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He was one of the greatest fraudsters of all time and the father of pyramid schemes

Charles Ponzi was entwined with pyramid-like gimmicks, the Ponzi scheme is named after him. Generations of scammers “grew up” his way, most famously Bernie Madoff, a Wall Street investment advisor who revealed in 2008 that he had caused $ 65 billion in damage to his clients. In our article, we explain how Ponzi realized that in a simple way, audiences can be deceived and huge mountains of dollars can be won.

Charles Ponzi, of Italian descent, saved tens of thousands of Americans from $ 20 million in eight months a century ago – nearly $ 300 million today, given inflation. His offer, which has promised investors a 50 percent profit, will hurt many in 45 days. Ponzi was incredibly enriched, and for a long time no one would guess the plot – until the pyramid scheme collapsed spectacularly and Ponzi was imprisoned as well as history books.

He came to America with a million dollars of hope

Carlo Pietro Giovanni Guglielmo Tibaldo Ponzi was born in 1882 in Lugo, northern Italy, in the province of Emilia-Romagna. At first, he tried to follow the right path because he claimed to have attended La Sapienza University in Rome, but did not graduate in the end.

During my college years, I was the kind of person I would call a stray here. “ He later told a New York Times reporter in an interview.

After running out of money, he immigrated to the United States in 1903. While crossing the Atlantic, he characteristically lost his remaining gambling fortune.

Charles PonziSource: Wikimedia Commons / Boston Library

I came to this country with two dollars, 50 cents in cash, and a million dollars of hope. “ Rogue remember To the beginnings of AmericaWhen he did not know even a single word in the English language. In the New World, he worked first as an itinerant fruit seller and then as a dishwasher boy in a few restaurants where he slept on the floor but learned the language. Over time, he struggled to become a waiter until he was fired for cheating and theft.

Then he got a job at a bank in Montreal, where he escorted him to the branch office. Zarussi Bank was created specifically to serve Italian immigrants. Most of the time, he was earning his income from interest-like interest on loans for vulnerable people who only knew Italian, but over time, this also didn’t save him from bankruptcy, and he went bankrupt. Ponzi is once again destitute.

The big idea was born

The criminal career of the subsequent fraudulent legend began in a rather modest way. In 1907, Canadian authorities arrested him on charges of forging checks and sentenced him to three years in prison. But his manipulative abilities were already shining at this point, as he believed with his mother that he was not serving his sentence, but only worked in prison.

After more than ten years, he wanted to launch an international trade paper and make a living from the ads he appeared in. Soon the idea faded because someone was not interested in the ads he posted. But then something happened that changed his entire life in one fell swoop. After a few weeks, the Spanish interest ran out. The store had indeed failed, but upon seeing the message Ponzi discovered the so-called The arbitrage opportunity.

Charles Ponzi, 1920.Wikipedia / Magrison

What does arbitrage mean?

Arbitrage is a trading strategy that aims to make a profit by taking advantage of small exchange rate differences on similar or identical assets. An investor who follows this strategy will usually sell an asset purchased somewhere directly in another location, usually at a higher price. Most of us have heard the classic trading slogan: “Buy cheap, sell big.”

Ponzi had previously worked at the post office and noticed the coupon in the reply letter hidden in the envelope he received from his Spanish partner. By purchasing the coupon, the recipient was able to reply to the sent message for free. In addition, the voucher can be redeemed in any country and thus receive money. However, the exchange rates that were changed due to inflation have not been adjusted, so a coupon purchased in Italy, for example, can be sold in the United States at a return of 400 percent, after deducting the costs.

The first hierarchical scheme in history began

Ponzi decided to tap into the system’s money-making potential: Buy huge quantities of response stamps in weaker economies and exchange them for more valuable vouchers in countries with stronger economies. Since the transfer values ​​are not determined by the market but are determined by international contracts, the plan does not appear to violate any law.

He sent money to his Italian relatives to take the reply coupons from him and send them back to him. Then he turned to his friends, and promised to double their money in 90 days. He kept his word. In moments, news of the miracle reached – however, the avalanche set off.

Over the past century, many people have been hit with this systemSource: Shutterstock

He founded his own company called the Securities Exchange Company and went after investors. To do this, he trained a team of agents how to present his plan to the electors.

Ponzi promised investors a 50 percent return in 45 days and 100 percent in 90 days, while banks at the time paid interest at 5 percent for an entire year. The “business” grew rapidly: the first 15 customers invested a total of $ 870, and after six months they had already received about $ 10 million from 20,000 people. Soon, she had clients in several big cities and had a bank with $ 3 million. Thousands of people mortgaged their homes just to pledge their money to Ponzi. Moreover, the profits were not taken but rather reinvested immediately.

However, instead of actually “using” his overseas clients to purchase international response stamps, he simply pushed his investors off of his subsequent investments, thus “creating” the pyramid scheme.

Scroll down to see how the rogue pyramid player fell!

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