Who Was Ponzi & What Was His Scheme?

What is a Ponzi scheme? And why does it bear this name? First, you need to know a little bit about its namesake, Charles Ponzi.

Anyone can work a simple swindle, but you have to be a special kind of con man to have your name become synonymous with "fraud." Ponzi pulled it off, though. After arriving in the U.S. from Italy in 1903, Ponzi knocked around in a variety of unskilled jobs that usually ended when he got into trouble for theft or cheating customers. A few years later, he moved to Canada, where he spent a hitch in prison for passing a forged check. When he eventually drifted back down to the U.S., he needed a way to make some quick cash.

Making Money via Mail

Ponzi eventually found his way to get rich quick using a vagary of the postal system. At the time, it was common for letters abroad to include an international reply coupon "“ a voucher that could be exchanged for minimum postage back to the country from which the letter was sent. Thus, if you sent your buddy in France a letter, you could include a coupon so he could respond. (This practice still exists but is less common.) As exchange and postal rates fluctuated, though, there was an opportunity to make a profit. You only had to purchase postal reply coupons cheaply in some foreign country, send them back to the U.S. to swap them out for American stamps of a higher value, then sell these stamps. This arrangement was perfectly legal; it was just cleverly gaming the system. Ponzi started buying and selling postal reply coupons using agents in his native Italy, and he was making a good living doing it.

Unfortunately, whatever defect made Ponzi steal from his employers and pass bad checks prompted him to get greedy here, too. He started to recruit investors into his system with the promise of 50% returns in just a few days. Investors would pay their cash in, and sure enough, Ponzi would get them the promised return. Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for this foolproof investment strategy.

Ponzi was pocketing millions, and he enjoyed a sumptuous life outside of Boston. At his peak, Ponzi was raking in $250,000 a day, which enabled him to collect such necessities as gold-handled canes. He became a celebrity investor, almost like the Warren Buffett of his day.

The Scheme

Why is it hard to think of Ponzi's name without affixing "scheme" to the end of it, then? Ponzi's underlying "business" — the arbitrage on the postal coupons — wasn't actually as sound as he claimed. In fact, there wasn't even really a business. However, since so much money was flowing in from new investors, he could just pay off the returns for the old ones from the new cash. In fact, Ponzi didn't even need to pay off the old investors, since many of them wanted to reinvest their returns in this wonderful business. Ponzi's charms made it easy for him to placate any worried customers, and his con looked unstoppable.

Fuzzy Math

Eventually, though, smarter financial heads started looking at Ponzi's business. Clarence Barron, owner of the Wall Street Journal and founder of the financial magazine that bears his name, realized Ponzi must have been a huckster and went on the offensive. While Barron conceded that there probably was a way for a person to make a small amount of quick cash on the postal reply coupon scheme, he figured that Ponzi would have to be moving 160 million coupons around to raise the cash he needed to support the business. Since there were only 27,000 postal reply coupons circulating in the world, Ponzi's story didn't check out. (Things only got worse when the Postal Service reported that there wasn't a huge flow of the coupons from one country to the other.)

On top of that, Barron noted that Ponzi told newspapers he invested his own cash in real estate, stocks, and bonds like any normal investor. Barron pointed out the obvious question here: if Ponzi had this failsafe scheme in which he could make a 50% profit, why was he putting his own money into plain old investment instruments that would give him (maybe) a 5% return? Those certainly didn't sound like the actions of a financial genius.

Barron's conclusions ran as front-page news in the Boston Post in July 1920, which would have been damning for most cons. Ponzi was such a charismatic force of nature, though, that many people chose not to believe the paper's report. Few believed that their hero, the man who had "tripled" their life savings, was anything less than 100% legitimate. In fact, the morning that the Post ran Barron's report, investors lined up around the block outside of his office in an attempt to give him more money "“ even after they'd been told that they'd been scammed. Ponzi later boasted that he'd taken in a million dollars in new investments the day the report ran.

The Unraveling

Things were starting to look less rosy for the scammer, though. Although he'd largely placated his investors after Barron's report, Ponzi must have realized his window of opportunity was closing. He hired a publicist, William McMasters, but the PR man saw through Ponzi's lies and renounced his client in the press. James Walsh reprints part of McMasters' slam of Ponzi in his book, You Can't Cheat An Honest Man. Of Ponzi, McMasters said, "The man is a financial idiot. He can hardly add"¦He sits with his feet on the desk smoking expensive cigars in a diamond holder and talking complete gibberish about postal coupons."

The next month, regulators raided Ponzi's office and discovered that he didn't have a huge quantity of postal reply coupons. Since Ponzi had used the mail to notify his marks of how their "investments" were performing, he faced serious mail fraud charges; in total, the government brought 86 charges against him in two separate indictments. Ponzi pled guilty to one of these charges in exchange for a light sentence of five years.

He served around three and a half years, then got his release to face state charges, for which he received a sentence of nine more years. But before he could go back to jail, he jumped bail and tried to start new scams in Florida and Texas. (You'd think the government would have learned their lesson about trusting this guy.) Eventually, though, his time on the lam ran out, and he served his whole sentence.

Upon his release, Ponzi was deported to Italy and spent the rest of his life in poverty before dying in 1949 in Rio de Janeiro, where he's buried in a pauper's grave.

Looking to Downsize? You Can Buy a 5-Room DIY Cabin on Amazon for Less Than $33,000

Five rooms of one's own.
Five rooms of one's own.
Allwood/Amazon

If you’ve already mastered DIY houses for birds and dogs, maybe it’s time you built one for yourself.

As Simplemost reports, there are a number of house kits that you can order on Amazon, and the Allwood Avalon Cabin Kit is one of the quaintest—and, at $32,990, most affordable—options. The 540-square-foot structure has enough space for a kitchen, a bathroom, a bedroom, and a sitting room—and there’s an additional 218-square-foot loft with the potential to be the coziest reading nook of all time.

You can opt for three larger rooms if you're willing to skip the kitchen and bathroom.Allwood/Amazon

The construction process might not be a great idea for someone who’s never picked up a hammer, but you don’t need an architectural degree to tackle it. Step-by-step instructions and all materials are included, so it’s a little like a high-level IKEA project. According to the Amazon listing, it takes two adults about a week to complete. Since the Nordic wood walls are reinforced with steel rods, the house can withstand winds up to 120 mph, and you can pay an extra $1000 to upgrade from double-glass windows and doors to triple-glass for added fortification.

Sadly, the cool ceiling lamp is not included.Allwood/Amazon

Though everything you need for the shell of the house comes in the kit, you will need to purchase whatever goes inside it: toilet, shower, sink, stove, insulation, and all other furnishings. You can also customize the blueprint to fit your own plans for the space; maybe, for example, you’re going to use the house as a small event venue, and you’d rather have two or three large, airy rooms and no kitchen or bedroom.

Intrigued? Find out more here.

[h/t Simplemost]

This article contains affiliate links to products selected by our editors. Mental Floss may receive a commission for purchases made through these links.

Who Were the Actual Brooks Brothers?

Phillip Pessar, Flickr // CC BY 2.0
Phillip Pessar, Flickr // CC BY 2.0

Brooks Brothers has been a mainstay of American formal wear for more than 200 years. The company’s suits have been worn by 40 U.S. presidents. They have supplied uniforms to the American armed forces and suits to regular people for their most important life events: going to the prom, attending their first job interview, getting married.

But in July 2020, the firm filed for bankruptcy, likely a victim of the working-from-home trend and the move towards more casual clothing. The Brooks Brothers’s name has been woven into the fabric of American fashion, yet a certain mystery surrounds the people behind the business. Who were the original Brooks Brothers, anyway?

The firm that would go on to be known as Brooks Brothers was established on April 7, 1818, by 45-year-old Henry Sands Brooks and his younger brother, David, as H & D. H. Brooks and Co. Before setting up the store, Henry Sands Brooks had been a provisioner for traders and seafarers, and likely did brisk business in New York City’s seaport. Their shop was situated on the corner of Catherine and Cherry streets in Lower Manhattan, a major shopping district that supported a number of clothing stores. It was said Brooks was something of a dandy with an eye for fashion.

Brooks Brothers ran a full-page ad celebrating its centenary in 1918.New York Evening Post // Public Domain

Henry Sands Brooks died in 1833, and the store passed to his eldest son, Henry Jr. When he died in 1850, Brooks Sr.’s four younger sons Daniel, John, Elisha, and Edward inherited the firm and renamed it Brooks Brothers. At this point, the store began to stand out from the crowd. The brothers adopted their familiar logo of a sheep suspended by a ribbon representing the Golden Fleece. This ancient symbol hearkened back to the Greek legend of Jason and the Argonauts, and was used by tailors and wool merchants across Europe as a sign of quality. By embracing this symbol, the brothers were announcing the caliber of their goods and aligning themselves with the prestige of European fashion.

While building a brand on traditional quality, the brothers also saw an opportunity to modernize. Brooks Brothers began specializing in ready-to-wear suits—an innovation that made “gentlemen’s clothing” accessible and affordable to ordinary Americans. An advertisement in New York’s Evening Post in June 1850 stated that Brooks Brothers ‘have on hand a large stock of ready-made clothing, suited to the tastes and wants of purchasers.’ Brooks Brothers also capitalized on the California Gold Rush by selling their ready-made suits to gold-seekers who didn’t have time to wait for a tailor to construct bespoke suits.

Business boomed in the years leading up to the Civil War, a time when the company benefited from slavery. Much of the cotton used by Brooks Brothers was picked by enslaved laborers in the South. The company also manufactured the types of uniforms worn by enslaved people forced to work as house servants.

Perhaps as a result of their experience making such clothing, Brooks Brothers was given a large contract by the Union government at the start of the Civil War to provide tens of thousands of uniforms for enlisted soldiers. A scandal blew up when the garments were delivered: it was obvious that the uniforms were of low quality, missing buttons or buttonholes, and made from cheap scraps of cloth glued instead of sewn together. When the outfits were exposed to wind and rain, they fell apart. In the rush to manufacture them for the war effort, Brooks Brothers had, in fact, substituted cheap and flimsy material instead of the usual grade of cloth—they were allowed to, according to the provisions written into their contract.

The New York state legislature launched an investigation, accusing the company of profiteering. When asked how much money the company had made by downgrading the cloth, Elisha Brooks prevaricated. “I think that I cannot ascertain the difference without spending more time than I can now devote to that purpose,” Brooks told lawmakers. Ultimately, Brooks Brothers agreed to replace 2350 of the substandard uniforms at a cost of $45,000.

An illustration of looters throwing trousers and other garments out of the Brooks Brothers store during New York City's draft riots appeared on the front page of Frank Leslie's Illustrated Newspaper on August 1, 1863.Frank Leslie's Illustrated Newspaper, 19th Century American Newspapers, Gale Primary Sources // Public Domain

The company’s association with outfitting the Union Army got them into trouble again in July 1863. The casualties among members of New York regiments were increasing as the war showed no signs of resolution. In New York City, working class people protested against the draft, and the protests quickly turned into a riot of racist violence and looting. Brooks Brothers’s Cherry Street store was one of the establishments it targeted. Harper’s Weekly reported that “a large number of marauders paid a visit to the extensive clothing-store of Messrs. Brooks Brothers … there they helped themselves to such articles as they wanted, after which they might be seen dispersing in all directions, laden with their ill-gotten booty.”

Brooks Brothers’s reputation didn’t suffer for long, however. At his second presidential inauguration in March 1865, Abraham Lincoln wore a greatcoat made by the company. It featured an eagle embroidered into its lining with the motto “One Country, One Destiny.” Lincoln was wearing the same coat when, just two weeks later, he was assassinated at Ford’s Theatre in Washington, D.C. After his death, Mary Todd Lincoln gave the coat to Alphonse Donn, a doorman at the White House, who kept it for the rest of his life. Donn’s family eventually sold the coat to the United States Capitol Historical Society, and it is now in the Ford’s Theatre museum's collection.

Brooks Brothers continued to grow and expand. The company introduced enduring fashions such as the button-down polo shirt in 1896, the sack suit in 1901, and their own version of a British regimental tie, the striped rep tie, in 1902.

For more than 200 years, the company has outfitted presidents, Wall Street traders, and businesspeople, becoming an iconic American brand with worldwide appeal. But today, their future may be less certain.