Ponzi circa 1920

Ponzi circa 1920 (Photo credit: Wikipedia)

Ponzi, The Incredible True Story of the King of Financial Cons by Donald H. Dunn. Carlo (Charles) Ponzi, born in Italy in 1882 and died in 1949 in Rio de Janeiro, Brazil, did not invent the Ponzi scheme, but he gave it its modern-day fame. I purchased this book when the Bernie Madoff scandal was in full flower, but I did not get around to reading it until after Barack was re-elected. Ponzi’s life is a fascinating tale of small successes and many failures until he had an inspiration.

He discovered that postal coupons purchased in one country could be used in another country, and thus exploit currency exchange rate differences. Huge percentage profits were possible, but the dollar amounts were small. Ponzi decided to proceed as if dollar profits were unlimited. He sold notes to buyers who were promised a 50% return on their money, at first after 90 days and later reduced to 45 days. When the banks were paying only 4% in 1920, word spread rapidly that Ponzi was paying 50% every 45 days. Lines started forming as people rushed to take advantage of the get-rich opportunity that Ponzi offered.

For 6 months, Ponzi prospered and then the wheels started to come off. Ponzi refused to reveal how he was redeeming the postal coupons that he claimed were the source of his profits, as similarly Bernie Madoff refused to reveal how his stock buying and selling could consistently beat the market in both Bull and Bear markets. To succeed for a time, a Ponzi scheme must grow in size as new investors’ money is used to pay off older investors. Eventually someone will question how such large operations function without leaving a trace of evidence of doing what they say they are doing. There were not enough postal coupons in the world to support Ponzi’s operation, and the stock tickets supporting Bernie Madoff’s operation were counterfeits.

During the GOP primary season, there were accusations that Social Security is a Ponzi scheme. Untrue. All the numbers supporting Social Security revenues and obligations are known and public information. In a true Ponzi scheme, the operator refuses to tell how he/she generates the extraordinary returns. Mitt Romney’s tax proposals where he refused details more closely resembled a Ponzi scheme than Social Security does.

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