A Little History: The Ponzi Scheme
Charles Ponzi immigrated to the United States from Italy in 1903. As many immigrants of the time, Ponzi arrived in the United States penniless with visions of great fortune. At the time, immigrants could purchase a "postal reply coupon" to include with their letters sent to the Old World. These coupons could then be redeemed at the post office of the loved one in the Old World for enough postage to mail a letter back to the United States.
In November of 1919, Ponzi realized that these coupons could be purchased overseas for a penny or two and sold in the United States for six pennies. On paper, he could show an average return of 400% for these coupons. This was due to the fact that someone using the coupons for currency exchange was never previously considered.
An idea was born.
Ponzi then began to attract investors by offering two payouts: "150% of invested monies in 45 days" or "200% of invested monies in 90 days". Over the course of the next seven months, a feeding frenzy started revolving around Ponzi.
By July of 1920, widows were mortgaging their homes, people were taking their life savings to invest with the clever Ponzi. Most people were not taking their money after 45 or 90 days, but reinvesting it immediately. Estimates of the money floating around Ponzi are as high as 9.5 million dollars (about 106 million in today's money).
Ponzi's problem was the postal reply coupons only existed on paper, they were not physically purchased. In fact, at the height of Ponzi's activities, Ponzi would have had to have 160,000,000 coupons and the postal services only reported 27,000 coupons in circulation. During the investigations that followed, it was determined that Ponzi was paying returns solely from the income from new investments. Each new investment actually was loosing money, since it was being used to payout up to 200% to a previous investor.
In the end, 17,000 people who had invested millions of dollars were financially ruined.
Today, the term Ponzi Scheme refers to any type of plan to generate huge sums of money in a short period based on any plan requiring new investors to pay out old investors.
For more information, please visit this WikiPedia article.
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