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)
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By then, Ponzi had built the lifestyle he had pursued for so many years: a 12-room mansion in upscale Lexington; servants; a couple of automobiles, including a custom-built limousine; and fine clothes and gold-handled Malacca canes for himself, and diamonds and other baubles for Rose. He purchased commercial and rental properties all over Boston and acquired stock in several banks. He even bought out his former employer, Poole. "The more I bought, the more I wanted to buy," Ponzi wrote. "It was a mania." But what he really wanted was control of a bank. He arranged a takeover of Hanover Trust, the same bank that had turned down his loan application the previous year. A few months later, when Ponzi fell, so did Hanover Trust. (The Commonwealth of Massachusetts, it turned out, had $125,000 on deposit with Hanover Trust—a revelation that figured in the September 1920 resignation of State Treasurer Fred Burrell.)

On July 24, 1920, the Boston Post ran a front-page feature on Ponzi with the headline: "DOUBLES THE MONEY WITHIN THREE MONTHS; 50 Per Cent Interest Paid in 45 Days by Ponzi—Has Thousands of Investors." The article described his rags-to-riches ascent, including details of his postal reply coupon scheme. It pegged Ponzi's worth at $8.5 million.

Monday, the 26th, started out as a banner day for Ponzi. The scene that awaited him as he approached his office that morning in his chauffeur-driven Locomobile "was one that no man could forget," he later wrote.

"A huge line of investors, four abreast, stretched from the City Hall Annex, through City Hall Avenue and School Street, to the entrance of the Niles Building, up stairways, along the corridors...all the way to my office!...

"Hope and greed could be read in everybody's countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, the worst kind of madness, was reflected in everybody's eyes!...

"To the crowd there assembled, I was the realization of their dreams....The ‘wizard' who could turn a pauper into a millionaire overnight!"

Interestingly, the U.S. Post Office Department announced new conversion rates for international postal reply coupons less than a week later—the first change in the rates since prewar days, the New York Times reported. Officials insisted that the new rates had nothing to do with Ponzi's scheme. However, they also insisted it was impossible for anyone to do what Ponzi claimed to be doing. (Postal authorities today say the same thing: although international postal reply coupons are available at post offices where there is a demand for them, regulations make speculation in them impossible.)

The tide turned quickly against Ponzi. He had come under investigation by postal and legal authorities as early as February, but they appeared to be making little progress in their efforts. Meanwhile, the editors at the Boston Post, possibly chagrined at having published the article that injected so much momentum into Ponzi's enterprise, launched an investigation into his business. The bad press enraged Ponzi. At the advice of his publicity agent, a former newspaperman named William McMasters, Ponzi offered to cooperate with the U.S. District Attorney's office by opening his books to a government auditor and declining to accept new investments, as of noon that day, July 26, until the audit was complete.

Word that Ponzi was closing his doors prompted a huge run, as thousands stormed School Street to redeem their investment vouchers. Ponzi directed his clerks to refund the money of everyone who presented a voucher. On one day, the Post reported, Ponzi paid out more than $1 million. Frightened investors who cashed in their chips early got back only their principal, which, Ponzi noted, saved him considerable interest.

Ponzi maintained a cool head. He played games with the authorities—on the one hand appearing to cooperate with them, and on the other snubbing them to talk to reporters, who provided daily coverage of the unfolding drama. "‘POSTAGE STAMP' KING DEFIES FEDERAL GOVERNMENT TO LEARN HOW HE PROFITS," the Washington Post reported on July 30. In the article, Ponzi shrugged off the notion that he was under any obligation to reveal details of his business dealings to officials. "My secret is how to cash the coupons. I do not tell it to anyone," he asserted. "Let the United States find it out, if it can."


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