Why It's Called a Ponzi Scheme

Ever wonder where the term Ponzi scheme comes from? Today associated with figures like Bernie Madhoff, it originated with one Charles Ponzi and his plan to make millions with postage stamps. Back in 1920, there was a deal where you could effectively pay for postage in one country, and redeem the value in the country you received it, where the price of postage might be different. Do this between the United States and Italy, where inflation had wracked the country, and according to Ponzi you could make a profit of 400%. Well he told his friends about his great plan, and he doubled their money in 90 days. So he started a company in January 1920, and by July he was taking in a million dollars a day. But here’s the catch: That whole postage scheme? The value was redeemed in stamps, not cash. Logistically the overhead purchasing such large quantities and shipping them from Europe to America would cost more than he could make in profit, so he didn’t - as long as more people kept investing, he kept paying out. Until the Boston Post reported that to cover his investments he would’ve needed 160 million postal reply coupons… and there were only 27,000 in circulation. Charles Ponzi lived 6 months as a millionaire, and the rest of his life in poverty.