Scam Busting: Charles Ponzi and the early days of his pyramid scheme

Charles Ponzi was born Carlo Ponzi, the only child of a family that lived comfortably in Italy. Although they had a comfortable life, they never lived up to the affluence Ponzi later bragged about. His family did have enough to send him to college, but he squandered the money and never received a degree.

Ashamed over disappointing his mother, Ponzi immigrated to the United States from Italy in 1903. He was certain that he would become rich there, and his mother would once again be proud of him.

Ponzi held many jobs, but none of them brought the success he imagined. After several years, he made an unwise decision to steal and forge a check, an act that go Ponzi a three year prison sentence. That was quickly followed by a two year prison term for smuggling illegal aliens into the United States.

After the second stint in prison, Ponzi began searching for the “opportunity” that would make him rich and famous. He believed in himself and his ability to come up with what he termed the next .Great Idea.. He had many ideas that never gained any real momentum, but it doesn’t appear that he initially set out to defraud anyone.

In Boston in late 1919, Ponzi finally came up with his idea to utilize postal reply coupons to generate investment returns. Postal reply coupons were a popular way to exchange letters with families overseas. They were meant to make it easier to send mail to other countries. A writer of a letter could purchase a coupon at the local post office to prepay the postage for a reply letter. The recipient merely turned in the coupon at his local post office for stamps.

There were no limits on the number of coupons that could be purchased or traded for stamps. Charles Ponzi determined that changes in currency exchange rates, coupled with the proper purchase and exchange of postal reply coupons, could create profits. And so the Securities Exchange Company came to be. Ponzi wisely chose an official-sounding name for his venture so as to appear legitimate from the start.