Where Did Ponzi Schemes Get Their Name?
It can be an honor to be named after something you created or popularized. The Greek mathematician Pythagoras created his own theorem to easily calculate measurements. The Hungarian inventor Ernő Rubik is best known for his architecturally puzzling Rubik’s Cube. But what happens when your name is attached to the worst crime you’ve ever committed?
That’s precisely the case with the Italian-American swindler Charles Ponzi. Originally born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, Ponzi’s name lives on anytime someone engages in a money-making scheme that pays profits to early investors with funds from more recent investors. Ponzi certainly wasn’t the first person to trick his investors out of millions, but his criminal history was so outrageous that his biggest scheme was immortalized in his honor.
Did Ponzi Always Have a Taste for Crime?
Ponzi may not have always had a thirst for swindling others, but he was always hungry for money. It’s what drove him to leave his native Italy after his family lost their ancestral fortune and his unfinished college training prepared him for nothing. Legend has it Ponzi arrived in America with only $2.50 after gambling the rest away on his overseas voyage. That desperation to keep himself afloat and bring wealth back to his family fed his hunger to get money by any means necessary.
The Original Ponzi Scheme
By 1919, Ponzi had tried to launch several businesses to no avail. He couldn’t even keep his new wife’s family fruit business from failing. Things were looking pretty grim until he set up an office in Boston where he mailed random business to his connections in Europe. He didn’t get any investments in his ideas, but a response note from Spain included an international reply coupon (IRC). IRCs allowed someone in one country who received correspondence from another country to respond to the original messenger free of charge.
The Ponzi Scheme Fallout
Reporters questioned Ponzi’s investment operation, but he reacted with successful libel lawsuits against the journalists. His lawsuit trigger finger held off additional journalists’ investigations until Clarence Barron, owner of The Wall Street Journal, realized Ponzi’s IRC scheme could never make enough revenue. There were only 27,000 IRCs in the world, but Ponzi would have to move 160 million coupons to keep his business afloat. In addition, Ponzi revealed he invested his money in real estate, stocks and bonds and not in his own company.