In Ponzi We Trust

Borrowing from Peter to pay Paul is a scheme made famous by Charles Ponzi. Who was this crook whose name graces this scam?

Mug shots of Charles Ponzi, Boston financial wizard, taken during his arrest for forgery under the name of Charles Bianchi. (Bettmann / Corbis)
Smithsonian Magazine | Subscribe

(Continued from page 1)

He soon met young Rose Gnecco on a streetcar and wooed her energetically. A small, pretty woman from a modest background, Rose was swept off her feet by her older, seemingly sophisticated suitor. Rose's youthful innocence shines through even in newspaper photographs, as does her unswerving devotion to her husband. The couple married in February 1918. Ponzi took over his father-in-law's grocery business and proceeded to make a mess of it. (He had already left Poole, who apparently failed to recognize his new clerk's latent financial genius.)

It was not long before Ponzi struck out on his own, and finally hit upon the scheme that—for a short time—was to make him rich beyond his wildest dreams. He had come up with the idea for an international trade journal, which he believed could make a tidy advertising profit. But the bank where he sought a $2,000 loan, Hanover Trust Company, did not agree. Following a brusque rejection by the bank president, Ponzi sat alone in his little School Street office and pondered his next move.

It came to him while opening his mail one day in August 1919. As Ponzi relates in his shamelessly exuberant autobiography, The Rise of Mr. Ponzi, a business correspondent from Spain, interested in learning more about Ponzi's aborted journal, had enclosed a small paper square that put the well-oiled wheels of Ponzi's imagination into overdrive.

The little scrap of paper was an international postal reply coupon, and the Spanish correspondent had enclosed it in prepayment of reply postage. Purchased in a Spanish post office for 30 centavos, it could be exchanged for a U.S. postage stamp worth 5 cents, a redemption rate that was fixed by international treaty. But the Spanish peseta, Ponzi knew, had fallen recently in relation to the dollar. Theoretically, someone who bought a postal reply coupon in Spain could redeem it in the United States for about a 10 percent profit. Purchasing coupons in countries with weaker economies could increase that margin substantially, he reasoned. It should be possible, then, to make a financial killing by buying huge quantities of these coupons in certain overseas countries and redeeming them in countries with stronger currencies. Ponzi called his new business the Securities Exchange Company, and set out to promote his idea.

It was a big idea—one that Ponzi managed to sell to thousands of people. He claimed to have elaborate networks of agents throughout Europe who were making bulk purchases of postal reply coupons on his behalf. In the United States, Ponzi asserted, he worked his financial wizardry to turn those piles of paper coupons into larger piles of greenbacks. Pressed for details on how this transformation was achieved, he politely explained that he had to keep such information secret for competitive reasons.

Of course, there was no network of agents. Nor, for that matter, did Ponzi expend any effort to corner the market on postal reply coupons. A final audit of his company's assets after the whole business was over turned up $61 worth of the coupons, according to Dunn.

Dunn's book, Ponzi! The Boston Swindler, provides a dramatized account of Ponzi's wild ride to riches and shows that, if anything, Ponzi's genius lay in psychology, not finance. Ponzi knew that his concept—the path to easy riches—was so alluring that the worst thing he could do was try to sell it too aggressively. Borrowing a page or two from Tom Sawyer, he cultivated an image among friends and acquaintances as a man on the verge of wealth who preferred not to discuss his good fortune in detail—unless, of course, he was pressed. In his role as the busy but cheerful investment expert, Ponzi showed up at boccie games and neighborhood cafés, plied his pals with good cigars and bonhomie, then rushed off to meet with one of his many important "clients," Dunn relates.

Only after his victims were well primed was Ponzi ready to dangle his bait: the grand plan in which his investors received 50 percent interest in 90 days. (Later he sweetened the pot, promising 50 percent interest in 45 days.) By December, the money had begun to roll in.

Most of the actual investment pitches were done by sales agents who were trained by Ponzi and received 10 percent commissions for investments that they brought in to him. In turn, many of those sales agents recruited "subagents" who received 5 percent commissions for new investors. Once Ponzi paid off his first round of investors, word of the financial "wizard" on School Street spread quickly. Ultimately, some 40,000 people joined the feeding frenzy. Many people simply reinvested their profits with Ponzi, thereby relieving him of actually having to make good on his promise. At the height of his success, Ponzi had offices from Maine to New Jersey, and was fending off shady offers from prospective "partners" in New York.

The newspapers caught wind of Ponzi after a man named Joseph Daniels filed a $1 million suit against him in July 1920, according to Dunn. Daniels, a furniture salesman, laid claim to a share of Ponzi's fortune on the basis of an old debt. His lawsuit for what was at the time an enormous amount of money started a buzz about Ponzi outside the circle of investors he had cultivated.


Comment on this Story

comments powered by Disqus