5 Facts About Charles Ponzi and the Original Ponzi Scheme
Some of the most infamous scams in history have been Ponzi schemes, but before Bernie Madoff (or Bitcoin), there was Charles Ponzi himself. The con he built was so successful that his last name became synonymous with fraud. In January 2020, a century after he set up his fraudulent Securities Exchange Company, the phrase Ponzi scheme is still used to describe any scheme in which funds from new investors are used to pay back old investors. Here are some facts about Ponzi and his scheme that you should know.
1. Charles Ponzi arrived in the U.S. with $2.50 in his pocket.
Charles Ponzi was born in Lugo, Italy, in 1882. As a young adult, he worked as a postal worker and studied at the University of Roma La Sapienza. Neither path panned out for him, however. In 1903, when faced with dwindling funds, Ponzi boarded a ship for America in search of a better life. But Ponzi wasn't a master hustler at this point in his life; he arrived in Boston with $2.50 after gambling away the rest of his life savings on the ship.
2. Charles Ponzi spent time in prison before his famous scheme.
Ponzi was no stranger to crime before concocting the scheme that made his surname infamous. Not long after arriving in Boston, he moved to Canada and got in trouble for forging checks. He spent two years in a Canadian prison for his offenses. Back in the U.S., he served a term in federal prison for illegally transporting five Italians immigrants across the Canadian border. It was only after his so-called Ponzi scheme began to crumble that his criminal history was made public by journalists, thus speeding up his downfall.
3. Charles Ponzi got rich off the postal system.
In 1920, Ponzi discovered the key to the ultimate get-rich-quick scheme: an international postal reply coupon worth $.05. It had been included in a parcel he received from Spain as prepayment for his reply postage. Thanks to an international treaty, the voucher could be exchanged for one U.S. postage stamp worth a nickel, which Ponzi could then sell. Ponzi knew that the value of the Spanish peseta had recently fallen in relation to the dollar, which meant that the coupon was actually worth more than the 30 centavos used to purchase it in Spain. He took this concept to the extreme by recruiting people back home in Italy to buy postal reply coupons in bulk from countries with weak economies, so that he could redeem them in the U.S. for a profit.
4. Charles Ponzi swindled $20 million from investors.
Ponzi technically wasn’t breaking any laws with his postal service transactions, and if he had kept his idea to himself he would have gotten away with it. Instead, he turned his small money-making operation into a wide-reaching scam. If people invested money into his “business” of cashing in foreign postal vouchers, which he dubbed the Securities Exchange Company, they would get their money back plus 50 percent interest in 90 days. The deal was too good for many investors to pass up.
It was also too good to be true: The money wasn’t being used to buy coupons overseas. Ponzi kept most of the investments for himself and used the flood of money coming in from new investors to pay off the old ones. Many investors were so thrilled with their returns that they invested whatever money they had made back into the business, which helped Ponzi keep the sham afloat.
Ponzi was finally rich and famous, but soon enough, cracks in the scheme started to form. The Boston Post launched an investigation into Ponzi and revealed that in order for his business to be functional, he would need to be moving 160 million vouchers across world borders. There were only 27,000 postal reply coupons in circulation at the time. The final blow came when the publicist he had hired to represent him came out against him to the public. His system fell apart and it was revealed that he had stolen $20 million from investors.
Because he had lied to his clients about their investments through the mail, Ponzi was ultimately charged by the federal government for mail fraud. He served three-and-a-half years in prison and then served an additional nine years for state charges.
5. Charles Ponzi didn’t invent the Ponzi scheme.
Though Ponzi schemes were eventually named for him, Charles Ponzi didn’t invent this type of scam. There were many crooks before him who used the same method to exploit investors. Charles Dickens even wrote pre-Ponzi Ponzi schemes into his 1857 novel Little Doritt.
It’s possible that Ponzi got the idea for his own fraud from William F. Miller, who pulled a similar stunt working as a bookkeeper in Brooklyn in 1899. But it was the highs of Ponzi’s success—and the lows of his demise—that made his story so memorable.