Ponzi Scheme Term Origniates With Charles Ponzi

Posted on December 18, 2008

The news about Bernard Madoff's $50 billion ponzi scheme has some wondering what exactly is a ponzi scheme. A Ponzi scheme is a type of pyramid scheme that promises a huge return in a very short. The Ponzi scheme relies on giving big payouts to early investors to lure in new investors and using new investor money to pay off the early investors. If a Ponzi scheme is working the early investors will often reinvest their money in the corrupt scheme. The term originated with Charles Ponzi who bilked investors out of millions in the 1910s and early 1920s. At his peak Ponzi was bringing in $250,000 a day. Here's an explanation from the SEC.

Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period - and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

Matt Friedman for the Associated Press also explains what a ponzi scheme in the video below.