In late 1919 Charles Ponzi, an Italian immigrant with a checkered past, started a fraudulent investment plan that would add a new term to the language: the Ponzi Scheme (Zuckoff 2005). Ponzi promised his investors high rates of return, 50 percent in 45 days. He had a story to back up his claim: He would invest in a special kind of international postage stamp. It could be bought in Italy for lira and sold in the United States for dollars. Because the official prices of the stamp had not been adjusted to match wartime changes in exchange rates, it was possible to buy the stamps cheaply in Italy and sell them for a profit in the United States. The costs of arbitrage, however, were high, and Ponzi never seems to have followed his plan. Instead, as more and more people—many of them, like Ponzi, Italian immigrants—invested with Ponzi, he used income from recent investors to pay interest to earlier investors and to pay investors who wanted to cash in their investments. For a time large amounts of money flowed in to the bank where Ponzi had moved his operation, and he began to live the life of a wealthy man. Stories questioning Ponzi soon appeared in the press, the government investigated, and in August 1920 federal agents shut his operation. He was later imprisoned for mail fraud. Ponzi was not the inventor of the scheme—indeed, he seems to have learned it from another fraudulent banker for whom he worked in Canada—but he gave the language a new term. It would be used again and again. In March 2009 Bernard Madoff pleaded guilty to running a $50 billion Ponzi Scheme, the largest to that date. Ponzi’s original scheme lasted only a short time and hurt a relatively small number of investors. The next speculative mania, the Florida Land Boom (in which an unrepentant Ponzi participated), would prove a clearer precursor of the stock market boom.
World History
