Ponzi's Scheme

by Mitchell Zuckoff

  Ponzi knew from his conversation with currency expert Roberto de Masellis at Fidelity Trust Company that few world currencies had suffered as much as the Italian lira. Once valued at five to the dollar, the lira had fallen after the war to twenty to a dollar. With the lower value, Ponzi calculated, a dollar could purchase sixty-six International Reply Coupons in Italy—three times as many as in Spain. Ponzi could scarcely believe it. The same dollar that could buy twenty coupons for five cents each in the United States could buy more than three times as many of the same coupons in Italy. Sixty-six coupons purchased in Rome for a dollar would be worth $3.30 in Boston. Ponzi’s mind reeled at the thought—he was looking at profits of $2.30 on every dollar spent, or 230 percent, before expenses. Other countries might have even more devalued currencies, and the profits would be even more astronomical. One example was Austria. After the war, the Austrian krone had fallen from the equivalent of twenty cents to less than a penny. A thousand dollars would buy 140,000 kronen, which theoretically could purchase more than a half million International Reply Coupons. If redeemed in the United States, Ponzi’s initial thousand-dollar investment would yield stamps worth more than twenty-five thousand dollars.

  The hitch, Ponzi understood, would be getting cash for the stamps he bought with the coupons. One possibility would be to sell the stamps at a slight discount to businesses that used large amounts of postage, giving them a bargain on a necessary item while still maintaining huge profits for Ponzi. Another hurdle would be figuring out how to buy and transport the enormous numbers of coupons necessary to turn a significant profit. But those crucial details would wait for another day.

  Sitting at his desk, Ponzi could hardly contain himself. The whole calculation had taken him less than five minutes, but he was certain of the conclusion. If he bought coupons in bulk in countries with weak currencies, converted them into stamps, and cashed them in the United States or other countries with strong currencies, he would soon be richer than Rockefeller. All he needed was a small pile of money to get him started with his first stack of coupons. But that was no small hurdle. As the summer of 1919 turned to autumn, Ponzi was deep in the hole.

  His first thought was to borrow the money in large sums from a few sources, but his options were limited. Banks were out. He was struggling to make payments on fifteen hundred dollars in loans from Fidelity Trust, and his rejection at the Hanover Trust when he’d sought seed money for the Trader’s Guide gave him a good idea about how Boston’s banks would receive his new idea. Also, he feared that if he thoroughly explained his plan to bankers, they might steal it and leave him cold. He would need private investors, but first he needed proof that his epiphany was more than a pipe dream.

  In the weeks after his brainstorm, Ponzi mailed a dollar to each of three acquaintances, one in Spain, one in Italy, and one in France, with instructions to exchange the dollars for the local currency, go to a post office, buy as many reply coupons as possible, and then send them to him in Boston. A few weeks later Ponzi had his answer: His calculations were correct. The Spanish and French deals were a wash, a small profit from Spain and a small loss from France, but the Italian effort was a big moneymaker. In the meantime, while waiting for his European correspondents, Ponzi went to a Boston post office and confirmed that coupons could be exchanged there for stamps. He also began collecting newspaper columns with quotations on foreign exchange rates, to demonstrate the fluctuations to potential investors.

  The more Ponzi thought about his idea, the more he liked it. He would effectively be operating under the umbrella of one of the most trusted institutions in the world: the postal service. Anyone with money and a mailbox was a potential customer. Even better, he reasoned, the supply of coupons was potentially limitless, like postage stamps. No matter how many a person bought, more would always be available. If they ran out, the issuer would print more until the demand was met. “They could not limit the number of coupons I wanted either to buy or redeem,” Ponzi concluded. “In other words, the burden of living up to the terms of the contract was entirely on the government’s side and not on mine. All I could be expected to do was to tender cash in payment of coupons. Coupons in exchange for stamps. But what I did with the stamps afterwards was nobody else’s business but my own.”

  Best of all, Ponzi was certain it was legal. The coupons were, in effect, legal tender used to buy stamps anywhere in the developed world. If a coupon bought more stamps in Romania than Rhode Island, that was not his fault. He was merely the first person smart enough to figure out how to take advantage of it. On the other hand, he acknowledged, some people might say exploiting exchange rates by trafficking in postal coupons might not be entirely ethical. But his experiences during the sixteen years since he’d arrived in America made that a secondary consideration: “Environment had made me rather callous on the subject of ethics. . . . Then, as now, nobody gave a rap for ethics. The almighty dollar was the only goal. And its possession placed a person beyond criticism for any breach of ethics incidental to the acquisition of it.”

  In the weeks after devising his plan, Ponzi appealed to anyone he thought might have significant amounts of available cash. But everyone he knew in that position declined his offer, at least in part because Ponzi refused to provide many details about his idea, lest would-be investors try it themselves. Also working against him was his lack of a track record to justify being entrusted with serious sums. He was close enough to touch success, but with one rejection after another he began worrying that once again wealth would escape his grasp.

  With his debts rising along with his frustration, on December 1, 1919, Ponzi swallowed his pride and walked across town to Northampton Street, in Boston’s South End. There he found a little storefront with a sign displaying a cluster of three gilded balls—the universal symbol for a pawnshop. Ponzi stepped inside Uncle Ned’s Loan Company and fished four items from his pocket: three diamond rings that belonged to Rose and his own gold, open-faced pocket watch. If ever Ponzi were looking for confirmation of Rose’s devotion, he needed to look no further than her willingness to let him pawn her rings.

  Ponzi placed the valuables on the counter and told the pawnbroker, a Russian immigrant named Max Rosenberg, that he was hocking them to start a business. He outlined his coupon idea in the hope of enticing Rosenberg to invest. Rosenberg listened to his pitch, but pawnbrokers as a rule do not invest with men who hock their family jewels. Rosenberg appraised Ponzi’s belongings and handed him five hundred dollars for the rings and twenty for the watch. Ponzi stuffed the cash into his wallet and left.

  His debts approached three thousand dollars and, as Ponzi liked to say, his only assets were his hopes. So the money from Uncle Ned’s did not last long. Just over a week later, Ponzi’s wallet was empty again when furniture dealer Joseph Daniels walked through the narrow, glass-paneled door of Room 227 in the Niles Building. Ponzi was behind on his five-dollars-a-month payments, and Daniels was threatening to haul the desks and chairs back to his store in the North End. Seeing the angry look on Daniels’s face, Ponzi was glad he and Daniels were the same height.

  “For the love of Mike, sit down,” Ponzi told him. “That chair is still yours, and [sitting in it] won’t place you under any obligations.”

  Ponzi had no money for Daniels—“I did not have it, and that settled it, and he couldn’t draw blood out of a turnip,” Ponzi explained later. But he hated the idea of Daniels seizing the furniture and leaving him with nowhere to sit but the floor or the windowsill. Ponzi began talking as fast as he could think. He came up with a deal that would delay the day of reckoning for at least two months.

  Ponzi offered to give Daniels a promissory note for two hundred dollars. Daniels could cash it, using the furniture dealer’s own credit at the First State Bank. Daniels scoffed—Ponzi was already in debt to him for the furniture. Why should he add two hundred dollars in cash? Anticipating that reaction, Ponzi parried with an appeal to Daniels’s greed. Ponzi told Daniels to keep half of the cash for himself�
��a hundred dollars—as a payment toward Ponzi’s furniture. Daniels would pay the remaining hundred dollars to Ponzi in twenty-dollar increments, and in sixty days Ponzi would pay back the full two hundred dollars, plus interest. If Ponzi defaulted, Daniels would be out only a small sum of money, and the bank where he cashed the promissory note would help him pursue Ponzi to make good.

  The deal remained a risk for Daniels—there was no guarantee Ponzi would be in any better shape two months hence, and even with the bank on Daniels’s side Ponzi might stiff him. On the other hand, Daniels would be giving Ponzi only a relatively small loan, and the alternative of repossessing the furniture held no upside for him.

  Still, Daniels was skeptical. He wanted to know how Ponzi intended to pay the note at maturity. Ponzi expected that question, so he outlined his plan to build a financial empire based on International Reply Coupons. He spoke of the meeting in Rome, showed Daniels a coupon, and read a passage from page 37 of the United States Official Postal Guide that described how the coupons could be redeemed for stamps in any country that was a member of the Universal Postal Union. Feeling the fish nibbling on the bait, Ponzi let out more line, expounding on foreign exchange rates and fluctuating currencies. He went in for the kill by describing the crux of his business plan: to pay investors 50 percent interest on any amount invested within ninety days, or forty-five days if everything went as smoothly as anticipated.

  Daniels listened to the rapid-fire delivery and found himself swept up in Ponzi’s excitement. Daniels accepted Ponzi’s note and gave him a check for twenty dollars, the first installment of Ponzi’s half of the two-hundred-dollar loan. Emboldened, Ponzi pressed his luck by asking if Daniels wanted to invest in the coupon business. Daniels declined—first he wanted to drop by the post office down the street from his store to inquire about postal coupons. Still, for Ponzi it remained a pivotal moment.

  Until then, everyone to whom Ponzi had explained the plan had brushed him off—it was impossible, impractical, and anyway, who was this pint-sized immigrant to imagine himself a financial giant? The only person who had believed Ponzi was Rose, and even she had trouble understanding the coupons-for-stamps-for-cash machinations. Although she did not tell her husband, Rose suspected it would turn out to be another of his short-lived inspirations, soon to be replaced by another. But now, by winning Daniels’s meager support, Ponzi sensed the possibility of success. And after so many years of failure, he was intoxicated by it. He had convinced a hard-nosed, if not terribly bright businessman that he was onto something. With some polish, he was certain his sales pitch would draw investors in droves.

  Just as important, the experience made Ponzi realize that he should launch his company by seeking small sums from large numbers of people. The few big-money types he knew had shunned him, but almost anyone could spare ten dollars, or fifty, or maybe even a hundred, on the promise of a 50 percent gain. Even if they did not grasp the details of how he would do it, or even if they had doubts about him, the possibility of huge returns in such a short time would be too tempting to pass up. If they gambled a small amount and lost, oh well, no great harm. But if the gamble paid off, they might invest more, believing they were on the verge of fulfilling the financial promise of the American Dream: great riches, easily obtained, swiftly delivered.

  Put another way, Ponzi had chanced upon what he was certain was a legitimate, foolproof formula to Get Rich Quick.

  In contrast to con artists who use stealth and subterfuge to target individual marks for big scores, Get Rich Quick promoters generally take a wholesale approach to generating wealth. When critical masses of people have ostensibly prospered, their friends and neighbors come running, setting off a financial frenzy. By the time Ponzi appeared on the scene, the people of Boston and New England had had plenty of experience with Get Rich Quick operators. Unlike Ponzi, however, most promoters paid no attention to the boundaries of legality, focusing only on the greed and gullibility of their audience.

  Fast-talking salesmen had promised fortunes from silver fox–fur farming and from engines that supposedly used water for fuel. Some had claimed divine intervention or inspiration. Many had told tales based on high finance—offering stocks, bonds, insurance, and complex loan deals with fraudulent underpinnings. Some had combined elements of several approaches to turn themselves into money magnets. What they’d all had in common was a three-step playbook: splash, cash, and dash. That is, make a big impression, grab as much money as possible, and disappear before being exposed.

  In the late 1890s, a handsome Baptist minister named Prescott Ford Jernegan, the scion of a well-known whaling family from Martha’s Vineyard, declared that a “heavenly vision” had delivered unto him the secret of extracting gold from seawater. He shared this revelation with several prosperous members of his former congregation in Middletown, Connecticut, who agreed to provide financing to test his discovery. Among them was Arthur B. Ryan, a former city alderman and partner in a successful jewelry company. Less publicly, Jernegan enlisted his boyhood friend, one Charles E. Fisher, a burly confidence man and professional diver from Cape Cod. Minister Jernegan once displayed his true nature in a letter to Fisher: “Money and lust,” he wrote, “have been the two most vexing problems in my life.”

  Jernegan needed proof of his “discovery” to attract big money, so one winter night he sent Ryan to a deserted resort on Narragansett Bay in Rhode Island. Swathed in fur coats to fight the chill, Ryan and an associate went out to a pier, cut a hole through the ice, and dropped into the water a box with iron bars and a secret catalyst that Jernegan called an “accumulator.” Jernegan claimed that a current of electricity, carried by platinum wires attached to the accumulator, would attract noticeable amounts of gold within twenty-four hours. While the experimenters waited, Jernegan’s accomplice, Fisher, took a back route to the resort on horseback. He slipped into a diving suit and followed the wires through the icy water to the box. He dropped nuggets of gold into the accumulator box and vanished without being seen. When the box was pulled to the surface the next day, Ryan tested the nuggets with tools of the jewelry trade. The gold was real. Ryan believed it had truly been sucked from seawater. He declared the test a rousing success.

  Word spread quickly, and soon Jernegan and Fisher began planning the Electrolytic Marine Salts Company in the remote fishing village of North Lubec, Maine. Jernegan said he chose the site because it boasted a daily twenty-foot rise and fall of the tides, which would send an enormous volume of seawater through the huge accumulating equipment he intended to build. He incorporated the company in November 1897 with $10 million worth of stock for sale at a dollar per share. Gold similar to the nuggets pulled from Narragansett Bay were displayed in Boston and elsewhere. Already primed by recent news of the Alaska Gold Rush, investors threw money at the idea. Newspapers throughout the region could barely contain themselves: “The amount of gold in all the oceans is estimated at seventy billion tons, forty-eight trillion dollars,” the Hartford Courant breathlessly announced.

  After several thousand investors bought stock, Fisher took the familiar path of fast-money magicians. In July 1898, he disappeared with about $100,000 in cash. Jernegan followed soon after, with perhaps twice as much. When a newspaper reporter caught up to him, Jernegan claimed he had left town in search of Fisher, who had stolen his secret formula. Fisher was never found, but Jernegan was struck by an apparent attack of conscience. Two years later, he returned a large amount of money to his dupes—as much as $175,000—and then lived most of the rest of his days in the Philippines.

  The gold-from-seawater trick fell into the category of Get Rich Quick stock schemes based on miracles of science, a particularly popular approach for scammers at a time of medical breakthroughs and mechanical sensations like flying machines and Marconi’s wireless. Another form of Get Rich Quick stock scheme could be called the exotic-products variety. Several years after Jernegan’s scheme, a smooth talker named Ferdinand Borges came to Boston with just such an idea.

 
For several months Borges lived in obscurity, taking rooms in lodging houses and eating meals at the counters of low-cost lunchrooms. He knew no one would invest with a man living hand to mouth, so he pooled his resources and moved into a suite of offices that he filled with mahogany furniture, oil paintings, and expensive rugs. It was an elaborate stage on which Borges offered to sell bonds of a corporation he called the Consolidated Ubero Plantation Company. The bonds, he said, would allow investors to share in the enormous profits expected from “the four-hundred-thousand rubber trees, the million pineapple trees, and the million coffee trees now under cultivation.”

  More than $2 million flowed into the company’s coffers, much of it from poor people who appreciated Borges’s offer to sell them bonds on the installment plan, investing as little as two dollars a month on the promise that when their account reached five hundred dollars they would be presented with a bond. Unlike Jernegan’s gold ruse, Borges’s company actually owned some plantation land. But that was never the point. Borges spent only a fraction of the money on the business. He kept the rest for himself, a few close associates, and a cadre of agents hired to sell bonds in exchange for commissions of 5 to 15 percent of whatever they brought in. It took authorities several years to catch up with Borges, but in 1906 he was convicted of conspiracy and seventy-three counts of larceny. Of course, by then most of the money was gone.

  A variation of Get Rich Quick schemes was robbing Peter to pay Paul, or benefiting one person at the expense of others. The origin of the phrase is open to dispute, but one account traces it to the 1500s in England, when the lands of Saint Peter’s Church at Westminster were sold to fund repairs at Saint Paul’s Cathedral in London.