In the 1920s, there was a tiny man in Boston with a charming smile and sparkling, penetrating eyes. He was always dressed in the latest fashions. There was something irresistibly attractive about him. He was one of those people that everybody loved. He arrived in the New World like most immigrants – with empty pockets. But Charles Ponzi was no ordinary immigrant. He had high-flying plans and immense self-confidence. He set up a finance company that promised incredible returns to investors. “Ponzi doubles your stake in three months,” wrote the Boston Post about him. His office was crowded with people ready to entrust him with their last savings. He made millions of dollars from his financial machinations. He had everything, a huge house, the latest car, the best clothes and a loving wife. People admired him and considered him a financial genius.
In the US, hard work has always been considered the most important value. “Every dollar saved is a dollar earned”, Americans say. Working hard and making sacrifices are the only guarantee of a prosperous future. But Charles Ponzi did not believe in prudence and hard work. He believed in only one thing – the almighty dollar. All his life he tried to get rich and never gave up. When he finally succeeded, he made American history, but not in the way he would have liked. For he became the greatest swindler of the twentieth century. He took too many shortcuts on the road to the American dream.
Dolce Vita
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was born on 3 March 1882 in Lugo, in the Italian province of Emilia-Romagna. The Ponzi family lived a leisurely but modest life. His father, Oreste, was a postman and died when Carlo was a young boy, while his mother, Imelde, came from an aristocratic family that had already lost its status and wealth towards the end of the century. As an only child, Carlo was the last hope for the Ponzi family to regain its former prestige.
His mother wanted him to become a lawyer, so she raised money and sent him to study in the capital. He enrolled at the prestigious La Sapienza University, but soon realised that the academic life was not for him. He preferred to spend his time in pubs and cafés with his wealthy classmates rather than in lecture halls. Life on the big foot had completely taken over him. He could not resist expensive dinners and even more expensive clothes, all the things his classmates could afford. Dolce vita doesn’t come cheap and Carlo soon spent all the money he should have had for four years of study.
With no money and no diploma, he returned to his mother with his head bowed. His Roman holiday had been a disaster and he decided he had to make amends for the disappointment he had caused her. With no job he particularly liked, he was left with only one option. He followed many of his compatriots to the New World in search of a better life. He was convinced that his imperfect education and his manners would surely leave their mark in America.
Hand to mouth
In November 1903, he boarded a ship in Naples and set sail across the ocean. He spent the two weeks of the voyage with his cards in his hand, squirreling away all the money his mother had given him for the voyage. When he arrived in Boston, he had only two and a half dollars left in his pocket, which was very bad news for someone with plans as big as his.
Icy winds and mud greeted a dejected Carl in Boston harbour. He had a slightly different idea of the start of his new life, imagining blue blood coursing through his veins from Rome onwards. In the eyes of his new homeland, he was just one of many poor and anonymous immigrants. For the next four years he shared the fate of his fellow immigrants – living from hand to mouth. He worked in factories and warehouses, washed dishes and took any job that came along. He slept in shabby rooms and occasionally under a soapy sky. The American dream turned out to be a mirage, and he often regretted the day he boarded the ship that took him across the channel.
After four years of torment, fortune finally smiled on him. Carlo had by then become Charles and English was no longer a problem for him. He found out that there was a large Italian immigrant community in Montreal and, after saving enough money, he headed to the Canadian city and started looking for a job. With the last of his savings, he bought a new suit and, armed with his signature smile, knocked on the door of the Zarossi bank. He introduced himself as Charles Bianchi and, with a confident air, persuaded the manager to hire him as a bank clerk. He no longer had to wash dishes and sleep in parks, his torment was over.
In the months that followed, Ponzi/Bianchi, through hard work and a sweet tongue, worked his way up to the position of bank manager, where he first encountered the dirty dealings for which he later became famous. Bank Zarossi attracted customers by promising returns on deposits twice as high as those offered by its competitors. Since such promises were unrealistic, the bank’s owner, Louis Zarossi, soon found himself in trouble. To pay the returns to new customers, he “borrowed” money from the accounts of his regular clients and paid himself rich bonuses for his efforts. Less than a year after Ponzi’s arrival, Zarossi collapsed and its owner fled to Mexico with suitcases full of Canadian dollars.
From embezzlement to smuggling
Although Ponzi was not involved in the fraud, he still found himself on the street. The few months he spent in the bank were clearly not in vain, because he soon came up with a simple scam. He stole a cheque from a large company that used to be one of his clients. He then forged the signature of a director he knew from the time they worked together and cashed the cheque. Never one to skimp on money, he immediately went shopping. He spent in one day what he had stowed away on a boat in two weeks five years before, but at least this time he had some of it. Among other things, he bought a new pair of boots, a couple of coats, a watch and several shirts. Thus equipped, he prepared to reconquer America, but his plan did not work out. The very next day, he was arrested by Canadian police and taken before a judge, who sentenced him to three years in prison for embezzlement.
When he came out, he was in an even worse situation than when he started. Penniless, with a police record and a bad reputation. But that did not make his hunger for success any less. He had drilled into his head that he had to return to the US, but he was out of steam. So he got involved in a dangerous game that ended badly. A former colleague offered him some money to escort five Italian immigrants across the border.
They set off by train and everything went according to plan until they reached the Canada-US border, where they were stopped by police. The immigrants had no documents and did not speak English. Ponzi tried to convince the police that he just wanted to help the poor people, saying that they would not find their way in a foreign country. They were not convinced by his words, and he found himself in front of a judge again. He insisted that he had only accompanied his compatriots across the border, but the judge disagreed. He was convicted of a serious offence – people smuggling. He breathed the free Canadian air for just 17 days, then had to go back behind bars for two years. This time to Atlanta, in the south of the USA.
Goodness is an orphan in America
When he completed his sentence, he had thirty years to serve, five of them in prison. The American dream continued to elude him, but Charles Ponzi did not give up. He was convinced that it was only a matter of time before he returned triumphantly to his homeland as a millionaire. With five dollars in his pocket, he set out to win again. He worked as a translator, an accountant and a medical technician and landed in a remote mining town in Alabama. The large Italian immigrant community there lived in impossible conditions. There was no running water or electricity. The enterprising Ponzi saw this as his opportunity. With contributions from the inhabitants, he planned to build a small power station and a water pump that would bring the long-awaited civilisation to the village. He would, of course, be richly rewarded for his efforts. The idea was ambitious, but perfectly legitimate.
Twice in his life he has been betrayed by greed, which landed him in jail, but this time his plans have been thwarted by that noblest of human traits – solidarity. When he learned that a nurse in the village had almost died in a fire, something inside him stirred. The doctor told him that only a skin transplant could save her, but he could not find a single donor in the whole settlement. Ponzi was furious and decided to help a woman he didn’t even know. The doctors used his skin to save her life and Ponzi spent three months in hospital as a result of the procedure.
The story of his sacrifice quickly spread and made the local newspapers, but when Ponzi was discharged from hospital, he was met with disappointment as well as fame. This time, fate played a nasty trick on him and another opportunity floated down the water. While he was healing his wounds, someone grabbed his idea and started building a power plant in the village.
Charlie and Rose
Ponzi was back on the road with a crutch on his shoulder and a smile on his face. He first sought his place in the sun in the American South, until fate brought him to the city where it all began. He arrived in Boston in 1917 and quickly found a job. Gone were the days when he earned his living with his own hands. Now he sat in the heated office of an import-export company. The pay was poor, but it was still a step forward for him. He was thirty-five years old and had decided never to wash plates or paint walls again.
He thought that maybe he should never have left Boston. He had met his life mate. Twenty-one-year-old Rose Gnecco was the daughter of Italian immigrants who arrived in the New World around the same time as Ponzi. Her family owned a small, unsuccessful vegetable business. Ponzi fell in love at first sight with the short-tempered Rose and decided to leave his clerical life behind for good. He invited her to the theatre and sent her flowers every day. The love was mutual and soon they were married.
When they moved into a small flat, they listened to music in the evenings and talked late into the night. Charles kept her entertained by playing the mandolin and telling her stories about his past adventures. He never mentioned the four years he had spent behind bars. Rose’s childhood dream had come true – all she wanted was a peaceful family life.
Charlie, as Rose called him, thought differently. He had a secure job and a wife he loved dearly, but that wasn’t enough for him. He wanted to get rich. Now more than ever. He imagined buying Rose the biggest diamond in Boston and taking her out to dinner every day at the best restaurant in town. Life without luxury was no life for him. His love for Rose was no less than his love for money.
Half a year after his marriage, he had the chance to prove himself. The Gnecco family business was sinking and his relatives offered him the chance to put his entrepreneurial skills to the test. He quit his job and devoted himself entirely to saving his family’s pride. But the crisis manager, as we would call him today, was not up to the task and the company collapsed. Despite his misadventure, Ponzi’s conviction that he had to become his own fortune-builder became even stronger. “I had had enough of working to make money for someone else and not for myself,” he later said.
Life goes on
He rented a small office at 27 School Street and started planning his next step. As always, he had big plans. With the experience he had gained in his previous job, he decided to try his luck in the world of commerce. He was going to publish a publication called Trader’s Guide, where companies involved in importing or exporting could buy advertising space to offer their services. He imagined that his advertisement would one day become a major reference in the field of trade. He recruited several secretaries and stenographers and started sending his offer to all the local and foreign companies that had any connection with this business. On the door of his office was a letter from the Boston Advertising and Publishing Company.
Unfortunately, there was no interest in his brilliant idea. The electricity bills were piling up in the letterbox at 27 School Street and he was running short of money. He began to think about how he could raise the extra funds that would allow him to survive until his idea came to fruition. He went to the Hanover Trust Company, where he had an account, and asked for a loan. He confidently presented his business plan to the bank’s manager, Henry Chmielinski, a Polish immigrant who, unlike Ponzi, had realised his dream in his new homeland. “I’m sorry, but we can’t give you a loan, and although we try to please all our customers, your account is more of a burden to us than anything else,” he told him. The proud Ponzi never forgot those words. He had no choice but to fire all his employees and admit defeat.
The first issue of Trader’s Guide never saw the light of day and Ponzi started looking for sub-tenants for his office. “Life goes on,” he consoled himself, already with countless new ideas in his head, one better than the other. In his eyes, the advertorial story was just an unfortunate episode on the road to ultimate success. Nothing was lost and nothing had changed. The first million is still waiting around the corner.
Stamps, vouchers and dollars
Great minds sometimes experience enlightenment when they least expect it. Archimedes came up with the law of buoyancy while bathing in a tub. Tartini, for example, was visited by the devil himself in a dream and inspired to write his famous The Flying Trill. And Charles Ponzi received the solution to all his problems in the mail.
In August 1919, a Spanish company sent him a letter enquiring about the Trader’s Guide. Although the project failed ignominiously, it changed Ponzi’s life forever. The letter was accompanied by a small piece of paper that the Boston entrepreneur had never seen before. It was an “international reply slip”, as it is professionally known. What is the secret of this magical piece of paper that made Ponzi rich?
The Spanish company wanted to get as much information as possible about the advertiser and sent an enquiry to that effect. The Spanish company expected a letter of introduction, which would be the basis for deciding whether to start working with the advertiser. Since they were interested in Ponzi’s reply, they were prepared to pay the postage and therefore enclosed an “international reply voucher” with the letter. Ponzi could exchange it for a stamp at the nearest post office, affix it to his presentation letter and send it to Spain. The coupon was put into circulation by the Universal Postal Union in 1906. Before then, international correspondence was more complicated. Before the introduction of the coupon, if a Spanish company wanted to reimburse Ponzi for postage, it would have had to enclose money with the letter. If it did not have dollars on hand, it would have sent him pesetas. Ponzi would first have had to exchange the pesetas for dollars and then use them to buy a stamp.
The International Reply Coupon has eliminated these unnecessary transactions. It was a kind of international stamp that could be bought or exchanged at any post office in the world. In addition, the Universal Postal Union gave it a fixed price for each country.
This is where Ponzi smelled an opportunity. Some European currencies, unlike the always stable dollar, have fallen sharply since the war, losing much of their value. He quickly realised that one dollar could buy twenty coupons in the US and, say, sixty-six in Italy. When he put down the pencil he had been using to calculate the various scenarios, he couldn’t believe his eyes – hevreka! On paper, the plan was simple and legal. He must buy as many coupons as possible in countries with devalued currencies and then exchange them for stamps in the US. All he needed was seed money, because as usual he was broke.
But his seemingly ingenious plan had a few holes. The stamp was worth five cents in the US, meaning Ponzi would have had to exchange millions of coupons to get rich. How to transport such huge quantities from Europe to the US? Who could be trusted with such a feat? Even if he had succeeded in solving this problem, another obstacle awaited him. He would not be able to buy a house and a car with stamps. So how to exchange stamps for dollars? Ponzi did not think about that, because the idea of the staggering profits had completely clouded his mind. He went to the administrative unit and opened a new business. The sign on the door of his office read ‘Securities Exchange Company’.
Steal from Peter to pay Paul
Ponzi decided to try to raise his initial capital from ordinary people because of his bad experience with banks. He put on his best coat and started going door to door. Nobody listened to the eloquent Italian immigrant and his stories about the Universal Postal Union and obscure coupons until he uttered the magic words “50% return in 45 days”. “We are all gamblers. We all want easy money. Lots of money,” he mused. It would be hard to argue with him.
People felt safe and at home in his company. Ponzi was a born salesman. His perseverance and ambition bore the first fruit. In January 1920, when Prohibition came into force in the country, he had $1800 at his disposal and his rise began. At this point, we might add that the same sum would be worth around $22 000 today.
The money, mainly from poor Italian immigrants, was a reward for Ponzi’s efforts and a testament to his salesmanship. He was thirty-eight years old and had a hefty pile of greenbacks in his pocket. Only a month before, he had been out of a job and up to his neck in debt. For the first time since he set foot on American soil, he was master of his own destiny. He wondered if he would ever get the chance again. One thousand eight hundred dollars should have been enough to see if his plan was actually working. A real entrepreneur in his position would have immediately started buying coupons and thinking of ways to exchange them for dollars to repay his investors. But Charles Ponzi did not buy a single coupon. Charles Ponzi was not an entrepreneur.
He put all the past defeats and humiliations behind him and refused to think about the consequences of his decision. The fat wallet was proof enough that he was on the right track. Meanwhile, the day was approaching when the first investors would be paid the promised 50% return on their investment. Despite its sound name, the Securities Exchange Company was not an investment house and was not making any profit. To pay its liabilities, Ponzi resorted to a simple financial scam. In the Anglo-Saxon world, this is called “robbing Peter to pay Paul”.
When the guaranteed 50% return had to be paid to the first investors after 45 days, Ponzi simply took the money from the investors who had invested after them and were still waiting for their fabulous profits. After the first payouts, people were amazed that they had managed to make so much money in such a short time. Most of them decided to keep their money with Ponzi, because in 45 days’ time they would have more greenbacks waiting for them. Such a system is only sustainable as long as fresh money flows in and collapses the moment all the investors suddenly decide that they want to be paid out. Fraud was as old as human greed, but Ponzi’s wallet was getting fatter and fatter.
A wizard with a guilty conscience
The story of the incredible 50% returns began to spread rapidly on the streets of Boston. The tale of the magic voucher captivated many. Everyone wanted to see for themselves “how a small dollar makes its way across the ocean and comes back six weeks later married and with two children”, as Ponzi put it. A colourful crowd of people from all walks of life and all ages stood at the door of his office. Poor Polish dock workers, Italian housewives, city policemen, waiters and wealthy businessmen. They all wanted to invest in the Securities Exchange Company and get rich quick. The huge interest led him to open more offices and to hire salesmen to recruit new investors on his instructions.
In May 1920 alone, investors entrusted him with nearly half a million dollars. As he walked around Boston, newspaper vendors and streetcar drivers excitedly shouted his name. Passers-by wanted to shake his hand and pat him on the shoulder. Everyone wanted to see up close the magician who, with his technically sophisticated financial sleight of hand, had conjured up the American dream for even the poorest of the poor.
In public, he was always in high spirits and full of confidence, as befits a successful entrepreneur. In his rare moments of solitude, however, his soul was in turmoil. The guilt grew stronger and stronger. For every dollar he was given to “manage”, Ponzi became 50 cents more indebted. With each new stake, he sank deeper into the red. He realised that the voucher plan was unrealistic, but kept this realisation to himself. As long as there are enough suckers in Boston, he has nothing to fear. When they run out, he will have long since made a fortune the legal way and paid all his obligations to investors. He had a fortune at his disposal, a superior knowledge of finance and an extraordinary business sense. Or so he thought.
The man who wanted to reach the Moon
Ponzi was getting richer by the day. The moment he had been waiting for all his life had arrived. He had enough money to afford everything he wanted. He bought a three-storey villa with a huge garden in the suburbs of Boston. He employed a cook, a gardener and several servants. He ignored the expense and furnished the house to his taste. Rose, however, disliked the large marble rooms, which gave her a feeling of loneliness. She also felt uncomfortable because the servants did all the work around the house. She longed for her old life, but was also proud of her successful husband, who was already forging new plans.
There were still enough gullible people in Boston, and Ponzi became a millionaire at their expense. To dig himself out of a hole that was getting deeper by the day, he began to look for ways to enrich his fortune. He bought property and even became the owner of a pasta factory. “So I’ll never run out of spaghetti at home”, he joked.
“You are never satisfied with what you have. When he has one shirt, he wants another. When he is single, he wants a wife. When he is married, he wants a harem… He always wants to reach the moon and go into space,” the newly-made millionaire mused. He didn’t need a harem, as Rose was his only love, but Ponzi’s eyes were always fixed on the Moon. His hunger for success was fed with every new purchase.
He has never forgotten how less than a year ago, the CEO of the Hanover Trust refused to grant him a modest loan and it was time to strike back. He had a powerful trump card up his sleeve, as he was by far Hanover Trust’s biggest client with three million dollars. He threatened to empty his account if the bank was not sold to him. Times had changed, and poor Director Chmielinski, who less than a year earlier had refused Ponzi’s request for a loan of 2000 dollars, now had his back against the wall. He had no choice but to sell his majority stake in the bank. Charles Ponzi became a banker and realised another dream.
The beginning of the end
Looking at his bank account and the bags of money sitting in his office, Ponzi finally felt that the time had come when he could proudly tell his mother that he had conquered America. The broke college student had become a millionaire. He invited her to join him in Boston and see for herself the empire he had built with his hard work. After seventeen long years, mother and son were reunited. Ponzi was the happiest man in the world and at the height of his fame.
On July 24th 1920, the Boston Post published an article entitled Ponzi doubles your stake in three months, and the next day hundreds of new fortune seekers were outside his office. Some were fainting from the heat, others with bundles of dollars in their hands, begging Ponzi to let them invest in his company. Throughout the day, he received phone calls with similar requests and congratulations on a job well done. Reporters besieged him at every turn – Charles Ponzi had become the biggest star in Boston.
On the one hand, he liked the attention because he saw it as a recognition that he had stepped out of mediocrity. He was no longer an anonymous immigrant with crazy plans, but a millionaire, an entrepreneur and a banker. He became part of the elite and a hero who brought the American dream into the home of every Bostonian. On the other hand, he knew well that too much attention comes with risks.
All his legitimate investments were nowhere near profitable enough to pay off his debts. He owed fifteen million dollars and had only seven. More than enough to keep him out of work for the rest of his life. He could have taken that money and fled the country with his family. But Ponzi was convinced that he had not yet said the last word, because he was, after all, a banker, a millionaire and a financial genius. All he needs is a little more time and he will be able to make even more money and pay off all his debts. Fame has gone to his head.
A millionaire with empty pockets
Over the next two weeks, events followed each other at lightning speed. Immediately after the article was published, he was contacted by federal prosecutors and bank supervisors. He explained to them that he had made a fortune from trading in postal coupons and that he was hiding nothing. He pointed the finger at greedy bankers who keep all the profits for themselves, while he generously shares them with his customers. As always, he was confident and convincing, but this time he knew it was for real.
They started attacking him from all sides. Bank supervisors dug into his books and bank accounts. The Postmaster General of New York came out and told the press that there were not enough coupons in the world to make Ponzi’s plan viable. In the USA, for example, there were 27 000 coupons in circulation, worth only USD 1 400. Where did Ponzi’s millions come from?
The news caused panic among his investors and thousands of people gathered outside his office. This time, they demanded that he return their money. He paid everyone who came to 27 School Street that day, thus reassuring the public. People still believed that Ponzi was a financial genius, because he paid out more than a million dollars in one day and yet he was still in business as usual. But his wallet was getting thinner and thinner and he would not survive another day like that.
Meanwhile, the Banking Supervision Authority found that Ponzi had several fictitious accounts at the Hanover Trust Bank, which he used to pay out the returns promised by his company, the Securities Exchange Company. He stole from Peter to pay Paul. The Hanover Trust was closed down by bank supervisors, dealing Ponzi a severe blow.
But it was the newspaper that put the final nail in his coffin, launching him into stardom. The Boston Post reporters found out that Ponzi was in Canada for forging cheques. Confidence in the financial magnate crashed the moment the article was published. Thousands of furious people were once again outside the office, trying to salvage what could be salvaged.
Ponzi scheme
He was most worried about how Rose would take the news. He never told her about his years in prison, and he never explained how he got rich. He was relieved to learn that Rose had been corresponding for years with her mother-in-law, who had told her all Charlie’s secrets. Rose had stood by him through these difficult times and Charlie was always grateful for that.
The pressure was mounting and Ponzi began to lose ground. It took him two decades to realise his dream, but it vanished in just two weeks. On 11 August, Ponzi was declared insolvent by the Banking Supervisory Authority and his story was over. The next day, he surrendered to the authorities and crossed the threshold of East Cambridge prison with a smile on his face. He was sentenced to three and a half years in prison for mail fraud. It was one of the most complex trials in Massachusetts history. New federal and state indictments, convictions, appeals and new prison sentences followed. In 1925, while awaiting one of the verdicts, Ponzi tried his hand at real estate. He offered developable land in an “attractive location” – the Florida swamps. This time, he promised his clients as much as a 200% return in two months, and soon found himself behind bars again.
He finally gained his freedom in 1934 and was deported from the USA, as he never applied for citizenship. Three years later, Rose filed for divorce. Ponzi was again alone and unmarried in his mature years. He died in Rio de Janeiro, where he had been swept away by another unsuccessful adventure. On his deathbed, he confessed to an Associated Press reporter that he knew from the start that his financial schemes were nothing more than a common fraud.
Ten years after his death, the Oxford English Dictionary adopted a new phrase – Ponzi scheme. “A form of fraud in which confidence in the success of a fictitious enterprise is based on the payment of quick profits to early investors with the money of later investors.”
Ponzi was neither the world’s first nor the last fraudster, but his name is forever etched in history. Who knows whether this ambiguous admission would bring a smile to his face?
