ave you ever wondered why Ponzi schemes are named that way? As with most things in life, this was also named by the first person to think about it and put it into practice. Charles Ponzi was the first man to run a Ponzi scheme (hence the name).
For those who may not know, a Ponzi scheme is a term to define illegal financial operations that promise huge wins for short-term investments. These can be described as those deals that you get in your email that are simply too good to be true.
Although Ponzi schemes are quite similar to Pyramid schemes, they are different in some aspects. A Ponzi scheme is a fraudulent investment management service where investors (victims) contribute with money expecting a high return. When the investors want their money back, they are given the money from new investors tricked into the same scheme. The person behind the scheme just keeps transferring money from one investor to another whilst taking a small cut.
Charles Ponzi’s life
Ponzi was born in 1882 and raised by a poor family in Italy. In his teens he was an ambitious boy, which is why he worked hard from a young age for the post office until he raised enough money to go to university. Once he got to La Sapienza University in Rome, it was as if he started a long vacation. His friends stated that he spent most of his time in the famous cafes in Rome, therefore failing university.
In 1903, Ponzi migrated to the United States, more specifically to Boston, which was a famous location for Italians that were migrating to America during the start of the 20th century. Despite his lack of commitment to the university, he learned English very quickly and tried to get a job in any place that would welcome him.
He ended up working as a server in a restaurant but was quickly fired as he was charging the customers extra and taking the extra money for himself. From this, we can see that Ponzi was simply desperate for money and he would do anything to make more.
The inspiration behind the Ponzi scheme
In 1907 he moved to Montreal in Canada where he got a job as an assistant manager at a new bank named Zarossi. The bank was offering a 6% interest rate, double of what the other banks were offering. This is because the bank was using an illegal financial scheme.
The bank was using the deposits made by new clients to pay for the withdrawals of old clients, much like the Ponzi scheme. However, the scheme didn’t last too long as the owner of the bank took most of the money and ran to Mexico. Ponzi was inspired by this scheme and took advantage of the mess his boss left behind him.
Ponzi wrote checks under his name with big sums and signed them with his boss’s signature. The fraud was soon found out and Ponzi ended up behind bars for three years. Once he got out he started a new scheme where he would bring Italian immigrants illegally into America, once again ending up behind bars for another couple of years.
The first Ponzi Scheme
In 1919, Ponzi received a letter from a Spanish company with a coupon for international stamps. This made Ponzi look at the big differences in the prices of stamps from across the world, specifically the difference between the stamps from Italy and those from the United States.
“I came to this country with 2.5 dollars in my pocket and a million dollars in hopes. Those hopes never left me.” (Charles Ponzi)
Therefore Charles ordered thousands of coupons for international stamps from Italy and exchanged them for American stamps. He was getting back from his investment 400% profit due to the high difference in price. In order to make even more money from this scheme, he got some of his friends to invest with the promise that he would return 50% profit in three months.
The word about this scheme quickly spread across the country, with Ponzi founding the Securities Exchange Company which made the scheme look more professional (less illegal). A few months after the start of the company he had already made $5,000 profit (accounting for inflation that would be $65,000 today). After six months, in May 1920, the company was seeing investments of millions of dollars.
In August 1920 an investigation was done by the Boston post which found out about the scheme, making the investors quickly withdraw their investments. Charles Ponzi was accused by 86 people who had yet to receive seven million dollars (accounting for inflation that would be 91 million dollars today) worth of investments back from Ponzi.
After many court battles, Ponzi was sentenced to 14 years in prison. After his sentence had finished in 1934, he was deported back to Italy and banned from entering the United States ever again. Ponzi even fought in World War 2 for Italy and survived with some injuries.
In an interview taken by an American reporter in 1946, Ponzi stated:
“Even if they didn’t win anything, it was a small price. We’ve given the Americans the best show since the pilgrims landed. It was worth at least $15 million to see me stage it. ” (Charles Ponzi)
In this weird way of obtaining it, Ponzi shows that he didn’t necessarily want to own money, but just to have lots of money and move it around. Charles Ponzi died in a hospital in Rio de Janeiro, Brazil, on the 19th of January 1949 with only $75 dollars in his account, showing that even after all of his schemes he ended up still being poor.
Although most of Ponzi’s actions were illegal, many people see him as a financial genius just for his ability to detect the factors that can be exploited.