Ponzi's Scheme

The other day (Tuesday, actually, while I was out in the field), Dennis Prager was interviewing the author of Ponzi's Scheme.

The book focuses on the story of Charles Ponzi, the person after whom the notoriuous scheme is named.

It turns out, he's a very complex character. Those who know him only from the scheme that bears his name will find a fascinating story in and around the man's life.

Dennis explored several aspects of Ponzi's life from the perspective of a "moral bank account", an idea that's had a fair amount of influence on my thinking. If the scheme had been the only thing Ponzi had effected in his life, his name would deserve the stains it carries. However, he did other things as well, and even in the context of this scheme, there are mitigating factors.

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Ponzi had come up with an idea for making money. It was basically a form of currency trading.

He realized that it was possible to buy international reply coupons (IRCs) in one country at one price, and sell them in another country at another price. Postage prices in different coutries hadn't caught up with actual costs in all cases. The problem was, he needed seed money.

Because of his past history, he had no credit, and no bank would loan him money. Especially since he wouldn't tell them what he intended to do with it, for fear they'd steal his idea.

He eventually went public, setting up an office and hanging out a shingle. His office, named, interestingly enough, the "Securities and Exchange Company", offered a 50% return on investment in three months' time.

People invested.

He was able to pay them back. However, since he kept running into trouble with the logistics trading IRCs, he paid his investors back with money from later investors. As long as he had more investors coming in, or letting their money ride, than collecting, he could keep his investors happy. All the time, as near as can be determined, he kept trying to get the logistics to work out.

Was this an intentional fraud? Probably not.

For one thing, about the time his company started raking in the dough, at the rate of $1 million per day, he started being treated for ulcers. For another, there was at least one occasion when he was walking around with an ocean cruise ticket in one pocket, and a draft in the other for enough money to buy that ocean liner outright.

He could have cut and run, and no one would have stopped him. He was recently married, and an overseas honeymoon would have not been suspicious.

All evidence shows he wanted to make this investment work.

Eventually, a determined newspaper editor started digging, and uncovered a past forged check, investors lost confidence, and the Securities and Exchange Company collapsed. Charles Ponzi served nearly a decade in prison, was deported to Italy, and eventually died in poverty.

Although his wife divorced him, she didn't re-marry until after he died, and kept up an amorous correspondence with him until he died.

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Perhaps also due to Dennis Prager's influence, I put a lot of weight in those things people do that they don't have to. Before the Securites and Exchange Company, Ponzi worked a number of odd jobs, including a male nurse at a mining company. While he was at the mining company, a female nurse, with whom he was not involved in any way, was burned in a kerosene explosion. She needed skin grafts in order to live.

The camp's doctor was talking with him one evening, lamenting the fact that this poor woman was going to die, because no one was willing to donate skin, and Ponzi said, "take as much as you need."

"As much as you need" turned out to involve large patches from his back and thighs. He spent weeks in the hospital recovering, and would be scarred, and have to treat his scars to prevent infection, for the rest of his life.

The nurse was, needless to say, quite grateful, and the whole town voted Ponzi a heroism award, which he certainly deserved. Under the "moral bank account" model, one could argue that this one act is enough to offset the harm he caused with the Securities and Exchange Company. It certainly offset a good portion of it.

It was also completely optional. Everyone else in the camp had refused to donate skin. Ponzi could have declined, and it would have been – quite literally – no skin off his nose.

(Oh, come on. Don't tell me you expected me to resist that pun...