Charles Ponzi arrived in the US in 1903, broke, ambitious, and without the wherewithal to hold a steady job and build a future for himself, as did so many thousands of others.
After quitting one job and getting fired from the next, he spent several years tinkering in the street hustles and con games that were popular at the time, but never managed to get very far with them.
He did, however, get a bit of an education from his grifting: He learned that the cons that worked the best – the ones that regularly produced the biggest stakes – were those that preyed upon the target’s desire to “get rich quick.” One scheme in particular involved gambling games where the target wins the first few times and is then encouraged to increase his wagers to make even more money, until he loses all or most of it. (Ponzi was said to be very good at this.)
In 1920, Ponzi devised the scheme that bears his name. It was essentially the same hustle he’d been practicing for several years, but he upgraded his look and his language and changed the frame of the ploy from gambling to investing.
He presented himself as an authorized seller of “international postal-reply coupons” that would give investors a 50% return within 45 days.
That should have raised eyebrows – and it did, at first. But after several months of regularly giving his early investors the 50% returns he’d promised, word got out. Ponzi became trusted and admired, and the scheme started selling itself.
The reality – and the part of the scheme that was almost impressively audacious: There was no such thing as an “international postal-reply coupon.” But it sounded like some sort of financial instrument that could have existed. And, like Ponzi’s old cons, early investors were allowed to “win,” paid with money scammed from new marks.
Eventually, the heralded story of Ponzi’s ability to deliver what he promised was replaced by the dawning knowledge that something was awry.
The genius – if you want to call it that – of the scheme was not the churning of other people’s money. That was how all such cons worked. The genius was that when he upgraded the name of his game from gambling to investing, he kept the promised ROI at 50% – which had some plausibility to it – rather promising 100% or more in the hope of bilking more people. This, incidentally, was the same strategy that Bernie Madoff used in showing investors falsified past returns in the 15% range, rather than promising 30% to 50% returns, which would have made experienced investors highly doubtful.
