Bernard Madoff’s multi-billionaire dollar swindle has been called a “Ponzi Scheme,†referring to a similar scandal perpetrated by Charles Ponzi beginning in 1920. There has been no surfeit in articles on Ponzi, but nearly all have focused on comparing and contrasting Madoff and his would be inspiration.
That’s one reason Chapter 3 in my father’s 1968 biography “Benjamin H. Swig: The Measure of a Man†is so fascinating. The book – which was commissioned by the Swig family to chronicle the life of Benjamin Swig, a well-known banker and philanthropist in San Francisco – describes how Ponzi operated long before Madoff came on the scene.
As a tribute to my father, who passed away just over a month ago on March 22, I am pleased to present here an excerpt from his book.
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To Ben Swig, it was a most peculiar site: this dapper little man with the carnation in his lapel who strode into the Tremont Trust Company [the bank owned by Ben Swig’s father Simon Swig in Boston] one day in 1920, his arms overflowing with wastebaskets, the wastebaskets in turn overflowing with money.
Charles Ponzi had struck it rich. No gold mine was the fountain of his wealth, however, but the dollars of simple men and women withdrawing their life savings, selling Liberty bonds, borrowing from loan sharks, cadging, stealing, appropriating every possible penny that could be pressed into the willing hands of a man already acclaimed throughout Boston as the “Wizard of Finance.â€
Ponzi, they said, had discovered money. His plan was simplicity itself. He would buy depreciated foreign currency with U.S. dollars, convert the currency into International Postal Union reply coupons at par, then convert the coupons back into dollars. Result: immediate profit. The coupons were incontrovertibly safe; they were regulated by an international agency which stipulated they could not be sold for less than 28 centimes gold.
The investor was given a tempting choice: he could double his money in 90 days – and many did – or he could hold on and make even more. An organization called the Securities Exchange Company (no relation to the present Federal agency) was set up to accommodate anyone who wished to avail himself of the scheme. But the mere mathematics of the thing staggered the imagination. By a simple process of calculation – of doubling, tripling and quadrupling – it became obvious that anyone joining Ponzi’s operation couldn’t help but become rich.
Of course, it was a swindle – one of the most fantastic, and certainly the most successful fraud of its kind ever perpetrated in the United States.
But it worked. By July of 1920, Boston was literally money-mad. In the first eight months of its operation, the scheme netted Ponzi $15,000,000 from 40,000 people. They were lining up around the block to get in. Ponzi was serving them free coffee and frankfurters as they waited. He was collecting $250,000 a day; his chief assistant, an ex-butcher’s helper, was earning $7,000 a week.
The money that poured into his dingy office at 27 School Street carpeted the floor, overflowed into closets and those unbelievable wastebaskets, lined the vaults in the basement of the million-dollar showplace he had built. He acquired large holdings of Boston real estate, purchased the controlling stock of the Hanover Trust Company, bought out the brokerage firm (Poole’s, which had employed him as a stock boy three years earlier), stocked a cellar with rare wines, and drove around town in a custom-built blue limousine. Wherever the limousine went, Ponzi was mobbed by investors begging him to take their money.
It was Simon Swig’s misfortune to be chosen as one of the bankers with whom Ponzi deposited his ill-gotten rewards. He watched the little “wizard†pyramiding his fortune, depositing more and more money with the bank. He eyed the hysteria that had gripped his adopted city, and worried. Then one day, just on a hunch, he got in touch with a financier friend, Thomas L. Lawson, and asked him what he thought of the Ponzi scheme.
Lawson sent out and bought one of Ponzi’s notes, and discovered to his horror that the lithographed document bore a promise to pay “at any bank†– obviously an impossibility – and not just any bank in Boston, but any bank in the country. Lawson’s advice to Swig was short and sweet: “Get Ponzi’s deposits out of your bank without a moment’s delay!â€
Simon Swig moved fast. He wrote a letter to Ponzi, ordering him to withdraw his account and outlining the reasons. “People have come to us and said that your company has given us as a reference,†he added with controlled indignation. “We know nothing about your company, and you had no right to give us as a reference…â€
Meanwhile, other minds in Boston were working along the same tracks. One of these was Richard Grozier, publisher of the Boston Post. Suspecting that Ponzi might be a racketeer, the Post assigned one of its top newsmen, William H. McMasters, to get the real story. Between them, the Post and Simon Swig pricked the bubble of Ponzi’s scheme, and the air rushed out with a terrible hiss. Thousands of small investors were caught in the downdraft. Five major banks had to close their doors. For a while, the entire economy of the city was threatened.
The resulting investigation revealed that, in the last six years, the entire issue of postal-reply coupons had amounted to only $1,000,000. Yet Ponzi had already accumulated over $10,000,000 in just a few months. How was that possible? The answer was simple: Ponzi hadn’t bought any postal-reply coupons at all. In the manner of the classic swindler, he had merely used the latecomers’ money to pay off the early birds. Since he kept no books, there was no way of telling where Ponzi was getting his money. When pressed for an answer, the little man had a ready excuse: “Why, I’ve just used the postal-coupon idea as a blind,†he said. “I didn’t want the Wall Street boys to get even a hint of what my real scheme was.
There was no “real scheme,†of course. But the little swindler was as brazen with lies as he was adept in manipulating money. Faced with exposure, he promptly offered to refund all the money taken in, rented an office, and for several days busily handed out cash at the rate of $500,000 a day. Did that end it? Not at all. Before long, new money was pouring in. Police inspectors, assigned to investigate Ponzi, ended up investing in his company. Even after the Post’s Pulitzer Prize-winning expose, Ponzi managed to collect more than $5,000,000 in additional investments.
Now, at last, the forces of law closed in on Ponzi. It was discovered that he was an ex-convict who had served time as a forger. The United States Attorney moved for an indictment, and the Post Office, which had been working undercover on the case, revealed the extent of its investigation. Still, Ponzi remained unruffled. Leaving Simon Swig’s Tremont Trust Company, he was asked by a reporter if he would mind disclosing how much he had withdrawn. “No, I don’t mind,†Ponzi replied airily. “Almost $200,000.†It was left to the treasurer, looking with distaste at his unwelcome customer, to furnish the exact total. “It was $185,600,†reported Ben Swig, who as usual had everyone’s finances – including a swindler’s – at his fingertips.
Ponzi was indicted on 86 counts by the Federal government. He spent the next three and a half years in prison for mail fraud. Released, he tried to launch a comeback with a “200 percent profit†land swindle in Florida, was jailed again, and in 1934 deported to Italy. He died in 1949 in a Rio de Janeiro charity ward, blind in one eye and partly paralyzed. When his effects were settled, it was discovered he had left an estate of $75. Few who read his obituary even knew who the little swindler was.
