Charles Ponzi — The inventor of the “Ponzi Scheme”

You must have heard of the term “Ponzi Scheme”. It is usually used to describe a way of multiplying your money extremely quickly. These are generally too good to be true, yet there are people that fall for them. The name for such schemes is inspired by Charles Ponzi, who used similar tactics to fool a lot of peoples and made millions in the process. And his million dollar idea was selling stamps.

International reply coupon

An international reply coupon, or IRC, was something that you could include in your mail when sending it internationally. The recipient can then use that coupon to buy stamps and then reply back to you.

What Charles noticed was that the cost was these coupons were based on the cost of stamps in the origin country. So you could get a coupon from Europe, get a stamp using that in the US, and sell it to make an immediate profit. This was basically free legal money, and Charles quickly started trying to raise some capital for it.

But most banks refused to give him any money. So he started asking the general public for it. His offer was simple, give him money and he will double it in 90 days. In those days when the normal annual interest rate being offered was 5%, Charles deal was really tempting.

Initial Success

Charles managed to convince some people to lend him money. And sure enough, when the time came, he gave them the promised return. This generated even more interest in his scheme, and more and more people started to invest with him. He grew at an exponential rate, at one stage bringing in up to a million dollars in investment each day. This was a bigger deal than it might seem because a million dollars were worth way more in the 1920s. Everything seemed to be going according to plan. People were getting the returns they were promised. So what was the Ponzi Scheme here?

The Scheme

The big lie that Charles was hiding was that he didn’t bring in any profits at all. He realized that his initial plan of buying IRCs didn’t make sense logistically. So he didn’t do it

So how did he manage to pay the investors? Easy, he just used the money coming in from the new investors to pay off the existing investors. And when it was time to pay these new investors, he would have raised even more money from newer investors. As long as he continued to raise money, his scheme would work.

The downfall

The rest of the world still thought that Charles was using his genius way of selling stamps to generate all this profit for them.

But there were a lot of skeptics, and they were able to pick holes in his scheme with simple maths. For example, in order for Charles to generate the profits that he was claiming, 160 million IRC’s would have to be in circulation. The actual number was close to 27000. Charles company was audited, and he was finally arrested for fraud.

The final investors in Charle’s scheme lost about 20 million dollars. In today’s money that would be worth 225 million!

This story is part of my 365 Day Project for 2019. Read about it here

Yesterday’s blog — The first dog in space