The Ponzi Scheme

A proper ambition of every young American of ability and zeal is to give his name to something big: to become eponymous. With what a fine, grim smile must our first president, reposing on a celestial alabaster throne and enveloped in a toga of clouds, hear a hundred million taxpayers excoriating Washington; how disconcerting for Union General Hooker to survive only because of the bad girls that swarmed about his headquarters (described as “half barroom, half brothel”); and how pleasantly ironic that the Teddy Roosevelt who brandished the Big Stick, scattered the Spaniards, grabbed the Canal, and extinguished whole herds of African animals should be remembered by that cuddly toy, the teddy bear.


But few malefactors leave a name behind them. Dillinger, Capone, Joe Bananas, where are they now? The last person one thinks of in connection with “Jamesian” is Jesse James. So in the pantheon of crime Charles Ponzi, of the Ponzi scheme, enjoys a secure niche.


Italian-born as Bianchi, later Ponsi, he started in Montreal around 1907 near the bottom of the ladder of iniquity as a modest con man in a firm that helped his fellow Italians arrange their remittances back to loved ones in Napoli and Palermo. Many of us have had occasion to find out what an eternity international money transfers can take. The banks collect interest on the idle balances, so they are happy for the transaction to drag out. In this narrow area of finance Bianchi/Ponsi was a petit maitre: his transfers were conducted at so stately a pace that many have not arrived to this day, three-quarters of a century later.


Then there was the rubber-check imbroglio. A year later the Canadian authorities, apparently misunderstanding some technical detail, actually stuck Bianchi/Ponsi in prison for forging signatures on a series of checks. On his reemergence into the light of day our hero resolved to lead a new life. Not to go straight, of course, but to do things differently . . . better. Shaking from his boots the dust of Montreal—and its courts and its jails—he headed south, to Boston, town of the bean and the cod. But the path to success is arduous. Before he could devise his big coup Bianchi/Ponsi, now rechristened Charles Ponzi, tried washing dishes . .. hard on the hands and dull; running his in-laws’ agricultural produce business .. . bankruptcy; clerking in an import-expert firm … tiresome and complicated.


While promoting a loose-leaf periodical for people in the import-export trade he wrote to acquaintances abroad, and in August 1919 received an answer from Italy. Inside the envelope nestled an International Postal Reply Coupon, redeemable in stamps. As Ponzi peered gloomily at the little square of printed paper he noticed a curiosity. The coupon had in fact been bought in Spain. Because International Postal Reply Coupons were redeemable at fixed rates of exchange negotiated by the participating governments, while currencies themselves can fluctuate wildly, this coupon had cost Ponzi’s correspondent only one-sixth as much to buy in Spain as it was worth in stamps of the United States.
Well! Many of us have been struck by falling apples, but only Newton, rubbing the spot and glaring upward, derived the law of gravity. Just so, numberless correspondents must have noticed the Postal Reply Coupon anomaly, but only Charles Ponzi, on that August day in 1919, saw in it the possibility of vast profits . .. fraudulent, naturally.
Why couldn’t you march into the post offices of some benighted land whose currency had collapsed, acquire stacks— bales, indeed—of these coupons for next to nothing, and thereafter, presenting them for redemption in a strong-currency country, make an immediate, huge profit, in stamps? After that, one would need only to wholesale the stamps, perhaps to business firms at a slight discount. The thing was a gold mine!


The first step was to form a firm, a sound, solid firm. A sound, solid name suggested itself: The Securities and Exchange Company. Then, experienced, reliable officers and employees. As president and, indeed, the entire staff, who better than Charles Ponzi himself? A splendid start!


The deal offered by The Securities and Exchange Company was irresistible. You handed over your cash, the S.E.C. worked its wonders with the coupons, and after ninety days you got back your original stake plus a profit of 40 percent. Very satisfactory .. . particularly compared to the then prevailing interest rate of 5 percent or so.


The S.E.C.’s “prospectus” percolated around Boston in the early weeks of 1920, and investors started to trickle in from here and there, the way a few gulls and then more and more materialize when you toss some scraps out on the water. The initial investors were not turned out in black suits with ample waistcoats anchored by gold watch chains; rather, coming mostly from Boston’s North End, they were the same simple immigrants that Ponzi understood and had victimized in the past. A number of policemen, themselves rather simple souls in financial matters, signed up as customers.


Soon the word got about, and the inflow of cash picked up. It became a torrent in February, when the S.E.C. lifted its rate on ninety-day notes to 100 percent, and began offering a 50 percent return on forty-five-day notes. Now the money began to pour in so fast that President Ponzi scarcely knew what to do with it all. Six clerks stacked piles of banknotes in closets until they scraped the ceiling. Wastebaskets did duty as coffers for greenbacks. A second office was acquired, and soon overflowed with money like the first. Crowds filled the street, waiting to turn over their savings for S.E.C. paper. Periodically they were treated to glimpses of the Midas himself, rolling up in his cream-colored Locomobile, complete with Japanese chauffeur. Ponzi—all five feet three inches of him—became a vision of opulence, his dapper raiment perfected by a malacca cane and a gold-tipped cigarette holder.


As the financial Niagara continued to pour, Ponzi acquired a quarter-share of the Hanover Trust Company. After that he took over J. R. Poole & Co., the import-export company where he had once been employed. He talked of opening branch offices … twenty, thirty. Also a chain of movie houses, a group of affiliated banks, even a steamship line.
The Boston papers were strangely silent on these exciting prospects. Finally, on July 26, the Boston Post broke silence. It ran an article claiming the whole thing was impossible: there weren’t enough International Postal Reply Coupons sold to Ponzi to be doing what he claimed.


Some of the investors got the wind up. A number hastened to the S.E.C.’s offices in School Street to demand money for their notes. As fast as they appeared they were issued Hanover Trust checks paying them off in full, with interest. Ponzi appeared in person to pooh-pooh the problem. Observers were permitted a glimpse of a certified check for a million dollars languidly peeking from one pocket. The newspaper story was irrelevant, Ponzi assured the crowd. In reality he had quite a different method of multiplying the money, a wonderful method he had to keep secret for a time, for the sole use of The Securities and Exchange Company: the Postal Reply Coupon business was a decoy. The crowd was impressed, and the confrontation passed off satisfactorily. By the end of the day the S.E.C. had accepted another two hundred thousand dollars.
Then came trouble. The D.A. stepped in. Ponzi must desist from taking in new funds, pending an audit of the books. There was a run on the S.E.C. Policemen had to push people back into line. Several women collapsed. Some noteholders who irrupted through a glass door were lacerated by shards. The president appeared undismayed. His clerks went on writing Hanover Bank checks as fast as notes were presented. A Ponzi Alliance Organization promised support. Ponzi announced that he would use his profits to “do good for the people,” and was cheered in the streets.


A week later the Post let fly again. This time it was an article by Ponzi’s former publicity man, one William H. McMasters, who opined that Ponzi was “as crooked as a winding staircase” and in debt to the tune of some $4 million. Furthermore, asked McMasters, if the S.E.C.’s scheme really made its investors 50 percent in forty-five days, why did Ponzi himself put his own money in 5 percent bank deposits? And why had he scuttled out of the office one day to a store to take advantage of an offer of a free pair of shoes?


New crowds of agitated noteholders surged to School Street, to be soothed by more hundreds of thousands’ worth of Hanover checks. More cheerful and confident than ever, Ponzi announced a $100 million worldwide investment syndicate. Declaring that he was being persecuted at the behest of the big bankers, he filed a $5 million suit against the Post. He and his wife were cheered in their box in the theater.


August, though, was bad. The Massachusetts State Banking Commission closed down that helpful institution, the Hanover Trust. And the Post sniffed out Ponzi’s earlier career in Montreal, the aliases, the disappearing transfers, the bum-check rap, the stretch in the pen. There was even a Canadian mug shot, minus the gold-tipped cigarette holder.
Then the auditors revealed that the whole operation was an absurdity. After token transactions of merely $30, Ponzi had never used the International Postal Reply Coupon idea at all. He simply paid off earlier investors with hinds received from later ones. There was no network of international correspondents. The S.E.C. was at least $3 million in the red.


The roof fell in. Using the mails to defraud, conspiracy, grand larceny, bankruptcy, civil suits. Once again, Ponzi was hustled to the slammer. But the legal uproar continued unabated, and his time behind bars was enlivened by constant expeditions to court to testify at one hearing or another.


Let out on parole after three and a half years, Ponzi was rearrested, jumped bail, fled to Florida under an alias, and was sentenced to jail there for real estate fraud: he was promising 200 percent profit in sixty days. He again jumped bail, was recaptured, and disappeared into a Massachusetts jail for seven years. On emerging, he was deported to Italy, got a job at Alitalia in Rio de Janeiro, was sacked when Alitalia closed down there during World War II, ran an unsuccessful boardinghouse, taught English, and finally died in a Rio charity ward.


He had worked on several books, but the publishers, as usual, missed their opportunity. One was called “The Rise of Mr. Ponzi”; another was called “The Fall of Mr. Ponzi.”