Anyone who's ever wondered where the term "Ponzi scheme" came from, or how modern e-swindles work, would enjoy the story of Charles Ponzi himself. Born to a comfortable family in northern Italy late in the 19th century, Charles (born Carlo) Ponzi spent his university money lavishly on clothes, dining and entertainment, before sailing to North America to seek new fortune. After a short stint in labourer jobs in the US, he headed in the early 1900s to Montreal, where he was a clerk in an Italian-owned bank. There, Ponzi got his first taste of financial swindling, since the bank's owner was running a "rob Peter to pay Paul" scheme: paying higher interest than his competitors for bank deposits, making real estate loans that generated huge debts, and paying depositors interest out of other deposits. The scheme, and the bank, collapsed, and Ponzi was left jobless, but not before trying to embezzle some money himself - garnering a short prison term in Montreal.
After serving his prison term, the penniless Ponzi headed back to the US, landing eventually in Boston. There, he tried to make a living selling space to businesses in a directory/listings catalogue. Faced with much competition and his own inexperience, Ponzi failed in this scheme. It was not an entirely negative experience, however: Ponzi got married to a woman whom he loved deeply, and he came up with the core of the future "Ponzi scheme."
At the time, it was possible for businesses to send international stamped, self-addressed envelopes to potential clients or suppliers, so that the respondent would not incur postal charges (similar to today's business reply mail, but international). Thus, a business in Italy could send a stamped, self-addressed envelope to a business in the US, and the Italian-stamped envelope would be accepted by the USPS. Due to currency fluctuations in the 1920s, it was theoretically possible to buy these "international reply coupons" in one country and cash them in at the post office in another country, making a profit on the exchange rate. Ponzi saw the business opportunity, which had not been tried before through the USPS. By attracting investors, and promising to double their money in 90 days, Ponzi was able to capitalize on the currency-exchange opportunity offered by these "international reply coupons."
Ponzi did, indeed, respect his commitments to investors, and working-class Bostonians entrusted him with their entire life savings. Initially, the investors were somewhat suspicious of Ponzi's claims, and cashed out their savings - and profits - after the 90-day window. But Ponzi proved his trustworthiness, and so investors simply ploughed their profits back into Ponzi's scheme. Within six months in 1920, Ponzi was taking in millions of dollars. He was able to buy himself a luxurious home in Boston, the finest clothing and cars; he hired a chauffeur and household help; he paid for his mother's first-class voyage from Italy to Boston; he bought fancy gifts for his wife. And the money continued to flow into his scheme.
It was bound to collapse sooner or later, of course. Ponzi was ultimately unable to respect all of his commitments to investors, and this is the "punch line" of the book. Suffice it to say that the reputed financial journalist Clarence Barron was instrumental in exposing the major flaw in Ponzi's venture, and in bringing down the whole Ponzi scheme. Ponzi eventually went to prison and was deported from the US. He spent his last years a pauper in Brazil, and died there in 1949.
This report prepared by Jan Arata