Before his birth in 1882, Ponzi’s family had been linked to the Italian aristocracy and enjoyed the wealth that came with those ties. Growing up, his mother made no secret of the fact that she believed in him to bring the family back to its former glory. This, combined with his personality, charm and entrepreneurial spirit, drove a hunger for riches – and for years Ponzi yearned to make a powerful name for himself.
Moving to the US was the first step towards realising this dream and Ponzi’s story begins in earnest with his arrival at Boston Harbour in November 1903, with very little money to his name. Aged 21, Ponzi had just $2.51 in his pocket when he set foot on American soil, having reportedly lost a couple of hundred dollars gambling during his journey over from Italy!
Despite enormous aspirations, Ponzi’s initial experience in America was beset by failure. He travelled the country, taking odd jobs, but often ended up being fired (because he spent so much time dreaming up schemes to make money). Finally, in 1907, he secured a job at Banco Zarossi in Montreal, Canada and it was here that he first witnessed ‘robbing Peter to pay Paul’ activity by his bosses. Although not directly involved, when the bank started getting in trouble for offering exaggerated interest rates and stealing money from depositors, Ponzi was arrested for forging a cheque in an attempt to get away quickly. Shortly after completing his 20 month sentence for this crime, he was arrested again and charged with smuggling Italian immigrants into the United States in return for cash.
Regardless of his bad experiences, Ponzi still held a strong desire to be rich and remained determined and optimistic about his potential for success in the US. The idea that finally brought this ‘success’ for the entrepreneur (in his eyes at least) came with the arrival of a letter from Spain in late 1919. With several rent payments overdue and his office furniture about to be repossessed, a flimsy document inside the envelope gave Ponzi a monumental idea. It held an international reply coupon – similar to sending a self-addressed stamped envelope.
In the early 1920s, 63 countries had adopted this prepaid coupon system for international postage. You could buy a coupon in Rome for it to be redeemed for stamps in Boston, for example. While these coupons resembled currency, they weren’t money; Ponzi, however, realised that they could be as good as.
The coupons were of fixed price and did not reflect the dramatic devaluation of some currencies post-World War I. Consequently, purchasing coupons in countries with weak economies could yield profits and, according to a reconstruction of Ponzi’s calculations by Mitchell Zuckoff, author of the 2005 biography ‘Ponzi’s Scheme: The True Story of a Financial Legend’, $1 worth of Italian lira would buy enough coupons to enable the redemption of $3.30 worth of stamps in the US. Ponzi realised he could exploit discrepancies in the prices of coupons in different currencies – making money via mail.
Originally running the scheme just for himself, he soon began to look for investors. And during a time when the banks offered 5% annual return, Ponzi’s grand scheme promised an opportunity that sounded too good to miss. It initially offered, by word of mouth, a 50% return for investors within 90 days – a deal later sweetened to 50% in just 45 days.
Too good to be true
Ponzi’s firm, the Securities Exchange Company, (ironically sharing the same initials as the Securities and Exchange Commission later set up to police markets and protect investors from schemes such as his) wooed numerous investors with its attractive offer. By the time spring arrived in 1920, the company was bringing in $30,000 a week (approximately $319,000 today). It is rumoured that so much cash was coming into their offices, drawers were overflowing with notes and workers used waste paper bins to store the ‘excess’.
However, as the saying goes: if it seems too good to be true, it probably is. Ponzi’s investment strategy may not have been illegal and, in theory, the postal coupons were potentially profitable, but the scheme was fundamentally flawed. It was impossible to buy and transport coupons in sufficient quantities to earn the returns promised – with the first 17 investors alone it would have taken 53,000 coupons to pay them off. Since there were only approximately 27,000 international reply coupons in circulation, Ponzi was out of his depth. Furthermore, soon after he announced his scheme, postal authorities in Italy, France and Romania temporarily suspended the sale of postal coupons. They were suspicious that Ponzi’s scheme was illegal and worried that someone could profit.