Ponzi: The Boston Swindler
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paper, United States History, DePaul University, put almost twenty hours into, most I write in four-five hours, very proud of this piece. Throughout history, the swindler has financially plagued society. Whether it is the get rich quick scheme or the carnival worker's impossible challenge, people have been cheated out of uncountable sums of money. In the 1920's a man named Victor Ludsig, posing as a French official, sold the Eiffel Tower to a gullible scrap ironworker for $50,000. Even today con artists are thriving using the Internet to borrow from Peter to pay Paul. This is a scheme made famous by a crook so successful that his name now graces the age-old fraud, the Ponzi scheme. Webster's Dictionary defines Ponzi Scheme as Any investment program that offers impossibly high returns and pays these returns to early investors out of the capital contributed by later investors. Named for Carlo Ponzi who promoted such a scheme in the 1920s based on a theoretical arbitrage in international postal reply coupons.
"Fifty percent profit in forty-five days!" was the claim of Charles Ponzi. Ponzi was a purported financial wizard. In the summer of 1920, he ran an "investment company" in Boston. He claimed to reap great profits by trading postal reply coupons. Nonetheless, the investment scheme was a fraud. Ponzi was using investors' money to pay off earlier investors, while keeping some for himself. In the end, he had collected $9,500,000 from 10,000 investors. Charles Ponzi was born in Italy in 1882
Born to a wealthy family, Ponzi put off work as long as possible and attended college at the University of Rome. Knowing he was avoiding the inevitable and seeing no appeal in the Italian business world, he immigrated to the United States. In 1903, upon entering the United States at the age of 21, Ponzi proceeded into Canada. In 1909, he was convicted of forgery in events surrounding the collapse of the Montreal banking firm of Zrossi & Co., of which he was a member. As punishment, he was sentenced to a three-year term in the St.
Vincent De Paul Penitentiary in Montreal. Released from Canadian Prison after only twenty months for good behavior, Ponzi entered the United States again on July 30, 1910. Within ten days of his release, he violated immigration laws by illegally bringing five Italians over the border from Canada. For this offense, he served two years in Atlanta, Georgia. After his release from the Atlanta prison he made his way to Boston and toiled in relative obscurity until he developed a postal reply coupon scheme and formed the Securities Exchange Company.
Since colonization, Boston had been infested with so called entrepreneurs seeking to interest small investors by promising big profits. High wages in industrial centers, the climbing cost of living, and below-par quotations on Liberty Bonds, helped make New England a fertile field for those who promised quick and big returns. Many agents found their best argument was that while old banking houses made small returns to their depositors, the banks themselves were able to make enormous profits by frequently turning over their depositors money. Some agents proposed that small investors share in these big profits by permitting their savings to be invested for them. Ponzi adopted from contemporaries the notion of sharing enormous profits with investors, adding his own twist: trade in postal reply coupons. This idea, the keystone of his swindle, was made more plausible with tales he spun about how he received the brilliant inspiration.
On one occasion he said that in August of 1919, when he was considering issuing an export magazine: I wrote a man in Spain regarding the proposed magazine and in reply received an international exchange coupon which I was to exchange for American postage stamps with which to send a copy of the publication. The coupon in Spain cost the equivalent of about one-cent in American money, I got six cents in stamps for the coupon here. Then I investigated the rates of exchange in other countries. I tried it in a small way first. It worked.
The first month $1,000 became $15,000. I began letting in my friends. First, I accepted deposits on my note, payable in ninety days, for $150 for each $100 received. Though promised in ninety days I have been paying in forty-five days. Ponzi opened his postal coupon business in December of 1919.
He filed a certificate with the city clerk citing himself as sole manager of "The Securities Exchange Company". In the beginning of the enterprise, Ponzi described himself as "everything from President to office boy". On the second day of operation, he explained his business to a visitor from the Chamber of Commerce. The man believed Ponzi's enterprise could succeed. A short time later the postal inspector stopped by and expressed doubts about the legality of redeeming millions of coupons.
Ponzi claimed that having the coupons redeemed overseas, outside of the federal government's jurisdiction solved this problem. In May 1906, the United States and over 60 other countries assembled in Rome, and revised the Universal Postal Convention of 1897. The UPC provided for the administration of postal services among signatory countries. Ponzi seized upon the mechanism provided by Article 11(2) of the revised Convention. Article 11(2) is as follows: Reply coupons can be exchanged between the countries of which the Administrations have agreed to participate in such exchange.
The minimum selling price of a reply coupon is 28 centimes, or the equivalent of this sum in the money of the country which sells it. This coupon is exchangeable in all countries parties to the arrangement for a postage stamp of 25 centimes or the equivalent of that sum in the money of the country where the exchange is requested. The Detailed Regulations contemplated in Article 20 of the Convention determine the conditions of this exchange, and in particular the intervention of the International Bureau in manufacturing, supplying, and accounting for the coupons. This provision, with a built-in 3-centime loss on the sale of each coupon (a centime being a hundredth of a franc). Clearly, this did not makeway for profitable arbitrage through these coupons.
The purpose of the reply coupon was simply to facilitate the prepayment of return postage when sending mail to another country. The recipient of a reply coupon would exchange the coupon for the appropriate stamp in the recipient's country, such stamp not being available in the sender's country. The value of the coupon was intended to be constant throughout all countries forming the Postal Union, and regulations defined the rate of exchange between each country's currency and postal reply coupons. Because of economic dislocations caused by World War I, however, some currencies became devalued relative to others, and the postal regulations had not been updated to reflect this. For instance, Ponzi claimed "The same amount of American money will buy more value in coupons in Bulgaria in than in the United States." There did seem to be potential for profit here, and although the aggregate volume of coupon redemption did not indicate abnormal trading activity, postal authorities took steps to prevent speculation. On July 2, 1920, the Post Office Department issued regulations limiting redemption of coupons to ten at one time.
The Post Office Department announced new conversion rates on July 28, to be effective August 15. Prior to this, the rates had not been changed since before the war. With characteristic government candor, postal officials denied that the changes were the result of concerns about speculation in reply coupons. Acting Third Assistant Postmaster General Barrows noted foreign countries had also taken steps to prevent speculation. Regardless, these measures did not hamper Ponzi's operations, as he was not trading in coupons anyway.
The flaw in a coupon trading scheme as Ponzi proposed was that while an individual stamp transaction may indeed yield a 400 percent profit, the amount of that profit would be minuscule in absolute terms. In order to earn the millions of dollars, astronomical quantities of coupons would have to be handled. One can imagine hordes of Ponzi agents, pushing wheelbarrows full of coupons to post offices, unloading them with shovels or pitchforks. Intuitively, we can see that the transaction costs of purchasing, transporting and redeeming the coupons would exceed any profits from sale, and it is conceivable that Ponzi actually made some trades early on and discovered this fact. Ponzi recognized that the problem of handling large volumes of coupons was a matter of concern to investors and authorities, incorporating this into the mystique of his scheme: "My secret is 'How do I cash the coupons?' That is what I do not tell." Ponzi started his business essentially penniless, and in December of 1920, he borrowed two hundred dollars from Joseph Daniels, a furniture dealer. Ponzi used most of the money to purchase furniture from Mr. Daniels, keeping the rest for spending money. Ponzi paid the note at maturity.
Although Ponzi knew the idea would never work, through his charisma and charm people began to invest in his postal reply coupon scheme. He happily accepted money from anyone willing. He even accepted eight hundred dollars from his wife Rose. By March 1920, nearly one hundred people had invested almost $30,000. Nonetheless, Ponzi owed these investors nearly $45,000.
Fortunately for Ponzi, when the notes came due, most depositors kept the money invested to accrue even more interest. At first, most of Ponzi's clients were Italian immigrants, but as the good word spread, many others rapidly joined the growing crowds. Policemen, priests, working class mothers with children, and fathers who mortgaged their homes all invested with Ponzi. Shortly thereafter, word spread throughout New England and Ponzi hired agents to operate and accept money throughout the central East Coast. The smooth and selfish Ponzi had ready answers for every question or doubt. The effervescent Ponzi was able to convince anyone with his sappy chatter. He had not studied finance, yet he had a natural...
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