 years as an Italian immigrant in various low paying jobs Ponzi was ready to take hold and realize the American dream. And thus began the Ponzi scheme.

Ponzi’s scheme theoretically included changing American currency to Italian lire in order to get favorable rates when buying postal stamps and exchanging them for American stamps. Because of this Ponzi claimed his investments had a return of 400%. Unfortunately, changing the US dollar to another currency, then receiving the foreign stamps and exchanging them for US stamps and back to US dollars ended up being virtually impossible on the grand scale Ponzi imagined and significantly slower than his promised 90 day double your money guarantee. However, the fact that the scheme would not work in reality for the long haul did not stop Charles Ponzi from capitalizing on his scheme and selling the idea successfully to investors. He advertised his scheme and before long investors were practically shoving money into the hands of Charles Ponzi. Because Ponzi was taking so much money in so fast he was able to meet his obligations and returns to the first investors. When these investors received their payouts they were pleased and as a result Ponzi gained more popularity and esteem for his investment opportunities.

However, the scheme could not last forever and although obligations were being met the newspapers and federal and state governments were starting to catch on and articles were printed questioning the validity of the investments and the government investigated Ponzi to try and find where he was breaking the law and where the fraud existed. Amazingly, Ponzi continued meeting his obligations and everyone was amazed that Ponzi was truly making good on his claim although many thought something was illegal somewhere.

The house of cards began to fall when the federal government convinced Ponzi to stop taking new investments while they audited his books. Why Ponzi agreed to this nobody knows and a riot occurred outside his office demanding he return their investments. He ended up returning approximately 1000 investments that day which only endeared him to the public more. However, about a month later Ponzi was publicly declared bankrupt by the government and newspapers. He admitted to having a criminal record and was arrested three days later only to be released on bond, was re-arrested the same day and released on bond again.

The result was lawsuits from all sides and a gigantic mess of accounts with no money to pay the investors. In addition to the 180,000,000 postal stamps intended for purchase by investors’ money government officials could only prove the purchase of two. Ultimately, Ponzi was sentenced to prison and spent several years there before being released on good behavior. He eventually was re-arrested on new fraud schemes and then deported to Italy and found himself at the end of his life as poor as he began. He expired in Brazil in a pension hospital and had just enough money to his name to cover his burial.

Charles Ponzi Scheme

Charles Ponzi Scheme

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