In 1906 the International Universal Postal Union created International Reply Coupons as a way for people in different countries to send return postage to each other. The International Reply Coupon could be purchased in one country and then redeemed in another for the equivalent value of that nation’s stamps; regulations set the rate of exchange, but the massive devaluation across Europe following World War I wreaked havoc with rates.
A Boston man, Charles Ponzi, realized that based upon post-war exchange rates, International Reply Coupons purchased in many European nations were worth more in the United States than their original cost. Ponzi figured that if he could work out a way to deal the coupons in a high quantity, he could become rich by simply buying and re-selling them. Ponzi convinced a few investors to give him start-up money, promising them a 50% profit in 45 days. This was the beginning of the pyramid scheme that bears Ponzi’s name to this day.
Ponzi was good to his word at first, using funds from new investors to pay off the old. As his popularity and number of investors grew, postal inspectors became suspicious of how he was able to ensure the returns he promised. Their investigation showed that worldwide International Reply Coupon sales were not nearly high enough to support Ponzi’s story about trading in them to make a profit. Inspectors were sure that he was doing something illegal, but despite the fact that he sent messages to his investors through the mail, they could not arrest him for fraud, because at that point no one was complaining of being cheated. These early funders were still flush with money pouring in from new investors.
Following the publication of a newspaper article that questioned the validity of his operations, Ponzi went on the offensive. He called a meeting with federal, state, and local authorities on Monday, July 26, 1920 during which he suggested they audit his books. Also at his own suggestion, Ponzi agreed to stop taking investments during the audit in order to make the job easier. In this attempt to reassure the public, Ponzi caused his own demise. The next day angry investors crowded his office to demand their money—they feared that Ponzi was about to close up shop.
Ponzi was able to pay back a few of these investors, again trying to reassure the rest. Many continued to withdraw their money until Monday, August 9, when Massachusetts Bank Commissioner Joseph Allen told the Hanover Trust Company to stop honoring Ponzi’s checks, and three people, who had deposited with Ponzi, filed a petition in court to declare Ponzi bankrupt. Unable to pay back these investors, Ponzi was charged with using the mails in a scheme to defraud, and in November pled guilty and was sentenced to five years in prison.
After being found not guilty in two state trials, Ponzi was found guilty of additional charges in a February 1925 trial and sentenced to another seven to nine years. While free on bail, Ponzi headed to Florida where he returned to his old tricks and was sentenced to a year in jail for violating Florida’s securities laws before he disappeared while awaiting an appeal. Found a few months later, Ponzi was sent back to Boston to serve out his remaining sentence there, and after being released in February, he was deported to Italy on October 7, 1934.