Ponzi's Scheme

by Mitchell Zuckoff

  Ponzi’s uncommon interest in the foreign stamps might have had something to do with a recent conversation he had had with Roberto de Masellis, manager of the foreign banking department at the Fidelity Trust Company, where Ponzi kept an account. Ponzi had met de Masellis when he’d strolled into the bank one day to exchange some dollars for Italian lire. De Masellis, who had been deputy Italian consul to the United States in Naples before immigrating to Boston, was a loquacious authority on foreign exchange. Unprompted, he launched into a tutorial about fluctuations in the values of European currencies after the Great War. Looking at Ponzi through pince-nez glasses, his banker’s paunch restrained by his suit coat, de Masellis explained that Italian lire, once worth five to the dollar, had been so devalued that lately it took eighteen or twenty to equal one dollar. The wild fluctuations created the possibility of hugely profitable speculation for anyone smart, daring, and lucky enough to figure out a way to buy one currency for a low price and sell it when its value increased.

  Rose, meanwhile, considered his persistent focus on the stamp books unwanted competition. “Charlie, for heaven’s sake drop it and talk to me,” Rose implored him. “What do you think I want to do after I’ve worked all day? Darn socks?”

  Sometimes Ponzi would smile and put down the book, but more often he would gently tease her: “Well, why don’t you get hold of something that’s worth spending your own time with?”

  “Oh well,” she would answer coyly, “if you don’t think my husband is important enough to spend some time with . . .” And they would laugh.

  To anyone who would listen, Rose would boast about her good fortune in finding him. “When a man is always a gentleman to his wife,” she would say, “behind closed doors as well as in front of them, he’s absolutely certain to be, at heart, a good man.” Ponzi, she was sure, was just such a man.

  Ponzi was equally delighted by his wife—“An American beauty. My Rose!” he called her. But the rest of his life left him unsatisfied. Ponzi wanted to drape Rose in finery, lavish her with servants, own a home big enough to get lost in. How could they start a family without financial security? “I want you to be able to throw away a hundred dollars,” he told Rose, though he must have known she could never be so extravagant. As they sat together at the small table in their kitchen, Ponzi outlined one intricate moneymaking scheme after another. Once she took a photograph of him sitting there, his feet up on the stove as though he already owned the world. He turned the camera on her and captured a more modest image, of Rose sitting demurely in her nightgown.

  When he spun his web of dollar dreams, Rose listened politely. Then she would remind him again that she did not need money to be happy. He went on dreaming. But it was not only about the money, Rose knew. Her husband wanted the world to take notice of him, to celebrate his ingenuity and be dazzled by his charm.

  Six months after they married, Ponzi got a chance to prove his financial acumen at Gnecco Brothers, the wholesale fruit business Rose’s father and uncle ran near Faneuil Hall. The company was failing, and John Gnecco turned to his bright new son-in-law for help. In September 1918, Ponzi quit J. R. Poole to work full-time on an effort to save Gnecco Brothers. He took the titles of president and treasurer and threw himself into the work, but his efforts proved fruitless. An end-of-the-year accounting showed that the company’s assets were worth about six thousand dollars and its liabilities were about eleven thousand. No one faulted Ponzi—the company had been in a hole before he’d gotten involved. But at the very end, Ponzi thought he could wrangle a dramatic way out. He appealed to the company’s lawyers to allow him to borrow the six thousand dollars in assets, promising he would use his knowledge of exporting to repay the money plus all the debt within a year. The lawyers said no, and on January 4, 1919, Gnecco Brothers went into bankruptcy.

  The same month Ponzi quit J. R. Poole to join Gnecco Brothers, his home life came under stress when Rose’s mother died. As much as she loved her husband, Rose’s one question when they’d married had been whether she could love him as much as she did her mother. Rose went deep into mourning. Ponzi was pure patience. He lavished her with kindness. He gave her gifts and offered to buy whatever she wanted, though she asked for nothing. She already had what she wanted. Her love for him deepened.

  After the collapse of Gnecco Brothers, Ponzi found himself without a job. He had no interest in going back to J. R. Poole or seeking similar work. He was “tired of working for expectations that didn’t pay either my rent or my grocery bills, tired of making money for my employers in general and none for myself.” He and Rose had saved enough to carry them for a while, and she had inherited some money from her mother, so Ponzi figured this was his chance to put his dreams into action.

  He rented a windowless, one-room office over the Puritan Trust Company on Court Street at the edge of Scollay Square, the heart of Boston’s commercial district and home to risqué entertainment at the Old Howard Theater. Ponzi was hungry for the former and ignored the latter. Since his marriage, Ponzi had become immune to all temptations except those with dollar signs. He sat in the office’s lone armchair for hours on end, hunched over the rolltop desk scribbling figures on pads of paper. As hard as he tried, his endless reams of calculations did not add up to profits. So Ponzi tried to become something of a commodities broker. His chief mistake was trying to do so with someone else’s commodities.

  On May 10, 1919, Ponzi was served with a warrant charging him with stealing 5,387 pounds of cheese valued at forty-five cents a pound. Two days later, he pleaded innocent in Boston Municipal Court. Then he received a rare stroke of good luck. The clerk who wrote out the warrant misspelled his surname, substituting a u for the n, listing the defendant as “Charles Pouzi.” The mistake frustrated efforts by authorities to follow up on the purloined cheese, and the case was continued several times before finally being dismissed for lack of prosecution. Ponzi never told his side of the story—he surely would have claimed it was an innocent misunderstanding.

  Best of all, the collapse of the case meant it would not be revealed that he had already served two prison terms, a circumstance that might have triggered deportation proceedings. He had never moved to become an American citizen, knowing that his felony convictions might make him an undesirable alien. Also fortunate for Ponzi, the misspelling would make the cheese incident almost undetectable in the future if anyone tried to check into his background.

  That same month, the Court Street office building changed hands, coming under ownership of the Tremont Trust Company, known throughout the city as “Simon Swig’s bank.” Swig was a leader of Boston’s Jewish community who treated Tremont Trust as a personal piggy bank. Swig fancied himself a political player, doing business with kingmaker and blackmailer Dan Coakley. To Ponzi, though, Swig was simply a landlord who wanted him out; Swig planned to renovate the building and charge higher rents.

  Ponzi moved around the corner to a couple of dingy rooms on the fifth floor of 27 School Street, the Niles Building. It was unfurnished, so he went to Daniels & Wilson Furniture Company in the city’s increasingly Italian North End. Ponzi picked out $350 worth of used desks, chairs, a typewriter, filing cabinets, and a small rotary printing press called a Multigraph. He could not afford the full cost, so he struck a deal with the store’s owner, Joseph Daniels, a deceitful man who had anglicized his name from Giuseppe Danieli. Under their agreement, Ponzi would pay fifty dollars down and five dollars a month. Once the furnishings were in place, Ponzi had an optimistic sign painted on his office door: CHARLES PONZI, EXPORT & IMPORT. The world took no notice.

  Ponzi’s original plan was to work on commission as an import-export agent, acting as a broker for domestic and international companies hoping to trade across borders. He thought he would be especially attractive to companies too small to hire such agents outright. Unfortunately, he had no contacts of his own at companies that might need his services. To attract business, Ponzi thought about printing circulars and sending blanket mailings to potential cl
ients. But that would cost him a nickel per circular for domestic companies and eight cents each for international firms. Ponzi realized he would be wiped out by mailing fees before he collected his first commission. Instead, he decided to advertise in foreign trade magazines, but again he was stymied by the cost. That led to a new plan: He would start his own foreign trade publication, one whose huge circulation would allow him to charge lower advertising rates for budding entrepreneurs like him. Inspired, he had a new sign painted on his door—THE BOSTONIAN ADVERTISING & PUBLISHING COMPANY—and set about launching a publication he called the Trader’s Guide.

  Ponzi devised an elaborate, impossibly ambitious business plan that envisioned his guide as a permanent reference book. He would distribute it in loose-leaf binders, to allow additional pages to be added as years passed and new editions were printed. To increase the guide’s reach, he intended to print it in English, French, Italian, German, Spanish, and Portuguese. The most audacious aspect of his plan was his imagined method for doubling circulation on a regular basis. First, he would mail 100,000 free copies of the Trader’s Guide to companies whose names he found in directories from the U.S. Bureau of Foreign and Domestic Commerce and the U.S. Consular Service. Six months later, he would mail those same companies an updated edition of the guide, while also sending the original mailing and the update to another 100,000 companies, also for free. Ponzi thought he could do this indefinitely, or at least until his mailing lists were exhausted. By then, he was sure, he would be rich.

  The initial mailing, he thought, would cost him thirty-five cents a copy, or $35,000. To meet that cost, he would lard a two-hundred-page guide with 150 pages of advertising. The ads would cost $500 a page, with a $5,000 premium for the cover page, for a total imagined advertising income of $80,000. After expenses, he figured on a profit of at least $15,000 in the first six months. He expected his profits would double as many times as he doubled circulation.

  Certain of success, he took larger quarters on the building’s second floor, Room 227, and hired two stenographers and a messenger boy. In his excitement, he began writing letters to acquaintances abroad, making wonderful claims for his soon-to-be-published guide and seeking to interest them in buying or selling ads and writing articles.

  Beyond the mountainous logistical challenges of selling so much advertising and producing fifty pages of editorial content of interest to exporters and importers, Ponzi was fast exhausting his limited money supply. He tried to interest investors in purchasing a half interest in the guide for five thousand dollars—a steal if it were possible to yield even a fraction of his anticipated profits—but found no takers. By summer 1919 he was running low on cash and options. Certain he was on the verge of greatness, Ponzi walked around the corner from his office to the Washington Street branch of the Hanover Trust Company, where for several months he had kept a small checking account that frequently approached a zero balance.

  Adopting the nonchalant air of a man certain to be approved for any loan he sought, Ponzi walked smartly through the bank’s heavy front door and asked to borrow two thousand dollars. He tried to say the sum “with the same inflection with which I would have asked change for a nickel.” But his faux confidence could not overcome his real lack of collateral. The application never made it to the loan committee. It was dealt with immediately by the bank’s president, Henry Chmielinski.

  “Sorry,” he told Ponzi, “but I cannot approve the loan. While it is our policy to accommodate our depositors whenever we can, your account is more of a bother than a benefit to us. Good day, sir.”

  Ponzi seethed as he watched Chmielinski turn on his heel and return to his private office. Bile rose in his throat—“I could have spat poison,” he said afterward—as he made the short walk back to the Niles Building. Anger turned to despair as he opened the door to his office. With a heavy heart, he laid off his small staff and pronounced the Trader’s Guide dead before its first edition.

  He swallowed his pride and placed a small newspaper ad offering office space to sublet. His new tenants would help cover the rent, but the added names painted on the door below his own were blows to his dignity. “Another house of cards had collapsed,” he said afterward. But he remained undaunted: “I was getting accustomed to chasing rainbows. As one would fade away, I would pursue another.”

  Sitting alone in the office one day in August 1919, Ponzi began idly leafing through his mail. He opened a letter from Spain inquiring about the Trader’s Guide. Unaware that the guide had been permanently mothballed, the letter writer asked to be sent a copy. To pay the postage, the Spaniard had pinned to the corner of his letter a strange piece of paper. It was roughly the size of a dollar bill but nearly square, with intricate watermarks and a fanciful drawing of a woman dressed in flowing robes delivering a piece of mail from one part of the globe to another.

  Ponzi held the note in his soft hands. In a spark of inspiration he saw a glittering future spread out before him. Everything up to this point in his life, from major events to chance encounters, from his never-quit persistence to his unquenched thirst for wealth, had led to this moment. It had its roots in his upbringing and his spendthrift youth, his dashed expectations of gold in American streets, and his jobs in banking and exporting. It could be traced to his stretches in prison and the men he’d met there, his acts of generosity, his return to Boston, his passion for stamp collecting, his memories of his father the postman, his chance meeting with foreign exchange expert Roberto de Masellis. All of this made it possible for him to see what no one else could, to dream what no one else dared.

  PART TWO

  A Ponzi note, issued to Boston Post reporter Principio Santosuosso.

  Albin O. Kuhn Library & Gallery, University of Maryland, Baltimore County

  CHAPTER SEVEN

  “THE ALMIGHTY DOLLAR”

  The paper in Ponzi’s hand was an International Reply Coupon. A more mundane and obscure financial instrument is hard to imagine.

  In April 1906, representatives of the United States and sixty-two other countries gathered in Rome with the goal of making it easier to send mail across national borders. All were members of one of the world’s first international governmental organizations: the Universal Postal Union, founded in 1874 to reduce the maze of postal regulations that made mailing a letter overseas a high-risk, high-cost proposition. A key item on the Rome agenda was to create a way for a person in one country to essentially send a stamped, self-addressed envelope to someone in another.

  The lack of such a mechanism posed a problem to anyone with an overseas family member or business associate. Consider, for instance, a lawyer in New York who wanted a Paris accountant to send him an important document. The lawyer would reasonably be expected to enclose with his request an envelope with his return address and the necessary postage. But at the turn of the twentieth century, there was no way to do that. The New York lawyer’s stamps would be United States issue. If the French accountant tried to use them, he would be turned away by any self-respecting, law-abiding Parisian postal clerk. The accountant would have to pay the postage himself, in French postage stamps, to send the document. Of course, it was possible that the American lawyer could enclose a few dollars to cover the return postage, but then the French accountant would need to exchange the dollars for francs before buying the stamps—hardly an efficient system. The same problem arose when young immigrants tried to correspond with parents or grandparents in the old country. The young émigrés wanted to hear back from their faraway family members, often as soon as possible, and so were happy to include postage for a return letter.

  As a solution, the Rome treaty writers created a system of international postal currency, paper that held a fixed value from one country to the next and could be redeemed for stamps in any post office of a country belonging to the Universal Postal Union. They called the currency they created International Reply Coupons. But they were not finished. The treaty writers wanted to make sure no one tried to profit from the purchase and
redemption of their coupons. They created regulations that set the rate of exchange between countries’ currency and postal reply coupons, so coupons purchased for one American dollar in New York yielded the equivalent of one dollar’s worth of French stamps in Paris, minus a small processing fee.

  All that was fine in 1906, but the Rome treaty negotiators did not foresee a world war a decade later. The Great War left some countries’ currency deeply devalued. Governments were too busy dealing with massive human and economic losses to worry about recalibrating postal exchange regulations. The result was an opportunity to profit. The Spaniard who’d sent Ponzi the coupon considered it nothing more than an act of proper business etiquette. He was, after all, asking to be sent a copy of the Trader’s Guide. But in a flash of insight, some might even say genius, Ponzi saw something more, a global currency whose value fluctuated wildly depending on where it was used. He took out a pencil and a pad of paper and began calculating the possibilities.

  The coupon had cost the Spaniard thirty centavos, or roughly six cents. After a penny processing fee, it could be exchanged in the United States for a stamp worth five cents. Ponzi knew that the Spanish monetary unit, the peseta, had been devalued after the war, so he began figuring how many pesetas he could buy for a dollar. Using exchange rates published in Boston newspapers, Ponzi concluded that a dollar was worth six and two-thirds pesetas. Because there were one hundred centavos to a peseta, Ponzi calculated that a dollar was worth 666 centavos. If each International Reply Coupon cost thirty centavos, a dollar could buy twenty-two of the coupons in Spain. If Ponzi brought them to the United States, those twenty-two coupons would be worth five cents each, or a total of a dollar and ten cents. By redeeming them in Boston rather than Barcelona, Ponzi would earn a profit before expenses of ten cents, or 10 percent, on each dollar’s worth of coupons he bought in Spain and redeemed in the United States.