charles ponzi
Ponzi Scheme: Often you would come across such news in newspapers or on TV, in which people are said to have lost crores of rupees. Sometimes a hoax of doubling money in two days, sometimes a promise of huge profits without any hard work. The game that goes on behind these tempting promises is known by the name of ‘Ponzi Scheme’. This is a word that gets associated with every major financial scam. But have you ever wondered why this fraud is called ‘Ponzi’? The answer lies in the story of a man with a cunning mind, who created a model of fraud about 100 years ago, which is ruining people even today.
A scandal was committed in the craze to regain lost respect.
This story starts with Charles Ponzi. Born in a rich Italian family in 1882, Charles’s childhood was spent in luxury, but the wheel of time turned in such a way that the family lost everything. After this, the obsession of getting back that old glow of wealth and status had started in Charles’s mind. At the age of 21, when he got some money, instead of studying, he spent it all on adopting a lifestyle like that of the rich. He was more interested in ‘looking rich’ than being rich.
When he reached America in 1903, his pockets were empty but his dreams were big. There he worked from washing utensils to selling insurance. But as soon as he got some money in his hands, he would spend it to show off his false grandeur. During this time, while working in a bank in Montreal, he learned an important lesson. There he saw that the owner of the bank was using the money of new investors to please the old investors. That bank collapsed, but Charles Ponzi had learned the ‘mantra’, the story you sold is more important than the business.
An illusion of fraud was created with a simple ‘coupon’
Ponzi got the opportunity to execute his nefarious plans in 1919. He received a letter from Spain containing an International Reply Coupon (IRC). According to the rules, it could be bought cheaply in one country and redeemed at a high price in another country. The profits were real, but there were a lot of complications. Based on this, Ponzi prepared a scheme which did not exist in reality. He promised people that he would buy these coupons with their money and give 50 percent profit within 45 days.
He started playing with people’s psychology. He knew that if the initial people got the money, they would promote his scheme themselves. He did exactly that. Money was returned to the initial investors, which gave it credibility in the market. This was such a psychological trap in which people kept getting trapped. He was selling ‘hope’, not profit.
People’s greed outweighs the evidence
People were so intoxicated by Charles Ponzi’s scheme that they forgot all logic and mathematics. When the first few people got the promised returns, the news spread like wildfire. People came running to him with their life savings. The situation was such that at one time Ponzi was collecting about $250,000 every day. He bought luxurious mansions and luxury cars.
Financial journalists of that time had also proved that there are not as many coupons present in the world as Ponzi is claiming. Experts like Clarence Baron said that the mathematics of this scheme is wrong. But greed had blunted people’s thinking power. Ponzi knew that when a person wants to believe something as true, he ignores the evidence. In the end what happened was supposed to happen. Ponzi himself got trapped in his own trap. He later confessed that he was not knowledgeable in mathematics and the whole matter was just a matter of fact. When this balloon burst, many banks collapsed and thousands of people came onto the streets. Even today, be it crypto scams or fake promises of online earning, everyone is running on the same ‘Ponzi Model’ which Charles taught years ago.