Mr. Ponzi & His Scheme
by David on July 14th, 2009
The Universal Postal Union (UPU) was established in 1874. Today it is an agency of the United Nations. According to its website, the UPU sets the rules for international mail exchanges and makes recommendations to stimulate growth in mail volumes and to improve the quality of service for customers.” Its mission is “to develop social, cultural and commercial communication between people through the efficient operation of the postal service.” One of the services provided by the UPU is the International Reply Coupon (IRC).
“When one writes to a stranger and requests a reply, it is considered polite to enclose a self-addressed stamped envelope. This works well when both persons live in the same country; however, if they are from different countries, the enclosed postage stamp will not be valid. This technical problem was solved in 1906 when the Universal Postal Union, during its Congress in Rome, introduced the International Reply Coupon service. As the service began before the days of airmail, the earliest coupons could only be redeemed for a single-rate ordinary postage stamp to a foreign country.”
What a charming description of a beneficial, useful, and entirely unexceptionable resource. Who could imagine that IRCs would be at the heart of the one of the greatest financial scandals of the 20th Century?
Charles Ponzi was an Italian who immigrated to the United States in 1903 at the age of 21. He managed to spend five of the next 14 years in prisons in Canada and the US for various white-collar crimes. Ponzi discovered IRCs in 1919 when he received one from a Spanish company asking for a catalog he was hawking at the time. The catalog company failed, so Ponzi had no use for the IRC, but he had a Great Thought. IRCs had not caught up with the huge changes in foreign exchange rates following the end of World War I. If he could buy IRCs in Spain with Spanish pesetas, he could sell them in the US for a whole lot more dollars.
The total value of all the IRCs in existence in 1919 was less than $1 million, and, of course, they were all in very small denominations. But Ponzi thought it was worth a shot. He placed a few magazine ads claiming his postal coupon idea would double people’s money in a few months. Forty thousand suckers took the bait.
Between February and May 1920 Ponzi received more than enough money to set himself up for life back in Italy. “Investors” mailed in $420,000 in May alone, which is more than $4.5 million in today’s money. The original plan became untenable; Ponzi had $3.5 million more than the size of the IRC market. Needless to say, Ponzi did not buy any IRCs. Why bother with markets and real investing when so many people sent money merely because you placed na ad? Instead he simply paid early investors with funds received from later investors. It couldn’t last and it didn’t. By July, the newspapers were on his trail. Instead of making a break for it, Ponzi foolishly fought back. Maybe he believed his own hype. At any rate, the end came on August 12, 1920, when Ponzi was indicted for mail fraud. The whole thing lasted barely six months, but it was long enough for many foolish people to lose their homes, their life savings, and their innocence.
Charles Ponzi should have been no more than a footnote to the financial mania of the Roaring Twenties. He wasn’t the first swindler to fleece the unwary in a pyramid scheme—they had been around since 1720. And he certainly wasn’t the last. Not even Bernie Madoff’s 150-year sentence is enough to guarantee that. But for some reason—maybe because his rise and fall was so meteoric, or maybe just because his unusual name caught peoples’ fancy—pyramid investment scams have been known as Ponzi schemes ever since.
There is a moral to Charles Ponzi’s sad story. (And it is sad. He died penniless and blind in a Buenos Aires charity hospital in 1949 after several more prison stints.) The moral is, “If it sounds too good to be true, it is.” Now that sounds simple and obvious, but too many people translate this maxim as, “If it sounds too good to be true, it usually is,” or “it probably is,” or “it is, except in just this one special case.” Here’s the real translation: “If it sounds too good to be true, it is, absolutely is and always is and especially is this time.”
Tags: community development, economic predictors, green banking, Ponzi Scheme, ShoreBank, triple bottom line
