DOUBLE your money in 90 days," promised Charles Ponzi, an Italian immigrant to the US way back in 1919. In the process of issuing an export magazine, Ponzi realised that he could take advantage of a huge arbitrage opportunity. He made an offer to a person in Spain, requesting him to subscribe to an export magazine he planned to launch. The subscriber sent Ponzi an international postal reply coupon, which could be exchanged at the local post office, for American stamps, needed to dispatch the magazine to Spain.
The coupon in Spain cost the equivalent of one cent in American currency. In America, when Ponzi exchanged the coupon, he got six cents worth of stamps. Sensing an opportunity to make money, Ponzi decided to float an investment scheme.
Money started pouring in as no other investments in the market at that point of time offered such high returns. Once the money had been collected, he planned to convert American dollars into foreign currency, buy international postal reply coupons from various countries, convert them into American stamps and sell them for a huge profit.
But Ponzi had not taken into account the difficulties involved in dealing with various postal organisations around the world, along with other problems involved in transferring and converting currency.
At its peak, the scheme had 40,000 investors who had invested around $15 million in the scheme. Meanwhile, Ponzi had started living an extravagant life blowing up the money investors brought in.
On August 10, 1920, the scheme collapsed. The auditors, the newspapers and the banks declared that Ponzi was definitely bankrupt. It was revealed that only two stamps had been actually purchased.
Money brought in by the new investors was used to pay off old investors. And this simple trick has been used by scamsters over the years, to fill in their pockets. Such a financial fraud came to be known as a Ponzi scheme. The most vulnerable investors are those who come at the end. Some of the Indian chit funds are a good example. They keep raising money from new depositors to pay off old depositors.
