Additional Focus

This is an excerpt from The Century Foundation's Countdown to Reform by Henry J. Aaron and Robert D. Reischauer.

Charles Ponzi's profession is listed in the Biographical Almanac as "swindler." Ponzi's name is immortal because he had the genius to turn a legitimate business venture into a very lucrative crime.

A native of Italy, Ponzi began his life of crime early, stealing from his parents and parish priests. He emigrated to Canada and then to the United States, where additional petty crimes led to short jail sentences. In 1919, he discovered "arbitrage"-making money by buying the same asset in one market and selling it at a higher price in another market. The asset was postage stamps. The International Postal Union sold certificates that could be used in post offices of various nations to purchase sufficient postage to send letters internationally. The cost of such certificates in Spain was 1 cent. The certificate was good For 5 cents worth of postage in the United States. This is the same sort of transaction in which "arbitrageurs" engage, buying grain, currency, or other materials in one market and selling it in another where prices are higher. Such transactions, which tend to raise prices in the low-price market and lower them in the high-price market, are entirely legitimate.

Ponzi had an innovation-he lied. After explaining the transaction to gullible investors, he neglected to inform them that he really had no way to convert the U.S. stamps back to cash. He also failed to tell them that he was not buying pasta certificates at all. Instead, he simply kept what initial investors paid him and, as more money rolled in, he repaid the initial investors, never Failing to skim funds for himself. Ponzi did very nicely, collecting "investments" worth $154 million in 1996 dollars.a He bought a twenty-room mansion and a bank, and in general lived very well. Eventually, he made a very serious blunder. He hired a public relations expert to help him maintain his image, an honest public relations expert, who quickly recognized Fraud and reported it to the authorities. Ponzi ended up in prison, From which he wrote letters to former investors expressing regret that he could not help them but promising to do so as soon as he got out. The immigration authorities had other plans, however, deporting Ponzi to his native Italy. With Few resources, he joined Mussolini's fascist movement and became a high ranking treasury official, until his incompetence was discovered. At that paint, he was sent to Brazil as manager of the new national airline Alltalia. Following the war and Mussolini's death, Ponzi lost his job and his money. He died penniless, tended only by a nun.

Frauds that closely resemble Ponzi's scheme abound. Everyone seems susceptible. One-sixth of the citizens of Romania fell For a Ponzi scheme in 1993. Nearer to home, the celebrated Foundation for New Era Philanthropy, a scheme that promised to double and triple the gifts wealthy donors wanted to give to charity, gulled people as sophisticated as William Simon, former Treasury Department secretary; John Whitehead, former managing partner of the investment firm, Goldman, Sachs; and I.aurence Rockefeller, financier.

a. David Segal, "Money for Nothing: Forget the Work Ethic; Mr. Ponzi Showed Us the Real American Dream," Washington Posf, Outlook, June 2, 1996, p. 1.