You Can't Cheat an Honest Man - James Walsh [1]
In the early 1900s, a person could enclose a coupon with a letter to save a correspondent the cost of return postage. An organization called the International Postal Union issued postal reply coupons that could be traded in for postage stamps in a number of countries around the world.
Ponzi figured that the coupons could be bought on the cheap in nations with weak economies and redeemed for a profit in the United States. He decided to stake some of his hard-earned money on a test of his Great Idea. But he quickly discovered that there was a lot to the scheme that he hadn’t anticipated. Most importantly, the red tape among postal organizations absorbed his profits. Delays prevented him from moving enough money through the system to make his plan work.
But, as his Great Idea wilted, something unexpected bloomed. Whenever he discussed the scheme with people, they quickly caught on and seemed interested in what he had to say. Friends and family members would ask him—unprovoked—how his tests were going. People were interested in the investment because it made sense to them...even though it didn’t work.
So, near the end of 1919, Ponzi made a decision which would make his name an icon of modern-day thievery. He stopped buying international postal coupons and dealing with endless bureaucracy—and focused instead on bringing in investors.
The Original Ponzi Scheme is Born
In December 1919, with capital of $150, Ponzi—who’d started using the first name “Charles”—began the business of borrowing money on promissory notes. He started out by inviting friends and relatives to get in on the ground floor of what he dubbed the “Ponzi Plan.”
Ponzi claimed that he was making 100 percent profit on his money in a few months. His problem was that he didn’t have enough capital to exploit postal rate discrepancies fully. Because there was room, he was willing to include investors on his deals.
Like many of his disciples in years since, Ponzi targeted people with the same ethnic background as his own.
Ponzi made his presentation...his pitch...shine. He would explain that he had received a letter that contained a reply coupon that cost the equivalent of one cent in Spain but could be exchanged for a six-cent stamp in the U.S. “Why can’t I buy hundreds, thousands, millions of these coupons? I’ll make five cents on every one,” he’d ask convincingly. His tone was described as something between a plea and a command.
Whatever it was, it worked. A few wary acquaintances decided to take a gamble, and Ponzi collected about $1,250. Early investors included extended family members, his parish priest, and players at the local bocce court. Ninety days later, he returned $750 in interest. Stunned investors told their friends and soon Ponzi’s office was filling with people eager to fork over money. He promptly moved his operation to a tony address in the city’s financial district.
With a written promise to repay $150 in 90 days for every $100 loaned, Ponzi convinced thousands of people to lend him millions of dollars. He placated investors’ fears by paying his 90-day notes in full at the end of 45 days. Within eight months, he’d taken in $9 million, for which he’d issued notes with a paper value of $14 million. He paid his agents a commission of 10 percent. Calculating the 50 percent promised to lenders, every loan paid in full would cost him 60 percent.
But Ponzi’s financial method was not based on actual earnings. Instead, it used incoming investors to pay the returns promised to earlier investors. Although he was cash-rich, Ponzi never actually made any money. As one court would later point out: “He was always insolvent, and became daily more so, the more his business succeeded. He made no investments of any kind, so that all the money he had at any time was solely the result of loans by his dupes.”
In time, Ponzi was taking in $200,000 a day...and paying out dividends of 50 percent in 90 days. He later upped the promised payout to 100 percent in three months. Investors literally lined up at his offices to invest in his company.
Keeping