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Charles Ponzi
Brian Trumbore

Over four years ago I did a piece on Charles Ponzi but I recently came across an article from a newspaper of his day that adds a little more heft to my prior story. In addition, I found a mistake in the research of a prime source in the earlier effort, that being that Ponzi was 37-years-old when he began perpetrating his fraud, not 42. [It's the second error I've discovered by this well known market historian in just the past few weeks. Alas, he's deceased, which doesn't absolve me while I'm alive!]


"Mundus vult decipi - ergo decapitur: The world wants to be deceived, let it therefore be deceived."
--Charles Kindleberger

Market history is full of ponzi schemes, from the South Sea Company bubble to John Bennett's New Era Philanthropy scam, and Charles (Carlos) Ponzi is the man we can thank for the term. In September 1919, Ponzi was a 37-year-old ex-vegetable dealer, forger, and smuggler in Boston who decided he would become a wealthy financier. Described as handsome and quick-witted, he had only $150 in cash to his name and lacked any real connections. But he had a scheme.

"Ponzi finance" is defined by one expert "as a type of financial activity engaged in when interest charges of a business unit exceed cash flows from operations." Another explanation is when "a borrower who has some control over the price in the market in which he issues his own personal debt will want to play the 'ponzi game of financing,' that is, the repayment of debt with the issuance of new debt." [Charles Kindleberger] And a third definition is when a scheme "entices initial investors, after they have made a lot of money, to tell their success stories to another round of investors, who then invest even more in the scheme, allowing the hoaxer to pay off the second round of investors, whose success story entices an even larger round of investors, and so on..The perpetrator may hope to exit, not having paid off the last and largest round of investors, and then hide from the law." [Robert Shiller]

In Charles Ponzi's case it was sort of like a chain letter in which he would borrow money without collateral, promising to pay $15 for every $10 left with him for 90 days.

What Ponzi told his would be lenders (mostly Italian immigrants) was that he would be buying International Postal Union reply coupons overseas and then send them elsewhere to be redeemed. As Robert Sobel writes in his book, "The Great Bull Market: Wall Street in the 1920s," "In this way, (Ponzi) could take advantage of differences in currency quotations to make profits." At least that's what he told his investors.

Ponzi was to purchase lire, francs, and drachmas at low market prices and sell them at higher official prices (in theory). He started a firm, The Old Colony Foreign Exchange Company, where he took in the money and paid principal and interest without fuss or bother. The newspapers in Boston picked up the story and soon Ponzi was not only famous, but he was also taking in about $1 million a week. He had grand expansion plans and he talked of establishing a string of banks and brokerage houses. Soon he was purchasing a controlling interest in the Hanover Trust Co., naming himself president.

Sobel writes of these times that wherever Ponzi went, crowds followed. "You're the greatest Italian of them all!" Ponzi protested, "No, no. Columbus and Marconi. Columbus discovered America. Marconi discovered the wireless." "Yes," came the response, "but you discovered money."

The Boston district attorney began an investigation. Edward Dunn of the Boston Post began one of his own. Dunn discovered that less than $75,000 worth of reply coupons were printed in most years and in 1919 only $58,560 was issued. Ponzi said he took in millions and invested them in the coupons. Clearly, Dunn reasoned, money had been used for other purposes.

Dunn was to find out during his investigation that Ponzi - using the name Charles Bianchi - had been involved in a remittance racket in Montreal back in 1907. The Post's reporter Herbert L. Baldwin was dispatched to Montreal and wrote the following account in the summer of 1920.

"Charles Ponzi, Boston's financial wizard, and Charles Ponsi, alias Charles Bianchi, a convicted forger who spent two and a half years behind the bars of one of the Canadian jails, were pronounced one and the same man today.

"A rogues' gallery expert, a police inspector who arrested Charles Ponsi (Bianchi), the warden of the penitentiary at St. Vincent de Paul; a clerk who worked in the same office where the forgeries took place, and an Italian banker, one of the best known in this city, were among those who saw photographs of Charles Ponzi of Lexington, Mass., and with one accord told a Post staff reporter:

" 'Why, that's Bianch,' or 'That's Ponsi,' as happened to be the name they knew him by....

"The offense that sent Charles Ponsi to prison here and the methods of the banking office of J. Zarrossi, where the forgeries were committed, were the end of the victimizing of scores - some say hundreds of hard-working residents of Montreal and vicinity by promising them 'more percentage' than any other bank offers..

"Twelve years have passed since Zarrossi closed his banking doors and fled to Mexico and Charles Ponsi went to jail for a term of three years."

Reporter Baldwin interviewed a number of those duped by Ponsi.

"Vitriolic epithets were poured into the Post man's ears as Italian residents of Montreal and a half dozen of its suburbs were interviewed and gazed upon the photographs..

"The warden at the penitentiary smiled quietly as the Post man once more produced his photographs..

"Ponsi was a model prisoner and attracted no unusual attention at the penitentiary, so far as could be learned. Records there give his height as 5 feet 2 inches and his age as 26 years in 1908..

"Bianchi-Ponsi at the time of his arrest declared, according to police officials here, that his mother and father were dead and that he had no relatives anywhere. Officials read with interest the details of his folks back in Parma, Italy, as supplied by Ponzi in his life story to a Post man last Sunday, and as they perused it they commented on the fact that he declared he was doing private investigating during the years that Bianchi-Ponsi was doing time in the big jail 25 miles from here.."

Confronted with the damning evidence, Ponzi had to act fast to avoid a panic. He countered by promising to pay his investors 50 percent interest on money left with him for 45 days, rather than the initial 90 days previously required.

But Ponzi's operations were finally closed pending a district attorney's investigation. Charles proclaimed his innocence and lenders besieged his office. Somehow he managed to pay them all off, though, without a single default.

Forced to go public more than he desired, he warned investors not to dispose of their holdings and told them they had nothing to fear. He also asserted at this point that he was worth at least $12 million. For a time, confidence returned and money began to flow back in.

On August 2 the Boston Post had claimed that Ponzi was insolvent, but even this did not prevent the positive flows. Finally, the end came on August 11 when all of his companies and offices were closed, never to reopen. Robert Sobel writes.

"In the days that followed it was learned that the dapper financier had purchased a few reply coupons, but used most of the money he received to pay those who presented 90-day notes. In effect, he was taking in money with one hand and paying out more with the other. Such a scheme could not last for long, unless increasing amounts continued to arrive. Ponzi was bound to collapse when the money ran out."

On August 16, Boston and the nation learned the Old Colony Foreign Exchange Company had no assets and liabilities of $2,121,895. The search for Ponzi's money extended into October and little was ever found. Ponzi himself was declared insolvent on October 15. The presiding judge, James Olmstead, commented.

"While Mr. Ponzi is not to be classed in the same category with robbers and burglars, he was undoubtedly a clever manipulator who took advantage of the credulity of the investing public, which in this instance is the usurer. The investors who loaned their money for a return of the principal and 50% interest would seem themselves guilty of usury if such existed."

It was finally resolved that Charles Ponzi had taken in some $15 million in 8 months, and that his books showed a deficit of $5 million; less than $200,000 was eventually recovered from his holdings.

While out on bail pending appeal, Ponzi decided he had to scam some other innocent fools so he sold underwater lots in Florida to the unsuspecting, thereby making another small fortune. [Ponzi was one of many crooked real estate agents selling useless land in Florida's mosquito-ridden interior during the 1920s.] Nonetheless, his appeal denied, Ponzi went to prison until 1934. Upon his release he was deported to Italy where he immediately joined the fascists and gained positions in the government. Later, he was sent to Rio de Janeiro by his employer, LATI Airlines, where he became a fixture in the social set. He died of natural causes in 1949.


As I alluded to earlier, I initially did the bulk of the above in March 2000, right at the top of the equity market. Just as in the 1920s, the stock market in the spring of 2000 was another ponzi scheme. As Robert Sobel wrote of 1920 and the era that followed, "The cult of the stock market was, in the end, the greatest fantasy in an age filled with illusion." But each generation or two needs to be taught this painful lesson all over again.


Charles Geisst. "Wall Street: A History"
Charles P. Kindleberger. "Manias, Panics, and Crashes"
Judith and William Serrin, editors. "Muckraking! The Journalism That Changed America"
Robert Shiller. "Irrational Exuberance"
Robert Sobel. "The Great Bull Market: Wall Street in the 1920s"

Brian Trumbore


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