On March 3, 1882, one-hundred-and-thirty-seven years ago today, the founding father of financial hijinks, Charles Ponzi, was born in Parma, Italy.
Ponzi emigrated to the United States in 1903. He arrived in Boston at age 21 with $2.50 in his pocket, having gambled away his money on the voyage over.
It wasn’t until after the First World War that Ponzi hatched his get-rich-quick scheme. His gimmick? The International Reply Coupon, a way to prepay foreign postage for mail. Because of a currency exchange quirk, Ponzi’s coupon, bought at a low price overseas, could be cashed in for a higher amount in the United States.
Ponzi told investors he could double their money in three months by buying and selling the coupons, and it worked … at least at first.
The money poured in, more than a million dollars a week.
But when a newspaper revealed that there weren’t enough coupons in the entire world to support Ponzi’s scheme, his fraud was exposed. He hadn’t been investing in the coupons at all – only paying off early investors with the money he got from selling tickets to later ones.
Many of his customers went into bankruptcy, and Ponzi went to jail.
And though he’s long dead, the Ponzi scheme lives on.
The most recent high-profile example: the Bernie Madoff scandal of 2008, which cost his investors about $19 billion … far more than then estimated $32 million Ponzi lost.
But Charles Ponzi is the name the world will long remember, as a catch-all for the sort of financial musical chairs that works just fine … until the music stops.
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