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!]
vult decipi - ergo decapitur: The world wants to be
deceived, let it therefore be deceived."
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.
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]
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
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.
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
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."
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.
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.
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
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
'Why, that's Bianch,' or 'That's Ponsi,' as happened
to be the name they knew him by....
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..
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."
Baldwin interviewed a number of those duped by Ponsi.
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..
warden at the penitentiary smiled quietly as the Post
man once more produced his photographs..
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 ¼ inches and his
age as 26 years in 1908..
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.."
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
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.
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.
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.
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."
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.
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."
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.
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
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.
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"