Ponzi Scheme

Charles Ponzi, is the origin of what we think of as the classic Ponzi scheme.

In 1917 Charles Ponzi in his mid-thirties was obsessed with money-making schemes. He had been involved in and thrown into jail for some of these schemes. He hit upon an idea to rob Peter to pay Paul in which he came up with a scheme that had the veneer of a legitimate business and economic rationality. Ponzi launched a new scheme with a new company, called the Securities Exchange Company, or SEC. Ponzi found a way in which he could buy up overseas postal stamps. Because of a fixed rate of exchange, he could cash the cheaper foreign bought stamps in the United States and make an arbitrage profit. This actually had some basis to it. The postal authorities had set up a scheme in which theoretically postal stamps could be bought in say, Italy, and the value that was paid in U.S. Dollars would be less than what the U.S. Postal service would sell them in the U.S.

The idea behind the policy was that if Americans had relatives in Italy, they could send them a letter with a postal stamp enclosed so that those relatives could easily send a reply mail. That's why there was a stamp exchange program. So there was an arbitrage opportunity.

Like all great Ponzi schemes, money rolls in by getting investors, rolling over their investments, while giving them pieces of paper that falsely declares that they are filthy rich and getting richer. There are books that reveal how extensive Charles Ponzi's knowledge of human psychology was.

He had a scheme in the end for even beating the state auditors who were pursuing him. Ponzi had to put all this money somewhere. When audited, he had this scheme that right before they counted all of his assets, he would scoop up the cash from an audited bank, and throw it up in front of the auditors. He would shuffle the money back and forth.

From the very beginning, Ponzi knew what he was doing. He always had a short-fall and had a negative position. But he eventually ended up losing 8 million in the late 20s.

There are franchisors out there that have absolutely the same mentality. If you can't hold onto your money, that is your fault. Like Ponzi, some franchisors and creators of business opportunities know exactly what scam they are doing.

Photo from Wikipedia