Ponzi schemes are named after Charles Ponzi, a fast-talking immigrant and college dropout. His scheme rested on the eagerness of ordinary working people to benefit from the wealth they saw being generated around them as the economy recovered from World War I.
Mr. Ponzi began telling New York investors in December 1919 that investments in foreign postage coupons could yield 50 percent returns in 45 days. By redeeming coupons bought cheaply overseas for much higher amounts in the United States, he could double their money in three months, he claimed.
There was no need for advertising; word of mouth sufficed. As the fever spread, millions of dollars were coming in every week, most of it from ordinary working-class people investing as little as $10 at a time. In February 1920, he took in $5,290; in April, more than $140,000; in May, more than $440,000; in June, more than $2.5 million; and in July, nearly $6.5 million. In seven months, 30,000 people had invested in "Ponzi notes", as they became known, with almost $10 million of their money. That was a time when the president of Harvard earned $6,000 a year.
With successive waves of people entrusting him with their cash, Ponzi needed only enough money to pay off those people redeeming their coupons. Certainly, with the prospect of increasing their savings exponentially every couple of months, few ever redeemed anything.
When the Boston Post, the financial journalist Clarence W. Barron, and state banking officials dug Mr. Ponzi’ operation, they discover a fraudulent investing scheme behind the Ponzi notes glamour. In the end, brilliant reign of the scam artist, Charles Ponzi, came to an end and investors were left with empty hands.
Mr. Ponzi was convicted of mail fraud in 1920 and served time in federal and state prisons. He has never become the U.S. citizen and was deported to Italy in 1934, carrying a suitcase with no money. His marriage was in ruins, he lived in poverty, and died in the charity ward of a Brazilian hospital in Rio de Janeiro in 1949, at the age of 66. Mr. Ponzi was buried in a pauper’s cemetery there.
Nowadays, this type of investment fraud promising high rates of return with little risk to investors is referred to as Ponzi scheme. This investment scam generates returns for older investors by acquiring new investors.