Sacco and Vanzetti were not the most notorious inmates in Charlestown Prison in the summer of 1927. That distinction belonged to a fellow immigrant who had rather faded from the news but whose name has, ironically, lived on more powerfully than those of Sacco and Vanzetti. He was Charles Ponzi, and eight years earlier he had attracted the world's attention, and made himself an eponym, by devising a scheme designed to make people a lot of money very quickly.
Ponzi was a dapper and diminutive fellow, barely five feet tall. Originally from Parma, Italy, he came to the United States in 1903 at the age of 21 and worked at various jobs, from busboy to office clerk to vegetable wholesaler. But in 1919, while living in Boston, he concocted a scheme—in itself perfectly legal—to make a profit by trading in international postal reply coupons. These coupons were invented as a way to help people or businesses send or receive letters or parcels from abroad. The system was meant to facilitate small-scale exchanges between countries. Ponzi realized that he could buy coupons in Europe with depressed European currencies and then redeem them in America for booming U.S. greenbacks. For every $1.00 invested, he could get back up to $3.50.
Promising investors a 50% return on their investment every ninety days, Ponzi launched his scheme in the fall of 1919, and by the following spring—at exactly the time that Frederick Parmenter and Alessandro Berardelli were being gunned down in South Braintree and Sacco and Vanzetti arrested in Brockton—Ponzi was being overwhelmed with eager clients.
Thousands of people gathered daily outside his offices in Boston's North End trying to thrust money into his care. Often it was their life savings. So much money flowed in that Ponzi literally couldn't bank it fast enough. It was packed into shoeboxes and stuffed in desk drawers. In April he took in $120,000, in May $440,000, in June $2.5 million, and in July over $6 million, mostly in bills of small denominations.
The problem with Ponzi’s system was that individual coupons were worth only very small sums — 5¢ typically — so it would have been necessary to exchange truly monumental volumes of coupons to make a reasonable return. Ponzi didn’t even try. It was much simpler to pay off early investors with funds paid in by more recent ones. As long as money kept flowing in, the scheme worked fine. But you didn’t need to be a financial wizard to see that the arrangment could not be infinitely sustained.
Ponzi, alas, genuinely believed it could. He opened branch offices all around New England to take in yet more money, and embarked on an ambitious program of expansion and diversification. At the time of his downfall, he was negotiating to buy a steamship line, a bank, and a chain of movie theaters, all in the sweetly delusional belief that he was a legitimate business titan in the mold of John D. Rockefeller.
Ponzi, it is worth noting, personally benefited little from his artful manipulations. He bought a nice house and a new car with his investors' money, but otherwise his greatest financial indulgence was to donate $100,000 to an orphanage. Ponzi's grand plans began to unravel when a newspaperman asked the post office's coupon redemption department how it was coping with such an influx of business, and learned that there was no influx of business. It turned out Ponzi had cashed in only $30 worth of postal coupons. All the rest was money taken from one lot of investors and given to another. Altogether, it is thought, Ponzi ended up some $10 million in the hole, equivalent to more than $100 million today. About 40,000 people had invested with him. From beginning to end, Ponzi's scheme lasted just eight months. Ponzi was charged, convicted, and sent to a federal prison for three and a half years. Upon his release, he faced additional state charges in Massachusetts, but he absconded to Florida while out on bail. Florida was in the midst of its celebrated property boom, and Ponzi, irrepressible, very nearly succeeded in setting up a bogus real estate scheme there, He offered real land but failed to tell investors that it was all deep seabed. In the summer of 1927, he was back in prison at Charlestown awaiting deportation.
— Bill Bryson, ‘One Summer, America 1927’
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