"We are discreet sheep; we wait to see how the drove is going, and then go with the drove. We have two opinions: one private, which we are afraid to express; and another one - the one we use - which we force ourselves to wear to please Mrs. Grundy, until habit makes us comfortable in it, and the custom of defending it presently makes us love it, adore it, and forget how pitifully we came by it." ~ Mark Twain
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Charles Ponzi achieved in his lifetime something very rare: his surname became part of the English Language. Thomas Crapper did that in the 1860s, when he developed and marketed the modern toilet, and so did Sir Robert Peel when he organized the British police; to this day, agents of that force may be called "bobbies" or sometimes "peelers." But how many other examples can one recall?
Recently I read Charles' bio, and saw something I'd not noticed before: although convicted of the swindle, he may not have been very guilty at all. A misjudgment, for sure; a business miscalculation, yes. But not necessarily much worse than that. This seems to me to have large implications for the evident wide acceptance by society of some far bigger, modern swindles. So let's review the facts.
In early 1920 he started trading in Boston to import something from Italy and sell it in that city. Like all other imports, the buying price overseas was much lower than the selling price at home; that's why things get imported. Tea, for example, was famously shipped from the Orient because Bostonians paid a lot more for it than the price at which Indian and Chinese growers were willing to sell. So it was in Ponzi's case; the merchandise was the "International Postal Reply Coupon" or IPRC, upon which the world's post offices had agreed; the idea was that if you wished to write someone in another country and extend to him the courtesy of a prepaid reply, you would buy one (in Rome, Italy, say) for whatever the Italian post office charged for a letter to America, and the recipient in Rome, Georgia could take the IPRC to his local post office and exchange it for US stamps sufficient to send the reply. Probably, when the agreement was signed, the respective postal rates were much the same so the managers reckoned that any small anomalies would come out in the wash and increased revenues would result (especially if the IPRCs were purchased but never used) because it would boost business.
But they didn't anticipate a rapid fall in the exchange rate of Italian currency. By 1919, it cost much less in dollar terms to send a letter from Italy to the US , than to send a reply from the US to Italy . Therefore, by sending dollars to a friend in Florence, said friend could exchange them and buy a pack of IPRCs and ship them to Boston, where they could be exchanged for stamps which could be sold (at a small discount, say) for many times more dollars than had been sent East. That is what Ponzi was the first to spot. Neat work!
I don't have the particular figures, but it might have been that he could send $1,000 to Italy and after paying all expenses and commissions sell the resulting US stamps in Boston the following month for $5,000 profit, all perfectly legally. Wow.
Being generous as well as greedy, Chuck invited others to share the wealth, by offering to return several percentage points per month on capital invested in the business; and Bostonians lined up to do so. From obscure poverty at the end of 1919, the genius businessman had by mid-1920 bought for cash a mansion in the right location, with clothing and automobile to match.
Business boomed so well, that he fell behind in its administration. Not unreasonably, his priority was to manage the capital flow, and he neglected the matter of importing shiploads of IPRCs and selling the US stamps they could buy. The flow of coupons failed to keep up with the flow of investment money. This created no cash shortage at all, because there was so much new money coming in that Ponzi had no difficulty at all in paying dividends as promised, nor even in refunding principal to the few who claimed it. Meanwhile, imported IPRCs were accumulating, and when time permitted, he could easily get around to buying stamps and selling them, and then importing more, i.e., operating the core of his business. But in mid-1920, he didn't.
It's in that minor omission that we find the moral core of the matter. Did he fail to move the merchandise because he was just too busy, while fully intending to get around to it when he could? Or did he, at some point in the spring of 1920, realize that he didn't ever need to--that he could go on taking in and paying out money until the net flow turned negative, and then skip town? The former would be harmless neglect, the latter would be fraud. Without being able to peer in to Ponzi's mind, it's a tough call.
Government intervened, as it often does when someone outside its immediate circle of supporters begins to make spectacular amounts of money. Its agents sniffed around, and news of that sent some investors back to Ponzi to recover their funds--which he enabled them to do, with a smile and a cherry on top, so the panic stopped. Then later that Summer, a fresh wave of snooping took place, by Barron of Barron's, and it was found from the Post Office that there had been no abnormal redemption of IPRCs. A visit to the Ponzi office revealed bales of them, imported but unredeemed. Then it became clear that Ponzi had not in fact been carrying out the business operation he had advertised, and he was arrested and his office closed; he was later imprisoned, many lost their savings, and his name entered our language in "Ponzi Scheme."
I think it is quite credible that his actual failure was a mere oversight, and that had he been left in peace, he would have got round to moving the imports and made fortunes for himself and all his investors. Eventually he'd have had to close down because the postal agreements would have been revised to reflect the exchange rate imbalance, but that would have been done with due warning and the business could have wound down in an orderly fashion with many winners and few losers, if any. That possible, relative innocence, however, does not apply to the many who have imitated Ponzi since 1920, deliberately operating what they always knew to be swindles in which new, incoming funds were used to pay dividends on earlier amounts so as to attract yet more new investments.
It's quite simple to operate a Ponzi plan: fabricate a business tale and promise unusually high returns, and wait for money to arrive. Pay the promised dividends, attract yet more investments. When the net inflow turns negative, hop on a plane to Brazil, having stashed the loot somewhere very safe. Such schemes are around still; I came across one last month, called PQI. They are usually closed down by the fuzz, before that point of peak net inflow is reached.
The biggest of them all by far, however, was launched just 15 years after Charles Ponzi's was closed, is still running after 73 years, and is called "Social Security Insurance." The fabricated business tale is that it's an "insurance" plan, under which premiums would top up a large reserve of funds, the returns on which would be used to pay the promised benefits. In truth, there are no such funds, and benefits are paid from new, incoming funds exactly as happens in any other Ponzi scheme; the differences are that (a) the point of maximum net inflow has long since passed, but instead of going out of business, SS has prolonged the fraud by reducing benefits and increasing premiums, (b) those premiums are not volunteered but are payments compelled at gunpoint, (c) the whole scheme is perfumed by backing it with the full faith and credit of the US Government, and (d) the fuzz descends not on the operators of the scheme but upon any who refuse to support it.
To call that a Ponzi scheme is to dishonor the memory of a businessman who was certainly creative and quite possibly honest.