The Hidden Motive And How The Ponzi Scheme Is Born

The Ponzi Scheme

Who’s up for an informative Sunday story??

In 1920, long before Bernie Madoff was born, an Italian immigrant named Charles Ponzi was concocting a scheme to make himself rich.

Charles Ponzi needed a new scheme.

Since arriving in America from Italy, his life had been a series of flops. By 1918, when he moved to Boston, he had served time in prison in both Canada and the US.

But his confidence never faded. Soon, he had hatched his next plan.

His plan involved a seemingly innocuous instrument – the Postal Reply Coupon (“PRC”).

Postal Reply Coupons were redeemable for stamps.

They were created by the postal authority to enable immigrants to more easily and cost effectively correspond with relatives back home.

Charles Ponzi noticed an arbitrage opportunity.

You could use dollars to buy PRCs in Europe, come to America, and then redeem the PRCs in America for postage more valuable than what you paid in Europe.

This is called ‘Arbitrage’ in today’s financial market jargon.

He just needed investors and capital to execute the plan!

Ponzi created a company – the Securities Exchange Company* – and began pitching investors on PRCs, the opportunity of a lifetime.

He would guarantee a 50% return in 45 days or a 100% return in 90 days. Their choice!

*Note: The irony of the SEC abbreviation is amazing.

Overjoyed by their “returns,” early investors rolled their gains into new investments with the company.
Then they told all of their friends about the incredible opportunity.

The party was on for Charles Ponzi!

Managed $ exploded:
▪️ March: $30K
▪️ May: $400K
▪️ July: $3M

Money poured in from investors across New England.

From policemen to factory workers to housewives, everyone wanted access to Mr. Ponzi’s offering.

At its peak in August 1920, Charles Ponzi’s scheme had ~17,000 investors and had taken in ~$10M, equivalent to ~$135M today.

But the perfect facade soon began to crack.

The Boston Post printed articles questioning the legitimacy of the returns.

Investors rushed to withdraw funds.

Ever the confidence man, Charles Ponzi famously served coffee and donuts to a line of investors awaiting withdrawals.

That is the story of Charles Ponzi and the background behind the “Ponzi Scheme” that is so often talked about in the modern financial world.

I hope you enjoyed it.

Do have a positive week ahead! 🤗