Ponzi's Scheme (9 page)

Best of all, the collapse of the case meant it would not be revealed that he had already served two prison terms, a circumstance that might have triggered deportation proceedings. He had never moved to become an American citizen, knowing that his felony convictions might make him an undesirable alien. Also fortunate for Ponzi, the misspelling would make the cheese incident almost undetectable in the future if anyone tried to check into his background.

That same month, the Court Street office building changed hands, coming under ownership of the Tremont Trust Company, known throughout the city as “Simon Swig's bank.” Swig was a leader of Boston's Jewish community who treated Tremont Trust as a personal piggy bank. Swig fancied himself a political player, doing business with kingmaker and blackmailer Dan Coakley. To Ponzi, though, Swig was simply a landlord who wanted him out; Swig planned to renovate the building and charge higher rents.

Ponzi moved around the corner to a couple of dingy rooms on the fifth floor of 27 School Street, the Niles Building. It was unfurnished, so he went to Daniels & Wilson Furniture Company in the city's increasingly Italian North End. Ponzi picked out $350 worth of used desks, chairs, a typewriter, filing cabinets, and a small rotary printing press called a Multigraph. He could not afford the full cost, so he struck a deal with the store's owner, Joseph Daniels, a deceitful man who had anglicized his name from Giuseppe Danieli. Under their agreement, Ponzi would pay fifty dollars down and five dollars a month. Once the furnishings were in place, Ponzi had an optimistic sign painted on his office door:
CHARLES PONZI
,
EXPORT & IMPORT.
The world took no notice.

Ponzi's original plan was to work on commission as an import-export agent, acting as a broker for domestic and international companies hoping to trade across borders. He thought he would be especially attractive to companies too small to hire such agents outright. Unfortunately, he had no contacts of his own at companies that might need his services. To attract business, Ponzi thought about printing circulars and sending blanket mailings to potential clients. But that would cost him a nickel per circular for domestic companies and eight cents each for international firms. Ponzi realized he would be wiped out by mailing fees before he collected his first commission. Instead, he decided to advertise in foreign trade magazines, but again he was stymied by the cost. That led to a new plan: He would start his own foreign trade publication, one whose huge circulation would allow him to charge lower advertising rates for budding entrepreneurs like him. Inspired, he had a new sign painted on his door
—THE BOSTONIAN ADVERTISING & PUBLISHING COMPANY—
and set about launching a publication he called the
Trader's Guide.

Ponzi devised an elaborate, impossibly ambitious business plan that envisioned his guide as a permanent reference book. He would distribute it in loose-leaf binders, to allow additional pages to be added as years passed and new editions were printed. To increase the guide's reach, he intended to print it in English, French, Italian, German, Spanish, and Portuguese. The most audacious aspect of his plan was his imagined method for doubling circulation on a regular basis. First, he would mail 100,000 free copies of the
Trader's Guide
to companies whose names he found in directories from the U.S. Bureau of Foreign and Domestic Commerce and the U.S. Consular Service. Six months later, he would mail those same companies an updated edition of the guide, while also sending the original mailing and the update to another 100,000 companies, also for free. Ponzi thought he could do this indefinitely, or at least until his mailing lists were exhausted. By then, he was sure, he would be rich.

The initial mailing, he thought, would cost him thirty-five cents a copy, or $35,000. To meet that cost, he would lard a two-hundred-page guide with 150 pages of advertising. The ads would cost $500 a page, with a $5,000 premium for the cover page, for a total imagined advertising income of $80,000. After expenses, he figured on a profit of at least $15,000 in the first six months. He expected his profits would double as many times as he doubled circulation.

Certain of success, he took larger quarters on the building's second floor, Room 227, and hired two stenographers and a messenger boy. In his excitement, he began writing letters to acquaintances abroad, making wonderful claims for his soon-to-be-published guide and seeking to interest them in buying or selling ads and writing articles.

Beyond the mountainous logistical challenges of selling so much advertising and producing fifty pages of editorial content of interest to exporters and importers, Ponzi was fast exhausting his limited money supply. He tried to interest investors in purchasing a half interest in the guide for five thousand dollars—a steal if it were possible to yield even a fraction of his anticipated profits—but found no takers. By summer 1919 he was running low on cash and options. Certain he was on the verge of greatness, Ponzi walked around the corner from his office to the Washington Street branch of the Hanover Trust Company, where for several months he had kept a small checking account that frequently approached a zero balance.

Adopting the nonchalant air of a man certain to be approved for any loan he sought, Ponzi walked smartly through the bank's heavy front door and asked to borrow two thousand dollars. He tried to say the sum “with the same inflection with which I would have asked change for a nickel.” But his faux confidence could not overcome his real lack of collateral. The application never made it to the loan committee. It was dealt with immediately by the bank's president, Henry Chmielinski.

“Sorry,” he told Ponzi, “but I cannot approve the loan. While it is our policy to accommodate our depositors whenever we can, your account is more of a bother than a benefit to us. Good day, sir.”

Ponzi seethed as he watched Chmielinski turn on his heel and return to his private office. Bile rose in his throat—“I could have spat poison,” he said afterward—as he made the short walk back to the Niles Building. Anger turned to despair as he opened the door to his office. With a heavy heart, he laid off his small staff and pronounced the
Trader's Guide
dead before its first edition.

He swallowed his pride and placed a small newspaper ad offering office space to sublet. His new tenants would help cover the rent, but the added names painted on the door below his own were blows to his dignity. “Another house of cards had collapsed,” he said afterward. But he remained undaunted: “I was getting accustomed to chasing rainbows. As one would fade away, I would pursue another.”

Sitting alone in the office one day in August 1919, Ponzi began idly leafing through his mail. He opened a letter from Spain inquiring about the
Trader's Guide.
Unaware that the guide had been permanently mothballed, the letter writer asked to be sent a copy. To pay the postage, the Spaniard had pinned to the corner of his letter a strange piece of paper. It was roughly the size of a dollar bill but nearly square, with intricate watermarks and a fanciful drawing of a woman dressed in flowing robes delivering a piece of mail from one part of the globe to another.

Ponzi held the note in his soft hands. In a spark of inspiration he saw a glittering future spread out before him. Everything up to this point in his life, from major events to chance encounters, from his never-quit persistence to his unquenched thirst for wealth, had led to this moment. It had its roots in his upbringing and his spendthrift youth, his dashed expectations of gold in American streets, and his jobs in banking and exporting. It could be traced to his stretches in prison and the men he'd met there, his acts of generosity, his return to Boston, his passion for stamp collecting, his memories of his father the postman, his chance meeting with foreign exchange expert Roberto de Masellis. All of this made it possible for him to see what no one else could, to dream what no one else dared.

PART TWO

A Ponzi note, issued to
Boston Post
reporter Principio Santosuosso.

Albin O. Kuhn Library & Gallery, University of Maryland, Baltimore County

C
HAPTER
S
EVEN

“T
HE ALMIGHTY DOLLAR
”

T
he paper in Ponzi's hand was an International Reply Coupon. A more mundane and obscure financial instrument is hard to imagine.

In April 1906, representatives of the United States and sixty-two other countries gathered in Rome with the goal of making it easier to send mail across national borders. All were members of one of the world's first international governmental organizations: the Universal Postal Union, founded in 1874 to reduce the maze of postal regulations that made mailing a letter overseas a high-risk, high-cost proposition. A key item on the Rome agenda was to create a way for a person in one country to essentially send a stamped, self-addressed envelope to someone in another.

The lack of such a mechanism posed a problem to anyone with an overseas family member or business associate. Consider, for instance, a lawyer in New York who wanted a Paris accountant to send him an important document. The lawyer would reasonably be expected to enclose with his request an envelope with his return address and the necessary postage. But at the turn of the twentieth century, there was no way to do that. The New York lawyer's stamps would be United States issue. If the French accountant tried to use them, he would be turned away by any self-respecting, law-abiding Parisian postal clerk. The accountant would have to pay the postage himself, in French postage stamps, to send the document. Of course, it was possible that the American lawyer could enclose a few dollars to cover the return postage, but then the French accountant would need to exchange the dollars for francs before buying the stamps—hardly an efficient system. The same problem arose when young immigrants tried to correspond with parents or grandparents in the old country. The young émigrés wanted to hear back from their faraway family members, often as soon as possible, and so were happy to include postage for a return letter.

As a solution, the Rome treaty writers created a system of international postal currency, paper that held a fixed value from one country to the next and could be redeemed for stamps in any post office of a country belonging to the Universal Postal Union. They called the currency they created International Reply Coupons. But they were not finished. The treaty writers wanted to make sure no one tried to profit from the purchase and redemption of their coupons. They created regulations that set the rate of exchange between countries' currency and postal reply coupons, so coupons purchased for one American dollar in New York yielded the equivalent of one dollar's worth of French stamps in Paris, minus a small processing fee.

All that was fine in 1906, but the Rome treaty negotiators did not foresee a world war a decade later. The Great War left some countries' currency deeply devalued. Governments were too busy dealing with massive human and economic losses to worry about recalibrating postal exchange regulations. The result was an opportunity to profit. The Spaniard who'd sent Ponzi the coupon considered it nothing more than an act of proper business etiquette. He was, after all, asking to be sent a copy of the
Trader's Guide.
But in a flash of insight, some might even say genius, Ponzi saw something more, a global currency whose value fluctuated wildly depending on where it was used. He took out a pencil and a pad of paper and began calculating the possibilities.

The coupon had cost the Spaniard thirty centavos, or roughly six cents. After a penny processing fee, it could be exchanged in the United States for a stamp worth five cents. Ponzi knew that the Spanish monetary unit, the peseta, had been devalued after the war, so he began figuring how many pesetas he could buy for a dollar. Using exchange rates published in Boston newspapers, Ponzi concluded that a dollar was worth six and two-thirds pesetas. Because there were one hundred centavos to a peseta, Ponzi calculated that a dollar was worth 666 centavos. If each International Reply Coupon cost thirty centavos, a dollar could buy twenty-two of the coupons in Spain. If Ponzi brought them to the United States, those twenty-two coupons would be worth five cents each, or a total of a dollar and ten cents. By redeeming them in Boston rather than Barcelona, Ponzi would earn a profit before expenses of ten cents, or 10 percent, on each dollar's worth of coupons he bought in Spain and redeemed in the United States.

Ponzi knew from his conversation with currency expert Roberto de Masellis at Fidelity Trust Company that few world currencies had suffered as much as the Italian lira. Once valued at five to the dollar, the lira had fallen after the war to twenty to a dollar. With the lower value, Ponzi calculated, a dollar could purchase sixty-six International Reply Coupons in Italy—three times as many as in Spain. Ponzi could scarcely believe it. The same dollar that could buy twenty coupons for five cents each in the United States could buy more than three times as many of the same coupons in Italy. Sixty-six coupons purchased in Rome for a dollar would be worth $3.30 in Boston. Ponzi's mind reeled at the thought—he was looking at profits of $2.30 on every dollar spent, or 230 percent, before expenses. Other countries might have even more devalued currencies, and the profits would be even more astronomical. One example was Austria. After the war, the Austrian krone had fallen from the equivalent of twenty cents to less than a penny. A thousand dollars would buy 140,000 kronen, which theoretically could purchase more than a half million International Reply Coupons. If redeemed in the United States, Ponzi's initial thousand-dollar investment would yield stamps worth more than twenty-five thousand dollars.

The hitch, Ponzi understood, would be getting cash for the stamps he bought with the coupons. One possibility would be to sell the stamps at a slight discount to businesses that used large amounts of postage, giving them a bargain on a necessary item while still maintaining huge profits for Ponzi. Another hurdle would be figuring out how to buy and transport the enormous numbers of coupons necessary to turn a significant profit. But those crucial details would wait for another day.

Sitting at his desk, Ponzi could hardly contain himself. The whole calculation had taken him less than five minutes, but he was certain of the conclusion. If he bought coupons in bulk in countries with weak currencies, converted them into stamps, and cashed them in the United States or other countries with strong currencies, he would soon be richer than Rockefeller. All he needed was a small pile of money to get him started with his first stack of coupons. But that was no small hurdle. As the summer of 1919 turned to autumn, Ponzi was deep in the hole.

His first thought was to borrow the money in large sums from a few sources, but his options were limited. Banks were out. He was struggling to make payments on fifteen hundred dollars in loans from Fidelity Trust, and his rejection at the Hanover Trust when he'd sought seed money for the
Trader's Guide
gave him a good idea about how Boston's banks would receive his new idea. Also, he feared that if he thoroughly explained his plan to bankers, they might steal it and leave him cold. He would need private investors, but first he needed proof that his epiphany was more than a pipe dream.

In the weeks after his brainstorm, Ponzi mailed a dollar to each of three acquaintances, one in Spain, one in Italy, and one in France, with instructions to exchange the dollars for the local currency, go to a post office, buy as many reply coupons as possible, and then send them to him in Boston. A few weeks later Ponzi had his answer: His calculations were correct. The Spanish and French deals were a wash, a small profit from Spain and a small loss from France, but the Italian effort was a big moneymaker. In the meantime, while waiting for his European correspondents, Ponzi went to a Boston post office and confirmed that coupons could be exchanged there for stamps. He also began collecting newspaper columns with quotations on foreign exchange rates, to demonstrate the fluctuations to potential investors.

The more Ponzi thought about his idea, the more he liked it. He would effectively be operating under the umbrella of one of the most trusted institutions in the world: the postal service. Anyone with money and a mailbox was a potential customer. Even better, he reasoned, the supply of coupons was potentially limitless, like postage stamps. No matter how many a person bought, more would always be available. If they ran out, the issuer would print more until the demand was met. “They could not limit the number of coupons I wanted either to buy or redeem,” Ponzi concluded. “In other words, the burden of living up to the terms of the contract was entirely on the government's side and not on mine. All I could be expected to do was to tender cash in payment of coupons. Coupons in exchange for stamps. But what I did with the stamps afterwards was nobody else's business but my own.”

Best of all, Ponzi was certain it was legal. The coupons were, in effect, legal tender used to buy stamps anywhere in the developed world. If a coupon bought more stamps in Romania than Rhode Island, that was not his fault. He was merely the first person smart enough to figure out how to take advantage of it. On the other hand, he acknowledged, some people might say exploiting exchange rates by trafficking in postal coupons might not be entirely ethical. But his experiences during the sixteen years since he'd arrived in America made that a secondary consideration: “Environment had made me rather callous on the subject of ethics. . . . Then, as now, nobody gave a rap for ethics. The almighty dollar was the only goal. And its possession placed a person beyond criticism for any breach of ethics incidental to the acquisition of it.”

In the weeks after devising his plan, Ponzi appealed to anyone he thought might have significant amounts of available cash. But everyone he knew in that position declined his offer, at least in part because Ponzi refused to provide many details about his idea, lest would-be investors try it themselves. Also working against him was his lack of a track record to justify being entrusted with serious sums. He was close enough to touch success, but with one rejection after another he began worrying that once again wealth would escape his grasp.

With his debts rising along with his frustration, on December 1, 1919, Ponzi swallowed his pride and walked across town to Northampton Street, in Boston's South End. There he found a little storefront with a sign displaying a cluster of three gilded balls—the universal symbol for a pawnshop. Ponzi stepped inside Uncle Ned's Loan Company and fished four items from his pocket: three diamond rings that belonged to Rose and his own gold, open-faced pocket watch. If ever Ponzi were looking for confirmation of Rose's devotion, he needed to look no further than her willingness to let him pawn her rings.

Ponzi placed the valuables on the counter and told the pawnbroker, a Russian immigrant named Max Rosenberg, that he was hocking them to start a business. He outlined his coupon idea in the hope of enticing Rosenberg to invest. Rosenberg listened to his pitch, but pawnbrokers as a rule do not invest with men who hock their family jewels. Rosenberg appraised Ponzi's belongings and handed him five hundred dollars for the rings and twenty for the watch. Ponzi stuffed the cash into his wallet and left.

His debts approached three thousand dollars and, as Ponzi liked to say, his only assets were his hopes. So the money from Uncle Ned's did not last long. Just over a week later, Ponzi's wallet was empty again when furniture dealer Joseph Daniels walked through the narrow, glass-paneled door of Room 227 in the Niles Building. Ponzi was behind on his five-dollars-a-month payments, and Daniels was threatening to haul the desks and chairs back to his store in the North End. Seeing the angry look on Daniels's face, Ponzi was glad he and Daniels were the same height.

“For the love of Mike, sit down,” Ponzi told him. “That chair is still yours, and [sitting in it] won't place you under any obligations.”

Ponzi had no money for Daniels—“I did not have it, and that settled it, and he couldn't draw blood out of a turnip,” Ponzi explained later. But he hated the idea of Daniels seizing the furniture and leaving him with nowhere to sit but the floor or the windowsill. Ponzi began talking as fast as he could think. He came up with a deal that would delay the day of reckoning for at least two months.

Ponzi offered to give Daniels a promissory note for two hundred dollars. Daniels could cash it, using the furniture dealer's own credit at the First State Bank. Daniels scoffed—Ponzi was already in debt to him for the furniture. Why should he add two hundred dollars in cash? Anticipating that reaction, Ponzi parried with an appeal to Daniels's greed. Ponzi told Daniels to keep half of the cash for himself—a hundred dollars—as a payment toward Ponzi's furniture. Daniels would pay the remaining hundred dollars to Ponzi in twenty-dollar increments, and in sixty days Ponzi would pay back the full two hundred dollars, plus interest. If Ponzi defaulted, Daniels would be out only a small sum of money, and the bank where he cashed the promissory note would help him pursue Ponzi to make good.