A certain type of fraud that dates back centuries, known as a Ponzi scheme, derived its name from a deception involving stamps in the early 20th century.
According to the online Merriam-Webster Dictionary, a Ponzi scheme is “an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.” Investors are led to believe that their investment is yielding unrealistically high returns. Despite the 20th century adage, “If it sounds too good to be true, it probably is,” billions of dollars have been invested in Ponzi schemes by gullible investors in the last ten years.
Charles Ponzi, born in Italy in 1882, was a con artist. Plying his fraudulent schemes in Canada and the U.S. in the 1920s, Ponzi convinced investors that he could buy a sufficient number of postal reply coupons in other countries and then sell them at face value, or a higher price, in North America.
A postal reply coupon, based on an international agreement, when purchased in the country of origin, can be redeemed in another country for return postage, regardless of any cost discrepancy. Ponzi’s scheme involved purchasing the coupons in a country where international postage is less costly than in the receiving country, then cashing in the coupons for profit. At the time, the cost of an international stamp in the U.S. was about ten times higher than in Spain or his native Italy.
This plan, in and of itself, is not illegal. And Ponzi was clever and persuasive, as are many con artists. Early investors in the Ponzi scheme received huge returns on their money, 40 to 50 percent profit. Word quickly spread among investors in Boston, and thousands rushed in to invest and make their fortune. Funds from later investors were used to pay off earlier investors.
As crowds lined up outside Ponzi’s office, U.S. Post Office officials became suspicious and raised the conversion rates on International Reply Coupons. At the same time, those officials made it clear that selling the reply coupons could never have generated the kinds of profits claimed by Ponzi. And they were correct. Not only was such a plan impossible, Ponzi did not even try to make it work. He made his profits on a giant pyramid scheme. U.S. Postal Service regulations today also would prevent this type of swindle.
By the time Ponzi’s scheme started to unravel, he had teams of investment agents who continued to collect money from tens of thousands of unwitting buyers, with offices from Maine to New Jersey. He owned a mansion in Lexington, filled with luxury items, as well as cars, jewelry, and even a limousine, in addition to multiple properties and substantial bank stock.
When The Boston Post revealed that he had served prison time in both Canada and the U.S. for previous swindles, the cards started to tumble down. Banks crashed, investors lost their shirts, and the Boston Post won a Pulitzer Prize for its reporting. Ponzi was sentenced to prison for mail fraud.
Ponzi schemes are often associated with Bernie Madoff, another highly successful fraudster who sold mathematically impossible investments. In fact, Ponzi schemes have been common throughout history, and many recent news stories would indicate that they are currently on the rise.
Charles Ponzi with his Ponzi Scheme was a standout among snake oil salesmen, using the U.S. Postal Service as the carrot to woo the unwary investor.
Sources
Bernard Madoff. Wikipedia
The Boston Post. Wikipedia
Charles Ponzi. Wikipedia.
If it sounds too good to be true, it probably is: Oxford Dictionary of Phrase and Fable. Oxford University Press, 2006.
In Ponzi We Trust by Mary Darby. Smithsonian Magazine, December 1998
In the Decade Since Madoff, Ponzi Schemers Try New Tactics by Angela Wang. The New York Times, Sept. 22, 2019
International Reply Coupon. Wikipedia.
Ponzi Schemes Didn’t End with Madoff by Paul Sullivan. The New York Times Business, Feb. 6, 2021 (print only)
Ponzi schemes hit highest level in a decade by Greg Lacurci, CNBC, Feb. 25, 2020.
