Boy, do I have an opportunity for you: The life of Charles Ponzi

Key topics:

• Unbridled Optimism: The 1920s were characterised by a widespread belief in a new era of endless peace and prosperity, fuelled by rapid technological and social changes.

• The Rise of Charles Ponzi: An Italian immigrant who, after numerous failures, created a fraudulent investment scheme promising huge returns by exploiting international postal coupons.

• A Sobering Reckoning: Ponzi's scheme was exposed as a simple con, and his name became a symbol for the deceptive nature of irrational exuberance, foreshadowing the end of the era's naive optimism.

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By Christopher Walsh

It is hard for anyone today to grasp the optimism of the 1920s.

The Great War – the last of its kind, surely, finally ended large scale military conflict and humanity would never again face destruction on such a vast scale. Old social structures were buried in trenches in France, old limits and old ideas perished alongside our most antisocial instincts – and we were all about to enter a new era: A golden age of eternal peace, endless progress and enduring prosperity.

It wasn’t a naïve conviction: the evidence was all around us.

Technology was changing more rapidly than ever. Radio was a form of magic – impossible to imagine by anyone from bygone ages. It certainly had unintended consequences on society as everyone simply took up the craze without forethought to the social impact of the technology, but even its detractors would secretly tune in to listen. We were defying gravity itself – airplanes made manifest humanity’s ancient and visceral dream of flight. Automobiles – carriages that moved about without the need for horses – like magic – moved through the great cities, for the first time larger population centres than the countryside.

Social changes were equally undeniable. War itself lay dead in an exhausted Europe, a continent that surely could not launch another conflict even if it wanted to, which surely it did not. Unfair and nepotistic power structures found themselves shattered – or at least shaken – and there was a sense of movement even among the poorest of the poor. Migrants were moving across borders worldwide at an unprecedented scale. Women were given the right to vote. Aristocrats found themselves at the mercy of merchants, and anyone could become a merchant. The United States was defeating the scourge of intoxication through instituting Prohibition – which would most assuredly transform society for the better. Perhaps the most compelling exhibit in our body of evidence for this golden new era lay in the profits of businesses. Ingenuity and industriousness were being rewarded with stocks going up and up and up – with no end in sight. Three words summed up the returns of the stock market: fast, easy and lots. America’s old financial capital, Philadelphia, was deposed – not by a single contender but a competition: Boston or New York, both cities had a lot going for them, and both could take the crown.

One young man came of age during this era in Italy. He was born in 1882 into an aristocratic family, but the money was long gone. His father had to work as a postman to make ends meet, and the family had very little, although his mother clung to the ideas of prominence and told the young Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi that he would be the one to restore wealth and greatness to their lineage.

In a time where less than 5% of the population went to university, the family somehow managed to scrape together enough money to send Carlo to the University of Rome. There he neglected his studies but refined his tastes as he socialised with rich young aristocrats. In very little time, the money was spent.

This disappointed his parents – enough that they decided he should be sent to America. Throwing more money after that already spent, they bought him a one-way ticket on a ship and gave him $200 to begin his new life. On board, Carlo promptly gambled this away and he arrived in the new world penniless. His parents had the foresight to anticipate this and also included a paid for rail ticket to Pittsburgh, where Carlo – now Charles – could live with a relative while he established himself.

He did a number of odd jobs. Italian immigrants were not always welcomed with open arms, nor treated fairly, as was the case with the Irish before them and nearly every other immigrant group at one point or another. The sheer number of immigrants made most of the East Coast a potential area to settle for Charles, and he spent a lot of time and money moving up and down the East Coast.

He landed in Montreal, a hub for Italian immigrants. Styling himself Charles Bianchi he began to work for a bank. Well, we can call it that, I suppose. There was already a bank serving Italian depositors, investing in Italian bonds and taking a percentage point worth of profit as they paid their depositors 3%.

Banco Zarossi, where Charles worked, paid depositors 6%. How was that possible? There were two explanations. The first one was offered to the public. Greedy bankers were charging too much money and taking too much of the profit, whereas Mister Zarossi was a man of the people who cared about the poor and was more reasonable in taking profits. The bank grew rapidly. Until the other explanation finally came to the fore, and Zarossi, having essentially robbed Peter to Pay Paul, fled to Mexico with a large amount of cash.

To ensure he wasn’t left destitute, Charles forged a cheque. The mistake landed him in prison. Upon his release, claiming to only serve as a translator, he helped smuggle non-English speaking Italian immigrants across the border into the United States. He spent some more time in prison for this.

Charles went looking for a fresh start, and he moved to a mining town in Alabama. There he planned to launch a utility company to supply water and electricity to the mines. He heard about a woman who was badly burned in a kerosene fire and volunteered to provide skin for her transplants. Donating 220 square inches of skin, he had to spend 4 painful months in hospital, and he would have scars for the rest of his life for his good deed. The local community praised him for his sacrifice, however. When he was finally released, someone else had started the utility company and he no longer had a plan to make a living. Good deeds, it would seem, did not go unpunished.

He moved to Boston, where he met Rose, who was 17 years younger than him. The two fell in love and married. Charles worked wherever he could, including at the fruit business of his in-laws. But success remained elusive.

He rented an office, determined to start an import and export business. Seeing the high cost of advertising, he changed his mind and decided to publish a magazine – The Trader’s Guide – instead.

The Trader’s Guide would be freely distributed, and the advertising would pay for it. That, at least, was the plan. It was soon clear, however, before the first issue was sent out in fact, that the venture was bankrupt and wouldn’t work.

But it was during this time that Charles was exposed to a very brilliant idea.

Before 1906, it was virtually impossible, or impossibly expensive, to send mail across borders. A group of countries came together to mitigate this, creating what was in effect the only form of international currency at the time. Charles received a Postal Coupon in the mail from Spain – and the idea was sparked.

You could purchase these postal coupons in Europe – where the currencies were severely depressed and value had collapsed. And then sell it in America, where the currency was strong. And you could pocket the difference.

That simple arbitrage was the idea – the good idea – behind Charles’ most inspired business venture. He went to a local bank, the Hanover Trust Company, and he was kicked out of their offices. He would remember the slight – but he was undeterred. A decade before the Securities and Exchange Commission was set up in the US, he formed the original SEC – the Securities Exchange Company. He would sell notes directly to customers. He set up the firm using the name of a dead relative and his wife’s uncle and got to work selling Ponzi notes.

The numbers were simple. Buy a Ponzi Note, keep it for 45 days, and you made 50% profit. Keep it for 90 days, and you’d double your money.

In eight months, he went from earning $1700 per month – a very respectable number in those days – to $30,000 per week. People fell over themselves buying Ponzi Notes. Everybody wanted them. He opened offices all over the East Coast – with Boston at the heart of his empire. He would invest money in Boston banks with his profits – including making large deposits and buying stock in Hanover Trust Company.

Business was fantastic – except that Charles Ponzi never quite figured out how to actually take advantage of the postal coupon price discrepancies. There was clearly value trapped in the price difference, but how exactly to liberate that value form the postal system was unclear. Also, he might have purchased a maximum of $10 worth of actual coupons, the rest was based on… well, possibility.

All he needed to do, if anyone wanted to take their money out, was use money from new investors to pay old investors. But who would be dumb enough to take their money? Why not leave it another 90 days and double your money AGAIN? And Charles Ponzi’s customers trusted him. Why, just before their notes became due, he took care to even send them a postcard reminding them that they could collect their money. Why would he do that unless he was a legitimate businessman. It was magic! You could grow your money! Fast! Easy! And Lots! Stop being so old fashioned and bringing all those outdated ideas about how commerce worked into your doomsaying and naysaying – and start taking advantage of this man’s genius.

Interestingly, Charles Ponzi had ample opportunity to take the money and run. Some historians even speculate that he believed the myths he created about himself, and that he was more stupid than dishonest – although how anyone could think building up $32 million in today’s money without doing any transactions other than collecting investors’ money is surely a bit of a stretch.

Still, the good times were rolling, and everyone wanted a piece.

Why, the Attorney General even listened in on his calls and found nothing.

The unravelling began when The Boston Post began to regularly run stories about Ponzi and his company, first merely as descriptive pieces bringing more and more scrutiny, and eventually negative pieces. Clarence Baron, a very respected financial journalist at the time, also began to call the scheme into question.

After months of negative press, Regulators – not wanting to appear to be asleep at the wheel as they bad been – began to look deeper into Mr Ponzi and his SEC.

Ponzi sued The Post and Baron – but then the Postal Inspector panicked and instituted a rule that limited redemptions of the postal coupons to 50c per customer per day. That caused a run on the SEC, and suddenly investors wanted their money back all at once.

Ponzi paid.

Not wanting to create a reputation that he didn’t pay investors; he even instructed the extra staff he hired for the extra office space he rented to take care of redemptions to honour even fraudulent claims. He paid and paid and kept paying.

The run began to slow.

A businessman from New York, impressed with the robust way in which the business withstood the run, even offered to buy the SEC from Ponzi for $10 million, but the deal fell through.

Ponzi hired a PR man and agreed to meet with law enforcement agencies and regulators. A deal was agreed whereby he would submit to an audit.

And that was the end of the scheme – although Ponzi’s story continued for some time yet. While he was tried and re-tried, and trying to stay out of prison, the damage was done, and all the wealth he had built up vanished. Three banks in the Boston area failed. His investors did not quite get back 30 cents for every dollar they had invested. $20 million in 1920 dollars was gone.

It was actually an incredibly simple scheme. Pay the old guys with the new guys’ money. Nothing fancy or sophisticated, just as plain as that.

He would be convicted and spend time in prison, successfully defend himself in another trial, be paroled, start the Charpon Land Syndicate scheme in Florida, and be sent to prison for that too (promising 200% returns in 60 days). Throughout all of it, Rose stood by his side and declared her love for him to the world.

He faked suicide while out on bail but was arrested again.

He was deported to Italy.

Finally, he moved to Brazil, where he died – blind, sick and in hospital – in 1948. Rose, still in love and still corresponding with him, had divorced him by then because they could not be together. Love seems to have endured where money did not – which might be some consolation.

By the time Charles Ponzi died, his name had become synonymous with scams. Prohibition was ended, not as a success, but as the high-octane fuel that propelled the rise of organised crime. World War II put to bed any notion that war was a thing of the past. The Great Depression wiped out any notion that things would always go up (although that refrain seemed to need to repeating every now and then) – and scamsters continued to operate, often with similar stories and reversals in respectability.

Bernie Madoff would run a very similar scheme – although he would cost investors 53 times what Ponzi did. Given his boundless ability to bounce back, he might very nearly have been an inspiring entrepreneurial story – just as he very nearly invested. His skin graft charity might be seen as an outlier, or as a trend that was never quite allowed to mature, much like all his grand investment ideas. He was praised as a genius of profit and was clearly not a dumb man, and yet most, if not all, of his mistakes were either malicious or monumentally stupid. His customers were victims, and yet those who cashed out did very well for themselves and never had to repay a cent.

And perhaps, in that way, Charles Ponzi was less of a one-off conman and more a figurehead for an entire era – driven by irrational optimism, unfounded hope and dangerous exuberance – as yet unrestrained by the sobriety of 1929. Judging Charles harshly is fair. But his era and contemporaries were along for the ride, and with their safety in numbers, it seems expedient that everyone else gets a free pass.