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Charles Ponzi and the New Economy
Charles Ponzi was a charming, dapper Italian immigrant who became the world’s most famous investment swindler. At his peak in the summer of 1920, when you could buy a house by mail from Sears for $495 and hire skilled labor to assemble it for $1 and hour, Ponzi pulled in a million dollars a week with his “postal reply coupon” investment scheme.
Ponzi promised a 50% return on your money in 90 days. He paid out as promised after just 45 days. Word spread like an e-mail virus. New investors flocked to his offices at locations from Maine to New Jersey. He could hardly haul in the money fast enough. In his offices desk drawers, file cabinets, and closets overflowed with cash daily.
Of course, Ponzi wasn’t investing in postal reply coupons. He was simply paying early investors with money he took in from later investors. A diagram of the scheme would show a pyramid shape. Early investors occupy the top with the swindler at the summit. New investors form a widening base from which money flows up. The game continues as long as the base continues to grow. Mr. Ponzi became so famous that today we call the many variations on his pyramid swindle “Ponzi schemes.”
The financial pyramid, with money flowing from many at the bottom to a lucky few at the top underlies scams ranging from the humble chain letter to vast public programs like the Social Security Administration.
Since the arrival of the Federal Reserve in 1913 the structure of modern American government and economics, in particular the most recent New Era economy, has come to resemble Ponzi’s model much more than that of Founder and chief author of the Bill of Rights, James Madison. And why not? Mr. Ponzi’s ideas are so much easier to grasp.
Consider these words from Mr. Madison: “The great desideratum, which has not yet been found for Republican Governments, seems to be some disinterested and dispassionate umpire in disputes between different passions and interests in the State. The majority, who alone have the right of decision, have frequently an interest, real or supposed, in abusing it.”
Sheesh! Right, Jim. The great what?
Now compare this from Mr. Ponzi: “In 90 days I’ll pay you a buck and a half for every dollar you give me today.” Simple, uncomplicated, enthralling, damn near irresistible.
Who do you go with? Given a choice between a buck and a half and a desideratum, Americans went with Ponzi. In the final days before his arrest, Ponzi rode out a massive run on his business, paying out millions to coupon holders. He paid until the lines of nervous investors wanting out had vanished. But the bank regulators were watching him closely. As soon as his account was overdrawn, they busted him and the bank that was carrying him. Ponzi was bankrupt. However, in the reckoning that followed, many more investors came out winners than losers. Even though people knew Ponzi was a crook, it took 6 years, and selective prosecution of 14 indictments before prosecutors, on their third try, got a jury to convict him of theft. But convicted or not, our love of Ponzi’s idea was undiminished.
The roaring 20’s roared because the newly formed Fed built a paper money pyramid based on our increasing gold reserves. A classic credit bubble inflated and finally popped in 1929. The resulting depression set us up for yet another and more spectacular triumph of Charles Ponzi’s economic ideas.
In the 30’s Americans bought into what is so far, history’s grandest pyramid scheme, Social Security. Sold as an “insurance” program, it is really just a compulsory chain letter. The first “investors” get paid from what comes in from a greater number of or a heavier fee on, later “investors.” Any insurance company operating that way would be shut down for fraud, its directors sent to jail. Even if such a company continued to run, eventually customers would wise up and stop buying new policies.
If, however, the company could force new customers to pay premiums, as Uncle Sam can force working people to pay into Social Security, the game is much more durable. Whether lawmakers are aware of the fraud is hard to say. Social Security’s winners are chronic voters; so naturally, rabid defense of Social Security is a critical part of congressional job security. On the other hand, Congress has opted out of the program. Our representatives enjoy lavish lifelong retirement benefits from the public treasury after just a single term. Ponzi wouldn’t have invested in his own schemes either, especially if he could just steal the money.
Social Security opened the door for a host of other pyramid shaped programs, Medicare, Medicaid, farm subsidies, industrial subsidies, education subsidies, rent subsidies, affordable housing subsidies, food subsidies, drug subsidies, in short, the heart, blood and bones of modern social democracy. Every compulsory government program is a monument to Mr. Ponzi’s genius.
Such programs multiplied wildly after the Second World War — each with an admirable goal. Each persuading us further that somehow, everyone can live at everyone else’s expense.
Finally, in 1971 the stage was set for the final, Mother of All Ponzi Schemes, the New Era economy. That was the year we stopped redeeming dollars for gold. The world went onto the Dollar Standard.
We stopped swapping dollars for gold because there were so many dollars out there that at the official price of $35 an ounce all the gold in Ft. Knox would not have redeemed even a tiny fraction of them. Suddenly all of our many trading partners had to admit their best customer couldn’t pay. Nobody wanted to lose their biggest, and in some cases, their only customer. Nobody wanted to write off a vault full of IOU’s. A default of such magnitude would have been a disaster for everyone. Something had to be done. Enter Mr. Ponzi.
Americans owed so much to so many that our creditors agreed to pretend U.S. Government IOU’s are just like gold. A worldwide depression was the only other option. The United States became unique in the history of humankind. We convinced the world that our government’s debt, which the Fed can produce in unlimited quantities as easily as Alan Greenspan can say irrational exuberance, was more valuable than gold, one of the scarcest and most durable commodities on the planet.
Did they believe it? They acted like they did. Foreign central banks started using Uncle Sam’s markers as “reserves.” Dollars became the base of a worldwide currency pyramid. Americans occupy the top levels of the pyramid. The U.S. Government and the Fed are at the peak. Chinese factory workers share the bottom with those toiling in factories all over the third world. As long as dollars keep materializing at an ever-increasing rate, the pyramid continues to grow. As long as Americans and our government steadily increase our debt, the game can continue.
So far, Americans continue to binge on foreign goods, buying what we don’t need with what we don’t have. Our biggest export is IOU’s. Those chits come back and buy real estate and stock, and, incredibly, more U.S. Treasury IOU’s. Prices rise. Ponzi triumphs as we borrow from our creditors to pay off what we already owe them. Naturally, we take out a little extra to pay down our credit cards.
How long the scheme can continue, no one can say. The future hides from us like the best parts of an artful fan dancer. We get hints. We get peeks. But what we can see, like the past, most of us ignore. As long as the Chinese are wiling to exchange hardware for promises, we will prosper. As long as we are willing to go ever deeper into debt, the pyramid will grow. Like righteous wars and drinking binges, Ponzi schemes are more fun at the beginning than the end.
Ponzi, finally got what he had coming. Unlike most swindlers, he didn’t bolt when the heat was on. He had delusions of legitimacy. It wasn’t until years later, after getting caught selling swamp in Florida and losing his Supreme Court appeal in Massachusetts that he finally ran. A Texas sheriff kidnapped him off an Italian freighter and sent him to do time in a Massachusetts prison. He died in the pauper’s ward of a Brazilian hospital in 1949. His estate amounted to $75, just enough to put him in the ground. Never the less, in the hearts of swindlers, bankers, and politicians everywhere, Ponzi lives!