Ponzi Schemes

Ponzi Scheme, named after an Italian immigrant, Carlo "Charles" Ponzi.

Carlo Ponzi came to America from Canada where he spent some time in jail for passing bounced checks. He ended up rather quickly in Federal prison in the U.S. for smuggling illegal aliens into the country.

Here's what He did.
At that time, the post offices of the world issued what were called International Reply Coupons, which in essence were certificates good for postage stamps throughout the world. Ponzi's idea was to purchase these coupons in countries where the inflation rate was high and redeem them in countries where the rate was low. Simply put, this enable him to buy low and sell high.
On the strength of these coupons, Ponzi created the Securities Exchange Company and issued his own "promissory notes."  An investor could purchase one of Ponzi's notes with a face value of say $100 or $150. In just 90 days, the investor could redeem the note for its full value.  In the days when banks were regulated to offer four percent interest, Ponzi's notes promised an extraordinary returns.!

At first, the investors were dubious and risked only a few dollars say $20 .  However, after earning 50 percent interest on their money a couple of times, they felt more secure and soon began to invest thousands. Ponzi also cut the time frame down to 45 days to sweeten the deal for investors. (It works!)
In no time at all, Ponzi's kingdom grew to a staggering proportions. One million bucks would flow into his offices every day!  As his investor got rich and spread the word of mouth, Ponzi got even richer.  He was hailed as a financial genius. He now owned a local bank (the Hanover Trust Company), lived in the posh suburb of Lexington, Massachusetts, and was known far as The Great Ponzi."

The Problem.
Ponzi's "money machine"  operated by robbing  from  Peter to pay Paul.  He took the money investors sent in today to pay the money due tomorrow on previous investor's notes.  It was a merry-go-round of money that seemed to work perfectly.. The International Reply coupons that were supposed to be the source of Ponzi's wealth building investments didn't exist.  Ponzi never purchased more than $100 worth of them.
And one day in 1920, the merry-go-round stopped dead.
A public relations man whom Ponzi had hired to handle the attactks from the Boston press took one look at was actually going on-- and blew the whistle.
Ponzi was convicted of mail fraud and sentenced to nine years in prison. He jumped bail, and move to Florida, sold swamp land in a real estate scam, got caught and was returned to prison. Eventually, he was deported back to Italy .  Ponzi died alone and broke in 1949.

Imagine, over $15 million (in 1920 dollars) was paid out to investors before the merry-go-round business collapsed.
The total amount of money lost during the time of Ponzi will never be known.

What made Ponzi's scam an illegal pyramid scheme was the merry-go-round principle. As long as money was coming in, money would continue to go out. Investors were paid in full , on time, and everyone was happy. However, when the money stopped coming in, the "jig was up." The same thing would happened if the amount of money coming in had begun to slow down.
 Carlo "Charles" Ponzi was the proud father of one of the most incredible inventions of all time--the illegal pyramid scheme.
What Ponzi did was to live on the "float"  you know,  like  writing a check today to pay yesterday's bills based on money that won't be cashed until tomorrow in the hope that the check won't be cashed until some time next week  and so on and on.

The people who invested late in the game lost their money. Some of them lost everything they had.