Patron Saint of the Wall Street Fraudster: Who Was
Charles Ponzi?

“Accumulate! Accumulate! That is Moses and the Prophets!”
–Karl Marx, Grundrisse
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The signs, it is almost trite to observe, were there. Charles Ponzi arrived as an almost penniless Italian immigrant in Boston in 1903, having lost all his money to a card shark en voyage and owning only a ticket via New York to meet his relatives in Pittsburgh. He bumped through a series of clerical and menial jobs before winding up in a Montreal jail, claiming that the banking fraud that had put him there was all a big misunderstanding, probably the fault of one of his love rivals, and that he would one day be avenged. After being encouraged to seek his fortune outside the Dominions of Canada, he headed back to the USA in the company of a party of illegal immigrants, which resulted in another short jail sentence.

He promoted power and light investment schemes, pretended to be in a secret society in New Orleans, hung around with medical-insurance fraudsters in Alabama, got married, and ended up back in Boston in 1919. Here, he turned to a seemingly legitimate business, aiming to use his natural gifts for languages and for salesmanship to publish The Trader’s Guide, a compendium of useful addresses, consulates, customs details, and similar information. The idea was that he would distribute it for free to companies worldwide in the import and export trades and make a profit by selling advertising. Ahead of its time, Ponzi’s international trade gazette was not a success. But while trying to promote it, he made a discovery that would change the course of his life. He received a request for a sample copy from a company based in Spain, accompanied by an International Reply Coupon (IRC) to cover postage.

While cashing in the IRC, Ponzi realized that while these coupons were convertible into a set amount of postage in each of the participating systems of the Universal Postal Union, they also sold for a set amount of local currency in each of the countries. The IRC system therefore defined a set of fixed exchange rates via its table of prices, and these exchange rates could differ significantly from the market rates. This was particularly true with respect to countries like Italy or Portugal that had devalued their currencies significantly in the aftermath of the First World War.

Ponzi even carried out a trial transaction, sending dollars to a relative in Italy to convert into lire, buy IRCs, and mail them back to Boston. He then took these coupons to the post office on Milk Street, exchanging them for US stamps worth around double his initial investment. It looked like a free-money machine, and all he needed was more capital. He took down the sign on his rented office for “The Bostonian Advertising and Publishing Company” and put one up for “The Securities Exchange Corporation.” He was ready to start borrowing money.

His first “investor” was an office-furniture salesman to whom Ponzi owed money; Ponzi successfully exchanged his commercial debt for a ninety-day note promising to pay 50 percent interest. He had to explain the mechanics of the IRC scheme to convince his irate creditor that he was not just playing for time, but once that was clear, the salesman was hooked. In general, Ponzi was never reluctant to give away the details of his scheme to potential investors. He claimed to be unafraid of having his idea stolen because nobody else had the contacts in Europe that were needed to buy the coupons in large amounts. This was true, but neither did Ponzi.

Postal inspectors regularly visited his offices accusing him of fraud; all of them left convinced by Ponzi’s charm and intelligence that the scheme was legitimate. Seemingly none of them were sufficiently familiar with the rules of the Universal Postal Union, which had anticipated the problem of implied exchange rates and gave a significant amount of protection against having money drawn out of the system by speculators. If Ponzi had ever tried to put his scheme into action, his overseas agents would have found it very difficult to buy coupons in bulk and he would not have been able to convert them into cash in the USA. There is, however, no real evidence that he ever made any serious effort to trade them—Ponzi claimed that unspecified administrative problems prevented the profitable coupon-trading business from getting off the ground, but this was almost certainly a lie.

Other investors soon followed the furniture salesman. Ponzi offered them the same terms—50 percent interest payable in ninety days (he later shortened the term to sixty days). Word first spread through Boston’s Italian American community but soon went beyond it into the wider New England scene. He started to employ commission sales agents, giving them 10 percent of the amount that they raised. The rented office was quickly outgrown (Ponzi had become a serious local traffic problem) and he moved into marble-clad premises on School Street, in the heart of the city’s business district. Ponzi bought automobiles, smoked large cigars, and made himself prominent about town.

His expansion plans seem to have proceeded as much by luck as by design. A fellow former Montreal jailbird came to him looking for a job and threatening to expose his murky past. Ponzi sent him out into the Boston suburbs and New England towns to set up new branches. This new employee turned out to be a natural, and soon the branch network was generating as many new customers as the central Boston office. By 1920, Ponzi had over thirty thousand individual customers, a float of millions of dollars of cash, and absolutely no hope of redeeming all the promises he had made.

Ponzi’s scheme differed from most of its imitators in that, in the early stages at least, rather than discouraging withdrawals, he actually welcomed them. The marketing proposition he gave to his investors was that interest was only paid at maturity—it was possible to get one’s money back at any time before the ninety days were up, but without interest. Each early withdrawal, then, actually reduced the size of his underlying problem, at the expense of draining his sources of ready cash. Conversely, customers who rolled over their investments into new Ponzi notes at maturity would be increasing the size of his problem, but not draining cash. This was how the scheme managed to continue rather than collapsing at the first maturity date. Having bought time, Ponzi was as industrious as he was unscrupulous in using it. He set out to try to use his lies and fake assets to take control of some real wealth.

Those who live by the sword tend to die by it. Ponzi’s scheme was fated to collapse in the equivalent of a bank run, but while he was operating it, he was not averse to using threats of bank runs as a weapon of his own. At the height of his scheme, his company’s cash balances (which were held on hand as short-term bank deposits, ostensibly to keep them ready to pay cash for postal coupons) were a significant percentage of the local money supply in Boston and its surrounding area. For a number of large and important banks, Ponzi’s deposits were a greater sum than they could raise at short notice and were essential to their ability to maintain enough liquidity to sustain their operations. This gave him considerable leverage, and he used it.

After buying some small blocks of shares, he threatened the Hanover Trust Company with an immediate demand for repayment of his deposits, unless the board of directors sold him enough of their own personal shareholdings to make him the majority owner. This left Charles Ponzi in control of a bank, spending about $2 million to gain control of several times that much in potential lending resources. He used his new firepower to make bids for other banks and for real-estate companies all over Boston, and to bid for the surplus ships of the US Navy. He even started trying to underwrite a bond issue for the Republic of Poland (and, in doing so, spread his sales network into another large ethnic community).

The crash, when it came, was triggered by Ponzi’s first investor (who cannot really be called his first “victim,” as he had long since been paid out). The furniture salesman who accepted Ponzi’s note at the beginning had taken notice of the apparently meteoric success that followed, and sued in court over a claim that the initial deal had involved Charles Ponzi selling him a 50 percent interest in the whole business. The lawsuit itself was not so much the problem as the interest it stimulated in Ponzi’s background, and particularly in the number of times he had been convicted of crimes of dishonesty. He did his best to fight back and defend his reputation, even submitting to public examination by a celebrated psychic to show that his mind contained no hint of turpitude. But the suspicions kept returning. A particular problem for him, of course, was the fact that he could not display records of successful transactions in IRCs because there were none; he had never put the scheme to work. Ponzi tried to bribe officials and used his and the Hanover Trust’s deposits as a weapon against the bankers he believed were his enemies. He hired an attorney who was, if anything, a bigger crook than he was (“Dapper Dan” Coakley, a Boston-Irish political operator). He even attempted to intercept the telegram traffic between Boston and Montreal.

The denouement came just as Charles Ponzi was on the point of another ahead-of-his-time discovery in the world of fraud—he had begun to make loans from the Hanover Trust to his own corporation in order to cover cash demands, anticipating the “control frauds” (see Chapter 7) of the Savings and Loan crisis by half a century. This, however, raised an alert with the remaining honest employees, and brought the state banking commission into the picture. As an audit report on the scheme came in (the valuation of which was pointlessly disputed by Ponzi), it finally became indisputable that there had never been anything like enough assets to pay the bonds back with 50 percent interest, and Ponzi was taken away by a US marshal.

Ponzi is ill-served as a fraudster by his eponym. He was a considerably more sophisticated operator than the epigones and wannabes behind most modern “Ponzi” schemes. He was aware from the earliest stages of his scheme that he was only buying time and was relying on his ability to find another idea, as brilliant as the postal scheme but not as impossible to execute. He was decades ahead of his time in understanding that “assets controlled” is more important to a wholly dishonest actor than “assets owned.” But Charles Ponzi is not like László Bíró or Rudolf Diesel; he did not invent the investment scam, or even the idea of targeting affinity groups. In fact, not only was Charles Ponzi not the first Ponzi schemer, he was not even the first Ponzi schemer in the town of Boston.

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Excerpted from LYING FOR MONEY: How Legendary Frauds Reveal the Workings of the World by Dan Davies. Copyright © 2018 by Daniel Davies. First Scribner hardcover edition March 2021. Reprinted with permission of Scribner, a Division of Simon & Schuster, Inc.