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Ponzi Makes a Name for Himself

A cautionary tale…

Relatively speaking, it is easy to gain notoriety in the United States. Yet to do something large enough and dumb enough that your name not only lives forever in infamy, but is used generations later to describe the poor actions of others - well, that is another matter indeed. Such was the case of Carlo “Charles” Ponzi.

Born on March 3, 1882 in Italy, Ponzi came to the United States at the age of 21. By his own admission he arrived in America with just $2.50 to his name. He quickly taught himself English and bounced around doing several odd jobs. Eventually he found steady work as a dishwasher in a restaurant. He worked his way up to being a waiter, but was fired for intentionally shortchanging customers.

In 1907, Ponzi moved to Montreal where he took a job working in a bank that serviced the needs of a growing Italian immigrant population in the area. After some time Ponzi was elevated to bank manager, but noticed financial troubles based on bad real estate loans. The bank’s founder had been making interest payments through the funds placed into recently opened accounts. Eventually, the bank failed and its founder fled to Mexico with much of the money.

Ponzi tried to help care for the fugitive man’s abandoned family, but had a hard time because of his own destitute situation. In order to help his own cause, Ponzi walked into the offices of a former bank customer and finding it empty, wrote himself a check for more than $400, forging the signature of the company’s director. However, after cashing the forged check and making several large expenditures, it was not long before the authorities caught up to him. He was arrested and spent three years in prison near Montreal.


Several years later (after another stint in prison for being involved in an immigrant smuggling ring), Ponzi moved to Boston where he married and laid the groundwork for the scheme that eventually would bear his name.

In 1919, while working at his father-in-law’s grocery store, Ponzi was trying to sell advertising in a large business catalog that would be distributed to other companies. While this idea failed, a stroke of happenstance led him to another concept.

A company in Spain wrote to Ponzi inquiring about his catalog. He took notice of the International Reply Coupon, a method by which someone in one country could purchase postage for a response to someone in another country. It was an early version of what we know today as the pre-paid envelope. Because of inflation in several European countries (including Ponzi’s native Italy) during World War I, the value of postage had decreased significantly when compared to U.S. postage.

Ponzi saw an opportunity. He quit his job and borrowed money to send back home to his relatives. He instructed them to buy postal coupons and send them to him in America. He claimed that by exchanging the Italian coupons for American stamps and selling those stamps, he could make profits in excess of 400 percent. Moreover, the action was considered to be a type of arbitrage (buying an asset in one market and immediately selling it for a higher price in another market) and was therefore legal. However to make large sums money would require purchasing and redeeming large numbers of coupons which would be a logistical nightmare with the transaction costs outweighing any profits he made.

Once again Ponzi found a new avenue. He went to friends in the Boston area and told them that he could give them a 50 percent return on their investment in 90 days. At that time, Carlo Ponzi was not the only person trying to make money through promising high-yield investments. What made Ponzi’s idea stand out was the use of the postal reply coupon, giving it a look of legitimacy.

It was not long, however, before Ponzi realized that in order to keep the operation running, he would need new investors to replace and pay off the outgoing ones. To help promote the business and garner new customers, Ponzi started the Securities Exchange Company. Word of mouth spread and business was booming. By February 1920, the company had taken in $5,000 (approximately $54,000 in 2008 dollars). Three months later, Ponzi and his company had begun taking in investments from New Jersey and all over New England, amassing $420,000 in investments ($4.59 million in 2008).

Ponzi realized that in order to continue moving large sums of money from one customer to another, he would need the services of a bank. On May 20, 1920, Carlo Ponzi opened an account with the Hanover Trust Company. Not long thereafter, Ponzi (with the help of several friends) purchased a significant interest in the bank, hoping that would help hide his activities.

The beginning of the end came when the Boston Post ran an article investigating Ponzi’s money machine. By most calculations, it would take about 160 million postal coupons to generate the type profits Ponzi was claiming. Yet according to the U.S. Postal Service, there were only around 27,000 coupons in circulation. It was also suspicious that Ponzi wasn’t investing with his own company.

As with most major scams, the unraveling began from within. Ponzi hired William McMasters as a publicity agent. The idea backfired when McMasters wrote an article for the Boston Post describing Ponzi as financially insolvent and describing him as a financial dunce who could barely add. Shortly thereafter, the Post ran a front page article detailing Ponzi’s past forgery convictions and his dealing with a disreputable bank in Montreal. Investors panicked and began asking for their money back. Ponzi did his best to pay off the run, trying to soothe customers’ fears by greeting them personally and offering them coffee and donuts as they stood in long lines outside of his offices.

The story drew the attention of Massachusetts Bank Commissioner Joseph Allen. Allen and Ponzi had been at odds for some time, with Allen previously unable to take down the Securities Exchange Company. After the article in the Post, Allen seized the books of Hanover Trust and discovered wild irregularities. Little did he know, that his seizure prevented Ponzi’s ultimate scheme of taking his money directly from the bank’s vault to pay off his investors.

In the end, Carlo Ponzi turned himself in and in two federal indictments was charged with 86 counts of mail fraud. He was sentenced to five years in prison but released after three and a half. Upon his release, he was immediately charged by the state of Massachusetts to ten counts of larceny. Acting as his own lawyer (because he had no money to pay for one), he persuaded the jury to find him innocent on all counts. His investors were almost completely wiped out, receiving just 30 cents on the dollar for their initial investments.

For the rest of his life, Ponzi lived on the run, serving several more jail terms for various schemes. He eventually returned to Italy and was given a job by Benito Mussolini in the government’s financial sector. However, he did such a poor job that he was forced to escape to South America. He was accused of stealing from the government treasury before he left.

Ultimately, Carlo Ponzi landed in Brazil where he worked occasionally as a translator. His health suffered and he died in 1949 in a charity hospital in Rio de Janeiro. While much of his story has been forgotten and other parts were fabricated and exaggerated by the man himself, there is no doubt that his name will live on.

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