Some of my most popular blogs have been about real-life people. These include ‘The Riches to Rags story of the Vanderbilts’ and ‘The Millionaire Janitor’. These stories bring some really important money lessons to life. In this blog, I want to share the real-life story of the scammer Charles Ponzi.
Over the last few years, I’ve been teaching my daughters about ‘scams’ by telling them different stories of real life people. For example, Sam Brannan who told everyone there was plenty of gold available during the American Gold Rush in the 1800’s so they would buy his shovels and make him rich (he was the inspiration behind Shovel Sam in my book, Grandpa’s Fortune Fables). Recently, I told them all about one of the most famous scammers in history, Charles Ponzi.
I want kids to hear these stories about scams so that when they are older they appreciate that “If something sounds too good to be true, then it probably is!”
Who is Charles Ponzi?
Charles Ponzi was born in Italy in 1882.
In 1903, aged 21, he travelled in search of a better life in America. When he arrived in Boston, he only had $2.50 left as he gambled all his savings on the long ship journey over. This was one of the first signs that he had little patience and wanted to find ways to get money quickly.
Once he got to America he started working in odd-jobs like waitering, as a bus-boy and a sign painter but he never kept these jobs for long as he would get caught stealing or swindling money from customers.
He then got a job in a bank and did quite well before the bank went out of business (not his fault). Ponzi then went to prison for trying to cash an illegal cheque into his account. This drawback didn’t stop him trying to make money quickly again.
After another stint in prison, he actually found a smart way of making money.
At the time, there were these special stamps called ‘International Relay Coupons’. These stamps were used to pre-pay for the delivery of items from one country to another. Ponzi realised he could buy these coupons for cheap in other countries (like Italy), ship them to America for a higher price and make a profit. This was completely legal and could have made him quite a bit of money.
Charles Ponzi started to tell people about his clever way of making money. People then gave him lots of money to buy these stamps so they could make a profit too. The profit he was promising was very high and seemed risk-free so lots of people were interested. He knew that, like himself, people love to ‘get rich quick!’
Ponzi, however, wasn’t buying any of these stamps as that was a lot of work. Instead, he realised that he was getting a steady flow of new people giving him money as they wanted a quick profit. This was the start of his scam.
He used the money he got from new investors to pay the ‘profit’ he had promised previous investors (telling them that the profit was from the stamp strategy). This worked as long as investors didn’t ask for their money back!
This was a case of:
“Robbing Peter to pay Paul!”
As the investors were getting their ‘profit’ they didn’t ask questions. They simply invested more and told their friends. More and more people were giving money to Ponzi. At one point, he was making $1 million each week!
This scam went on for a whole year. It wasn’t until a journalist, Clarence Barron, realised that to meet the promises that Charles Ponzi had made to his investors he would need to be buying around 160 million stamps, however, there were only 27,000 actually in existence!
As soon as the investors started to believe it could be a scam, they asked for their money back, only to realise that there was no money. It had all been given away as ‘profit’ to investors or spent by Ponzi himself.
Charles Ponzi was arrested. Investors lost around $32 million as a result.
He died penniless in Brazil in 1949!
Modern Day Ponzi Scheme
Sadly, people didn’t learn the lessons from this scheme as there have been many other people copying the Ponzi scheme to make money. The biggest being Bernie Madoff who ran a Ponzi scheme for over a decade and investors lost over $19 billion by the time he got caught in 2008.
One of the saddest things about Bernie Madoff is that he was a successful businessman before he started his Ponzi scheme. He just got ‘greedy’ and wanted more money and power. He didn’t know when ‘enough was enough’. Teaching your kids to know when they have ‘enough’ is a fundamental lesson when it comes to money and happiness. That topic will be covered in a future blog.
What are the key messages for your kids from the life of Charles Ponzi?
It’s very sad that I even have to write blogs about scammers but the reality is that our kids are very likely to be approached by scammers throughout their lives. We need to prepare them for this.
The key message for our kids to learn is that ‘If something sounds too good to be true, then it probably is’. Our role as parents is to help our kids appreciate ‘What is too good to be true’?
For me, if someone says I can make more than 10% per year from an investment, then I would be very cautious. If they say that they can provide these returns with little risk then I would definitely say ‘It is too good to be true’.
Also, if someone found a way of making lots of money without much risk, why would they want to tell everyone about it? They are most likely telling everyone as they feel they can make more money from ‘selling the idea’ than from the actual idea itself (just like what Charles Ponzi did with his stamp strategy).
An action for you:
Whenever you receive a scam email or message, share the concept with your kids. We need to build up their knowledge of different types of scams.
More on scams:
My eldest daughter then asked “Is Bitcoin a Ponzi scheme?” - I’ll share my response to that question in a separate blog, so make sure you subscribe below. I’ll also be sharing about other scams such as the ‘Pyramid Scheme’ and ‘Pump and Dump’ in future blogs too.
You can learn more about how I’ve previously taught my daughters about scams, including the use of ‘Scammy Sam’ from reading my blog 'How to teach kids about Scams' or buying a copy of my book Grandpa’s Fortune Fables.
Thanks for reading!
Will
P.S. If you enjoyed this blog (and other blogs I have written), it would be amazing if you could support my work by checking out my best selling book, Grandpa's Fortune Fables, or my highly rated online course. These help me continue to writing and helping more families to talk about money.
