Meet The Man Who Invent Ponzi Scheme

Who Was Charles Ponzi? What Did He Create?

A profile of the infamous inventor of the scam that bears his name, PONZI SCHEME

Although few people outside finance circles know who Charles Ponzi was, most can guess what he’s famous for, given his last name. The term “Ponzi scheme” or “pyramid scheme” is familiar as an investing scam in which money from a constant stream of new investors is used to pay off earlier investors while simultaneously enriching the scheme’s creator.

The scheme or scam continues until, as is always the case, it collapses when there are no more new investors. Although Ponzi was not the first to utilize this scam to make money, he’s the most famous and therefore the one for whom it is named.

• Coming to America
• An American Beauty
• Simple Arbitrage
• END

The Ponzi scheme, also known as the Rob Peter to Pay Paul scheme, was used for many years before Charles Ponzi used it. Ponzi is the name of the scheme.

The Ponzi plot, which includes taking care of early financial backers with continues from later financial backers, regularly falls when not any more new financial backers can be drawn in.

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Ponzi was born on March 3, 1882, in Lugo, Italy.

His early life consisted largely of low-paying jobs and criminal activity.

He accidentally discovered a way to make money by using international reply coupons and differences in exchange rates.

He became famous when the scheme took his name because he turned that process into a scheme.

Childhood and Education Charles Ponzi was born on March 3, 1882, in the town of Lugo in northern Italy, to Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi. Ponzi later claimed that his parents, Oreste and Imelda Ponzi, belonged to a wealthy Italian family that had fallen into extreme poverty by the time he was born. It is said that Ponzi was a troublemaker from a young age, stealing from his parents and even parish priests.

He went to Sapienza University in Rome as a young man, where he said he wasn't a very good student. Consequently, Ponzi was compelled to leave after four years with no money and no degree. He decided that this was the only course that was still available to him after hearing about other Italians who went to America to find fame and fortune during his time at university.

Coming to America

On November 19, 1903, Ponzi boarded the S. S. Vancouver and made his way to Boston. He claimed in his autobiography, The Rise of Mr. Ponzi, that he left Italy with $200 but arrived in the United States with much less. Ponzi wrote, A card sharp had taken me for the majority of it, the tips, and the bar the rest of it, and the $200 had dwindled down to $2. 50 on the way over. Ponzi was able to pick up some odd jobs and learn English over the next few years.

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The self-described jack of all trades offered this explanation in The Rise of Mr. Ponzi: I tried everything I could. from grocery clerk to drummer on the road. Man who fixes sewing machines and sells insurance. Help in the kitchen and dining room as well as in the factory In some jobs, I worked quickly. I lasted longer in other cases. I would frequently be fired. I would frequently leave on my own initiative, either out of disgust or to avoid being fired.

Some of those firings, which included theft and undercharging customers, are not mentioned in Ponzi's personal account.

He ended up in Montreal, Canada, where he worked as a bank teller after moving to several cities, including Pittsburgh, New York, New Haven, Connecticut, and Providence, Rhode Island. When the bank went bankrupt, he lost that job. He returned to crime, as Ponzi did frequently, which led to a three-year stint in Quebec prison for forgery. He began assisting in the smuggling of Italian immigrants into the United States after his release. After being discovered at that endeavor, this was followed by an additional two years in prison in Atlanta.

An American Beauty

On Memorial Day weekend 1917, Ponzi, who was 35 years old at the time, saw a young girl standing on a streetcar platform. He later wrote, At that picture of loveliness, kindness, and clean vivacity! One glance at her! Take one look into her dark, deep, and happy eyes! I couldn't look away from her when I saw her round face set against a backdrop of gorgeous curls.

Rose Gnecco was her name, and they got married in February 1918. Ponzi worked several jobs over the next few months, including the grocery store owned by his father-in-law, an import-export business, and the fruit business owned by his wife's family, which eventually failed.

Rose was by Charles's side through the difficult times and the awe-inspiring rise to wealth, which included a 12-room mansion, servants, and a limousine made specifically for him. She stayed with him after his deportation, even after the scheme failed and he was sentenced to prison for mail fraud. In the middle of the 1930s, they got divorced.

Simple Arbitrage

The SchemeIn 1920, Ponzi organized a company called Securities Exchange Co. in which he sold stock (promissory notes) advertising 50% interest after 90 days. The funds obtained from investors were supposed to be used to buy IRCs to redeem in the U. S.

Instead, Ponzi used funds obtained from new investors to pay off old investors.

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By way of explaining why he did this, Ponzi blamed the Universal Postal Union for suspending the sale of IRCs once it learned about his coupon redemption scheme. After attempting to get around the suspension, Ponzi shifted to his “Rob Peter to pay Paul” scheme. For a while, it worked. He raked in $15 million ($220 million in 2022 dollars) in the first eight months of 1920.

He kept the scheme going by telling investors he had created an elaborate network of agents buying IRCs for him overseas that he could redeem in the U. S. for a tidy profit. In fact, there was no elaborate network of coupon buyers; he was using new investments to pay off old investors.

As of Jan. 27, 2013, the U. S. Postal Service no longer sells IRCs. International reply coupons purchased in other countries may be exchanged in the U. S. for a First-Class Mail International 1-ounce, letter-size stamp per coupon.

The Scheme

After starting a small export-import business in 1919, Ponzi received a request for an advertising catalog from a Spanish company. He discovered an international reply coupon (IRC), a type of voucher that could be exchanged for local postage stamps in other nations. Ponzi quickly realized that buying IRCs in one country and redeeming them in another using exchange rate differences could make money.

Ponzi described that moment in his own florid prose: I actually received the racket of international response coupons like a ripe apple. To get it, I didn't have to shake the tree. I simply grabbed it from where it had fallen by reaching over. It seemed nice. Luscious. I looked for flaws in it. Nothing was found. I needed to bite. If I didn't, I wouldn't have been a human.

At this point, Ponzi had discovered the practice of arbitrage, which involves buying and selling an asset simultaneously in two different markets. A modest profit is possible due to minute price variations. When carried out on a large scale, purchasing IRCs in Italy for a single price and trading them in for more expensive postage stamps in the United States would result in a significant profit.

He most likely would have been free and clear if Ponzi had stopped there.

Sarah Howe, a woman from Boston, started Ladies' Deposit Co. in the late 1870s, a savings bank for unmarried women. She was one of the first people to use what became known as the Ponzi scheme. Howe fulfilled her promise of a monthly interest rate of 8% by paying early depositors with money from new customers.

The very definition of a Ponzi scheme is exactly this.

How It All Ended

The Boston Post published a glowing front-page article about Ponzi in July 1920, estimating his net worth at $8. 5 million. The U. S. Post Office Department made the announcement of new conversion rates for international postal reply coupons less than a week later; however, officials claimed that the rate change had nothing to do with Ponzi.

Until the Boston Post launched its own investigation, which resulted in negative press and caused Ponzi to decline new investments, investigations of the Ponzi scheme made little progress. Current investors ran away as a result, and Ponzi reportedly paid out more than $1 million.

Ponzi's fate was ultimately sealed by more negative press from the Post. He was eventually found guilty of mail fraud on federal charges and sentenced to 3 1/2 years in prison, you can also check some of the most famous prisons. He was found guilty of state charges while on parole, jumped bail, was caught, and spent another year in prison before being released in 1934. He had never become a U. S. citizen when he was deported to Italy at that time. Although it is known that he passed away on January 18, 1949, in a charity hospital in Rio de Janeiro, leaving only $75 to pay for his burial, his history in Brazil and Italy is not well documented.