The Spanish Scheme that Bankrupted Boston: A Look into the History of Ponzi’s International Postal Reply Coupon Swindle

In the summer of 1919, an audacious money making scheme unfolded in Boston, USA, orchestrated by Charles Ponzi, an Italy-born con artist. This is the story of Ponzi’s International Postal Reply Coupon Swindle.

An Unexpected Opportunity

Ponzi, who was residing in Boston at the time, stumbled upon an opportunity after receiving an International Postal Reply Coupon. The coupon, worth substantially less in Spain than in the US due to exchange rate differences, sparked an ingenious plan.

The Birth of The Security and Exchange Company

Capitalizing on this lucrative opportunity, Ponzi formed a company named The Security and Exchange Company. His intentions were not yet nefarious, as he was not attempting to deceive potential investors at this stage.

Attracting Investors

Ponzi circulated persuasive literature offering investors a whopping 40 percent return in just 90 days. In comparison, the prevailing interest rate was mere 5% per year. His publicity primarily reached Boston’s immigrant community, many of whom were also part of Ponzi’s Italian heritage.

The Scheme Grows

Investment in Ponzi’s scheme began in January 1920, with small amounts. As the returns started to roll in, Ponzi upped the promised rate to an astonishing 100 percent return on 90-day notes and 50 percent on 45-day notes. The influx of cash was exponential, with six clerks working ceaselessly to manage it.

Misappropriation of Funds

Ponzi deposited the funds in a mutual savings bank, becoming the primary depositor and president of the organization. Despite his constant engagement in managing the money, buying properties, and enjoying a life of luxury, he neglected to actively exploit the coupon price discrepancies. Instead, his organization only generated a 5 percent interest on the bank deposits.

A Temporary Reprieve

News of the financial gains reached the local press, prompting doubts about the scheme’s feasibility. Some investors clamored for their money back, but Ponzi offered them an alternative: a better, secret scheme. Convinced, investors hesitated to withdraw their funds, instead, they injected more, bolstering the scheme with an unexpected $200,000 net gain.

The Collapse

However, this respite was short-lived. In July 1920, the Boston Post published a damning article, demonstrating that the scheme could not possibly generate the returns Ponzi had promised. Panic ensued, and the Security and Exchange Company lost investors’ confidence. The Boston District Attorney intervened, ordering Ponzi to halt new investments and initiate an audit of the company’s books.

The Truth Comes Out

The scrutiny brought another run on the scheme, which now faced insurmountable obligations and dwindling funds. As Ponzi’s questionable past came to light, so did the truth about the meager profits from the underpriced coupons and the diversion of funds to the Boston Post bailout attempt.

The Impossibility of Financial Survival

Though the Boston Post’s revealing articles led to the collapse of the Security and Exchange Company, the scheme’s financial downfall could be traced to a few simple calculations. Calculations that showed a net loss on every transaction, perpetuating the scheme’s downward spiral and highlighting the impossibility of its financial survival.

Lessons Learned

The Ponzi scheme is a classic example of a financial bubble that is unsustainable and eventually collapses. It is a reminder to always verify the legitimacy of investment opportunities, be skeptical of high returns with little risk, and understand the basis of investment returns.