King of the Sting
Reprinted from Le Monde DiplomatiqueBy Ibrahim Warde
August 2009
The sting is as old as finance itself, but before 1920 pyramid chain promoters like Molière’s Monsieur Jourdain did a Ponzi without knowing it.
Carlo Ponzi was born in Parma, Italy, in 1882. He arrived in the United States in 1903, the heyday of robber barons, convinced like many immigrants that the streets were paved with gold. As Charles Ponzi, this get-rich-quick artist endowed with more imagination than talent tried all sorts of fiddles, practised a thousand trades and frequently found himself on the wrong side of the law.
Employed in a Montreal bank in 1909, he was accused of passing a dud cheque and given three years in prison. Released in less than two years for good conduct, Ponzi returned to the US. Ten days after his release he was rearrested for trying to smuggle a group of illegal Italian workers into the country. He was given a further two years’ prison sentence.
In 1919, after any number of attempts at all sorts of scams, he stumbled on the dodge for which he became notorious. Since 1907 the international postal union had issued a sort of universal postage stamp, known as the international reply coupon. By chance, Ponzi saw one of these coupons on a letter posted in Spain. He sensed profits. According to his calculations this coupon, which in Spain cost the equivalent of one US cent, could be exchanged in a US post office for a stamp costing six cents. He concluded that one million invested in Spain, Italy or France could be worth six times that sum on the other side of the Atlantic.
Worried that the big names of the period – the Du Ponts, Astors or Vanderbilts (1) - would beat him to it, he established the business as quickly as possible. On 26 December 1919 the Securities Exchange Company was registered at Boston with Ponzi as founder, sole employee and principal shareholder. The company issued certificates “guaranteeing” 50% interest for a 45-day loan (2).
Exchanging stamps for money was judged illegal by the postal authorities, but that didn’t prevent the entrepreneur from fulfilling his part of the deal. New investors, recruited all the time, allowed him to reimburse the older ones. His business grew astoundingly. Investors fought for a part of the action. Ponzi, all systems go, was seen as a financial wizard. By July 1920, the dawn of the mad years, he was at the peak of his fame.
An obliging press helped build his legend. He recalled the origins: “I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me.” The New York Times estimated his personal wealth at $8m.
But clouds started to gather over this meteoric rise. A financial analyst by the name of Clarence Barron reckoned that just 27,000 postal coupons were in circulation in the US while it would take 160 million to underwrite Ponzi’s results. The debate became impassioned on both sides: some clients panicked, yet new deposits continued to flow in.
Then, in August 1920, a Boston Post investigation revealed Ponzi’s past and his prison sentences. The financier was arrested. His adventure had lasted eight months and cost some $20m in the money of the time. It went straight into the annals of financial fraud.
This fiasco did not, however, blunt the Italian immigrant’s taste for easy money. After another stretch in prison he was back at his old tricks. He changed towns and names frequently, trying for instance to set up a property scam in Florida. He even spent several years back in Italy where legend has it that he was offered a (short-lived) position in an Italian airline company by Benito Mussolini himself, before departing again for the New World. In 1949 he died penniless in Brazil.
(1)Donald Dunn, Ponzi: The Incredible True Story of the King of Financial Cons, Broadway, 2004, p 72 (2) Mitchell Zuckoff, Ponzi’s Scheme: The True Story of a Financial Legend, Random House, New York, 2006, p 39
• Ibrahim Warde is a Professor of International Business at The Fletcher School of Law and Diplomacy at Tufts University.