People lined up hundreds deep outside his office, cash in hand. When he left the premises, crowds gathered around him, cheering. They couldn’t be deterred even after the government announced they were launching an inquiry to make sure everything was on the up and up.
It was the dawn of the Roaring Twenties and there was a spirit of excess and opportunity in the air. Social class and bank account limits were no longer cemented at the time of one’s birth. Everything seemed possible, and no one wanted to miss out on the chance to embrace the spirit of the day. But first, they had to get rich quick.
And so, Bostonians pulled their savings out of banks and out from under their mattresses and entrusted them to the man who promised financial success on a level never before heard of. Within 90 days, he would deliver a 50-percent return on their investment, he said. Those who had gotten in early were reporting that the reality was even better: Charles Ponzi was nearly doubling their fortunes in just a month and a half.
As the long history of financial fraud has taught us, when something seems too good to be true, it is. Charles Ponzi did not run the first ever Ponzi scheme, but his was the first that was so outrageous in size and scope that long after he died nearly penniless, the practice of taking money from new investors to pay off old would still be associated with his name.
Carlo Ponzi was born in 1882 in Italy into a family that had once been well-to-do, but had fallen solidly into the middle class. While having a husband with a comfortable post office job might have been fine for some people, it was not acceptable to little Carlo’s mother. So, she transferred her dreams of one day restoring the family to its former glory onto her only child. Ponzi later recalled the “castles in the air” his mother weaved about what his future would one day hold.
So, it’s safe to say that Ponzi grew up with a sense of entitlement and grandiose ideas about his place in the world. It was perhaps this ego and the echo of his mother’s stories in his ear that drove him from an early age to embrace shortcuts to achieving his dreams. By the time Ponzi left for America at 21, he had already dabbled in the shady side of making a living.
True to the American dream he espoused, Ponzi arrived on the shores of the New World at the turn of the century with only $2.50 to his name (now “Charles”) and an oversized ambition. While he would later tout his rags-to-riches American origins, his story differed from the typical bootstrap tales in one characteristic way: he left Italy with $200 in his pocket (or around $6,400 today), but he gambled and drank away $197.50 on the boat ride over.
“I had come all the way from Italy, over five thousand nautical miles of deep, blue water, to find nothing but mud and shattered dreams of untold wealth easily acquired,” Ponzi wrote in his autobiography. His shattered dreams were not his own fault, of course. He chalked up his loss not to his own profligacy, but to being “grossly duped” by a card shark.
Never deterred by setbacks, Ponzi set about making his way in America and earning back his fortune, first in a series of odd jobs. He tried everything from washing dishes and selling fruit to becoming a sewing machine repairman and a salesman.
His first major career move came around 1908 when he secured a job as a bank clerk in Montreal. It didn’t last long. His bosses soon discovered that he had forged checks and robbed one of his elderly clients. The Canadian government slapped him with a 20-month prison sentence, but he would ultimately serve three years as will happen when you are released from jail and are immediately caught trying to sneak undocumented Italians across the border.
“He loves lying so much that he wrote to his parents and was like ‘Yeah, I’m gonna be working at this jail for three years so you’re going to get a lot of letters from here,’” Chelsea Ursin recounts on the podcast Ridiculous History.
After Ponzi did his time—er, “worked”—he eventually ended up back in Boston where he again set about hoisting himself up by his bootstraps. While he continued dabbling in the criminal underworld, it was during a legitimate but not wildly successful venture in publishing that he stumbled on what would become his most brilliant and infamous idea.
“The ‘racket’ of international reply coupons actually fell in my lap like a ripe apple,” he wrote. “I did not have to shake the tree to get it. I just reached over, where it had fallen, and took it. It looked good. Luscious. I examined it for flaws. Found none. I had to bite. I wouldn’t have been human if I didn’t.”
Ponzi’s financial scheme is a little complicated to explain as it had to do with gaming the system of international exchange rates using a now-defunct financial asset called an international reply coupon.
At the risk of repeating the folly of his investors, understanding his exact idea isn’t actually important. While these postal coupons did in fact exist, and while his idea in theory might have worked (though not at the level that Ponzi would claim), none of this matters as Ponzi never actually purchased the postal coupons. Instead, he found a way to make his fortune by telling his investors that’s what he was doing and instead, well, carrying out a massive Ponzi scheme.
Ponzi launched the venture at the beginning of 1920. His first investor was a furniture salesman to whom he was deeply in debt. Ponzi convinced the man to let him pay off his debt by investing it in his genius new idea that would earn the furniture maker a lot more than Ponzi owed him within a matter of just a few months. The man went for it and reaped his reward. As more investors bought into the scheme, word of the fortunes they were raking in began to quickly spread.
Ponzi was notoriously charming. A later New York Times article reporting on the court case that would begin only a few months described him as “the dapper little Italian.” His smooth-talking ways paid off, at least in the beginning.
From the working class Italians of Boston to the well-to-do financial wizards of New England, Ponzi attracted millions of dollars worth of new investments. Even those who didn’t entirely buy in—who shouldn’t have bought in—were quickly convinced after speaking with the man himself.
“Postal inspectors regularly visited his offices accusing him of fraud; all of them left convinced by Ponzi’s charm and intelligence that the scheme was legitimate,” Dan Davies wrote in a piece for Lit Hub.
Very quickly after Ponzi launched this new financial business, doubts began to spread. The problem was that the proverbial account books—so-called given that Ponzi didn’t actually keep books—just didn’t add up.
Ponzi was taking in millions of dollars—at the height of his scheme, he raked in $1 million in new investments in a single day—and paying out his guaranteed 50-percent returns. But despite the gullibility of some of its inspectors, the United States Post Office knew something was off. They examined their own assiduously kept books and realized that the entire amount of international reply coupons issued within the past year didn’t come close to the number that would have been needed to equal the amount of money Ponzi was claiming to have made. And he had only been in business for a matter of months.
As the U.S. Attorney launched an investigation, Ponzi continued claiming that everything was fine. It was all a misunderstanding, he had tons more money that he needed to fill all of his obligations to investors, and he was ready to eagerly comply with a government investigators, which he knew would soon absolve him of any wrongdoing, he said.
By the beginning of August 1920, the investigation was in full swing and things were not looking so great. Ponzi was still attending the theater with his wife at night, but during the day, he was making one appearance after another in court, where his business was looking increasingly shady. On August 20, he was arraigned and booked, unable to pay the $25,000 bail.
“He seemed to fall for his own trick,” author and financial expert Patrick Boyle said in a documentary on Ponzi. “He appeared to believe in himself right up until the end, and he didn’t seem to understand that there was no real way that any of this could work out for him or anyone else involved.”
According to Life magazine, Ponzi raked in $15 million (or over $200 million today) from investors over the short few months that he was in business. By the time he was convicted and sent to jail for 12 years, he is estimated to have had $4 million, but to have owed $7 million to investors who had entrusted their life savings to him.
Despite his long stint in jail and his name forever being associated with financial infamy, Ponzi would never give up his dream of making it big. During a brief reprieve from prison in 1924, he tried to convince a new set of investors to buy underwater lots in Florida, but the con was quickly stopped by the authorities.
Ponzi died in Rio de Janeiro in 1949 with $75 to his name, “barely enough to bury him.” According to Life, “he was still talking vaguely about a comeback when he died.”