Ponzi's Scheme
Authors: Mitchell Zuckoff
C
ONTENTS
“Always reaching for the moon”
“Like stealing candy from a baby”
F
or my father
P
ROLOGUE
O
n June 9, 1920, a smooth-talking salesman named Martin Kolega went door-to-door in South Boston, Massachusetts, demon-strating a double-your-money machine small enough to fit on a sewing table. When Kolega knocked at the modest home of Mrs. Blanche Crasco, she welcomed him inside. But Mrs. Crasco was no fool. She wanted proof that the marvelous appliance worked. Kolega happily obliged.
No one could deny that the machine was a wonder. Encased in an enameled metal box, it sported flashing lights and a revolving board dotted with what looked like typewriter keys. In a darkened room, Kolega inserted into the box a hundred-dollar bill and a blank sheet of paper cut to the same size. Lights flickered, gears turned, and the box emitted a mysterious whirring sound. After a long minute of anticipation, Kolega pressed a button and, miraculously, two genuine hundred-dollar bills emerged.
Mrs. Crasco was sold.
Kolega pocketed her moneyâthe $540 was enough for Mrs. Crasco to buy a car, but it seemed worth it for the endless stream of hundred-dollar bills the machine was sure to produce. In exchange, Kolega handed Mrs. Crasco a package wrapped in brown paper. Allowing for time to escape, Kolega warned her not to open it until nightfall, to be certain she did not expose the special duplicating paper to light. He left. She waited.
When Mrs. Crasco opened the bundle, she found a plain wooden box. Realizing that she had been duped, she called the police.
Oddly enough, a gullible newspaper reporter writing about the arrest of Kolega and an accomplice seemed to believe that Mrs. Crasco had been sold a fake version of a truly wondrous device. “It is alleged,” the reporter wrote, “that the men reserved one machine for demonstration and sold their customers dummy affairs.”
In other words, had Kolega only been kind enough to sell Mrs. Crasco a working copy of the splendid contraption, everyone would be happy and he would not be in jail.
In 1920, anything seemed possible. Especially when it came to money.
A new ethos was emerging, one that would reshape what it meant to be an American. No more pennies saved and pennies earned. Money was best when it arrived fast, easy, and in large quantities. Newspapers fueled dreams of prosperity with stories of poor girls marrying rich men, inherited fortunes from long-lost relatives, and fearless entrepreneurs who'd hit it big. The message was clear: No longer was prosperity the preserve of the well-born; even the laborer and the charwoman could aspire to the manor. All it took was the right break, the right knock at the door. And if wealth did not come knocking, go get it yourself. Plunge into dark waters in pursuit of sunken treasure. Never mind the shallow bottoms.
For promoters of instant assets, it was a time when it paid to think big. Kolega was a small-timer, quickly behind bars, his name soon forgotten. But at the same time, in the same city, a smiling, cane-twirling banty rooster of a man had a better idea for doubling moneyâa secret formula for financial alchemy that could transform penny stamps into millions of dollars. Admirers hailed him as a wizard, critics branded him a fraud. Either way, he arrived on the scene at the perfect moment. His amazing run would mark the first roar of the 1920s, and his name would live on forever.
PART ONE
Ponzi displays his fancy walking stick in a pose fit for a drum major.
Boston Public Library, Print Department
C
HAPTER
O
NE
“I'
M THE MAN
.”
T
he huge blue car moved slowly through the crooked streets of the old city, its owner sitting on the wide rear seat, his bottom comforted by deep, horsehair-filled cushions that absorbed the bumps from the uneven cobblestones. Heat and sunlight bounced off the brick and granite buildings, baking the Locomobile limousine and broiling its passengers. The morning air bristled with the hint of a developing thunderstorm. When the skies broke loose it would be a welcome relief from the weeks of summer heat that had made downtown Boston ripe with the smells of horses, fish, fruit, fresh-cut leather, and tight-wound rope, all seasoned by salt from the nearby harbor.
At the wheel of the hand-polished Locomobile was a young Irish immigrant named John Collins, wearing the hat and brass-buttoned uniform of a newly created job: motorcar chauffeur. His boss, an Italian immigrant, had taken delivery of the dazzling vehicle only three weeks earlier, paying a thousand dollars in cash above the $12,600 list price to spirit it away from the New York financier for whom it had been custom-built. For the same price a man could own twenty Model T's, with enough change to buy a modest house. But what was the point of that? In 1920, the Locomobile was the most expensive car in America, dripping with luxury, from its sterling-silver trim to its crystal bud vases. Purring, glistening Locomobiles filled the garages of Carnegies and Vanderbilts, and General John J. “Black Jack” Pershing, commander of American forces in the Great War, had shipped his to France for use as a staff car. The executives at the Locomobile Company of America understood that exclusivity appealed to the elites. They had positioned their automobile in direct opposition to Henry Ford's backfiring rattletrap of the masses. The company's ads, with the look of engraved invitations, stated that Locomobiles were built by hand “in strictly limited quantities because the making of any pre-eminently fine article is impossible on a large scale.”
In the short time he had been driving the car, Collins had learned well the daily twelve-mile route that began at his boss's gracious home in the historic suburb of Lexington, less than a mile from the site of the first skirmish of the Revolutionary War. From there, they rolled east through working-class Arlington and Somerville, into tony Cambridge, across the Charles River, then down Tremont Street to a nondescript building on School Street, less than a block from Boston City Hall. Occasionally there would be detours, most often to a bank, and the boss would use the one-way intercom from the back seat to relay the new directions to Collins. But on this dayâJuly 24, 1920âit was straight from home to office.
Collins slowed as he turned down School Street and saw what awaited them: a mob of several hundred men and women, crowded together hip to hip, chest to back. Viewed from above, it looked like an abstract mosaic of straw boaters and colorful felt cloche hats, punctuated by the dark crowns of a few bowlers. Some in the throng had brought bewildered children, who cried or whined as they struggled to avoid being trampled underfoot. The street was alive with electricity unrelated to the gathering thunderclouds. It came from the horde itself. Each member was a charged electron jittering in a magnetic field created by the man in the back seat of the Locomobile.
The street normally would have been all but deserted on a sultry Saturday in late July. But this was no ordinary day. When the crowd saw the limousine turn down the street they pressed toward it, half in reverence and half in mindless desire. They parted to allow Collins to steer toward the curb in front of the Niles Building, at 27 School Street, the modest home of his boss's extravagantly immodest firm, the impressively named Securities Exchange Company.
From his perch in the back seat, Collins's boss could see that some men in the street were holding copies of that morning's
Boston Post.
The banner headline trumpeted a victory in one of the America's Cup races by the American yacht
Resolute
over its British challenger,
Shamrock IV.
At a time when anything seemed possible except a legal drink of whiskey, elite sports like yachting and golf had captured the public imagination.
If one subject interested Bostonians more than rich men's sports, it was the prospect of becoming rich themselves. Undeniable evidence could be found in that morning's
Post,
just below the yacht race story. On the left side of the front page, in bold black letters, was the headline that had filled School Street to bursting:
D
OUBLES THE
M
ONEY
W
ITHIN
T
HREE
M
ONTHS
A
Post
reporter had visited 27 School Street a day earlier and acquired a basic understanding of how the Securities Exchange Company claimed to create spectacular profits for its investors. The unbylined story even described the Locomobile limousine and the boss's Lexington home, which was “furnished with the best” and “does not give the impression of
nouveau riche
either, for the fine Italian tastes of the owner fixed that.”
The man who owned the fine home, the flashy car, the Securities Exchange Company, the adoration of the people on School Street, and anything else he cared to buy was named Charles Ponzi.
Reading the
Post
story that morning, Ponzi could chuckle with appreciation of his good judgment in granting the reporter access to his office and home. He had handled the interview himself, but from now on he would rely on advice from a publicity man he had just hired, an ex-reporter named William McMasters. At first, Ponzi had been skeptical about publicityâhe had not needed much to achieve success that approached his wildest dreamsâbut his gentle treatment by the
Post
made it seem as though every card he turned would be an ace.
The front-page
Post
story eclipsed two previous stories Boston papers had printed about him and his business. The first, six weeks earlier in the
Boston Traveler,
had described his company in flattering terms but never mentioned it or him by name. Still, word had spread as to the identity and location of Ponzi's operation, and hundreds of thousands of dollars had poured in during the weeks that followed. The second story, three weeks earlier in the
Post,
had been a brief item about a million-dollar lawsuit filed against Ponzi by a furniture dealer. That, too, had helped. The fact that he was rich enough to be sued for a million dollars had attracted swarms of new investors.
The brief account of the enormous lawsuit had piqued the interest of the
Post
's young acting editor and publisher, who had ordered the follow-up feature story that appeared this day. In it, the
Post
reporter printed Ponzi's comments at length and without challenge, as though Ponzi had delivered them with his hand on a Bible. During the course of several hours of discourse, the thirty-eight-year-old entrepreneur had offered a condensed, sanitized version of the seventeen years since he had emigrated from Italy. Then Ponzi had explained his business in broad, confident terms, telling how it was built on a modest and unlikely medium: International Reply Coupons, slips of paper that could be redeemed for postage stamps. He'd described his company's growthâfrom pennies to millions of dollars in seven monthsâand had boasted of the opening of branch offices from Maine to New Jersey. The reporter had filled a notebook with Ponzi's comments and played the notes back to
Post
readers as clear and sweet as a song from a Victrola.
Ponzi had capped the interview with a priceless assertion, and again the reporter had obliged him by printing it: “I get no pleasure out of spending money on myself, but a great deal in doing some good with it. Always I have said to myself, if I can get one million dollars, I can live with all the comfort I want for the rest of my life. If I get more than one million dollars, I will spend all over and above the one million trying to do good in the world. Now I have the million. That I have put aside. If my business closed tomorrow I am sure that I will have that amount on which to make myself and family comfortable for the rest of our days.” If anyone doubted how secure Ponzi felt, the story continued: “Ponzi estimates his wealth in excess of $8.5 million.”
With a maestro's touch, Ponzi had struck a perfect balance among the forces competing to control the new American identity: altruism and avarice. Now that he was all set, he insisted, he had no need for more investors. But he would continue accepting their money out of the goodness of his heart, so they could join him and his family in savoring the finer things in life.
If there was any reason for the people of Boston to be suspicious of Ponzi, they would not find it in the morning
Post.
The story read with all the confidence of the advertisements the paper ran that promised disappearing dandruff to wise buyers of Petrole hair tonic, or “sunshiny” stomachs courtesy of Goldenglo tablets, or relief from chronic constipation in a tin of Fruit-a-Tives.
The closest the story came to skepticism was to mention that federal and state authorities had looked into Ponzi's extraordinary investment plan. But the reporter defused that land mine in a single sentence, writing, “The authorities have not been able to discover a single illegal thing about it.” Ponzi could not have hoped for a more sterling endorsement.
Adding to Ponzi's delight, below the front-page story was an ad for a prominent local bank, the Cosmopolitan Trust Company. The bank was trying to drum up new deposits by guaranteeing a generous interest rate: 5 percent a year, compounded monthly. To Ponzi, the ad was a divine gift. For months he had been comparing his promised rate of returnâ50 percent in forty-five daysâto the paltry sum paid by banks. Here was the same comparison on the front page of the
Post,
the self-proclaimed “Great Breakfast Table Paper of New England.”
A working man with one hundred dollars to invest, reading that day's
Post
over a bowl of Grape-Nuts, faced two choices of seemingly equal reliability but vastly different outcomes. Even in the margins of his newspaper, he could calculate that depositing his hundred dollars in the Cosmopolitan Trust Company would yield him an annual profit of five dollars and change. That was assuming the bank did not fail in these days when federal insurance for deposits was barely a whisper of an idea. Or he could entrust his hundred dollars to this Charles Ponzi fellow and watch it multiply over and again during the same year.
If he reinvested his hundred dollars plus interest after each forty-five-day period, he would walk away with more than twenty-five hundred dollars after a year. If he let it ride for a second year, he would pocket more than sixty-five thousand dollars. It was an unimaginable sum at a time when the average U.S. income was about two thousand dollars, the president of Harvard University was paid six thousand dollars, a Men's Ventilated Raincoat could be ordered from the Sears catalog for less than twelve dollars, a can of codfish cakes for a family of three cost twenty-five cents, and the newspaper he held in his hands cost two cents. Only a fool would choose the bank's interest over Ponzi's.
Having read the
Post
and done the math, would-be investors had begun assembling on School Street long before the Locomobile had even started the trip from Lexington. They came from all corners of Boston and beyond, a miniature League of Nations, with immigrants brushing shoulders with Brahmins, Italians mingling with Spaniards, Irish alongside English, Greeks chatting with Poles. Among them were Swedes, Frenchmen, Jews, blacks, and Portuguese, new and old Americans. Kitchen maids stood alongside businessmen, office boys squeezed against society matrons. It was the one place in the tribal city where the only denomination that mattered was engraved on the bills clutched in investors' hands.
Bookbinder Arthur Case of the city's Dorchester neighborhood was ready to invest a whopping three thousand dollars, just a week after his wife, Clara, had put in one thousand. Their neighbor, candy-factory worker William Hoff, emptied his wallet and came up with seventy-eight dollars. Boston florist Philip Feinstein was ready to place eleven hundred dollars in Ponzi's hands, while Patrick Horan had stuffed sixteen hundred dollars into his billfold. Benjamin Brown intended to add six hundred dollars to the six hundred he had deposited just four days earlier. Stable worker Timothy Donovan of suburban Somerville and Alfred Authoir of nearby Cambridge each expected their fifty-dollar investments to grow into seventy-five dollars by the first week of September. Print shop foreman Percy Stott of Methuen had made the thirty-mile trip to Boston for the third straight day, this time to add one hundred dollars to the two hundred he had already invested.