Charles Ponzi: Here’s How The Fraudulent Ponzi Scheme Got Its Name

• Charles Ponzi’s 1920 scheme is the origin of the term “Ponzi scheme.”

• This fraudulent investment model promises impossibly high returns, paying early investors with funds from new participants.

• The scheme inevitably collapses when the flow of new money ceases.

• This article explores the history of the Ponzi scheme, its mechanics, and infamous examples in India like the Saradha and Rose Valley scams.

• Despite legal protections, the allure of quick wealth continues to make people vulnerable to such financial frauds.

In 1920, an Italian immigrant to the US named Charles Ponzi walked into Boston with an idea that would forever cement his name in the world of financial crime. He promised investors a 50 per cent return in 45 days, something banks, bonds, and legitimate businesses could never match. The method, he claimed, involved exploiting price differences in international postal reply coupons. The reality: there were no meaningful trades, no profits, only money moving from the pockets of new investors into the hands of the previous ones.

The mechanics were simple enough to lure thousands. Early participants were paid promptly, creating the illusion of a thriving business. As word spread, cash poured in, at one point, an estimated $250,000 a day. But by August that year, the pipeline of fresh money slowed. The scheme, like every one that followed its blueprint, collapsed under its own weight. Ponzi was arrested, and the investors who believed him were left counting losses instead of profits.

What is a Ponzi Scheme?

A Ponzi scheme works on one fragile assumption that new investors will always outnumber the old. When that flow dries up, the facade crumbles. 

Unlike legitimate businesses that generate income from goods or services, Ponzi operations recycle funds in a closed loop. The first signs of trouble appear when payouts get delayed or investors are discouraged from withdrawing capital. The moment confidence falters, the collapse starts.

Some Infamous Ponzi Schemes in India

India has seen its own versions of the scam. The Saradha Group collapse in 2013 wiped out the savings of lakhs in West Bengal. The Rose Valley scam, larger still, involved over Rs 15,000 crore. SpeakAsia’s pyramid-style “online survey” business fell apart in 2011. PACL, under the guise of selling land, collected Rs 49,100 crore before regulators intervened.

The law recognises these schemes as fraud. The Prize Chit and Money Circulation (Banning) Act, 1978, also prohibits these. 

The Banning of Unregulated Deposit Schemes Act, 2019, also gives enforcement agencies sharper tools to act quickly. Under the Prevention of Money Laundering Act, 2002, proceeds can be seized and culprits prosecuted.

Despite legal safeguards, the lure persists. High returns with no risk remain the oldest bait in finance. Warren Buffett’s quote, “Only when the tide goes out do you discover who’s been swimming naked” captures the inevitability of exposure. Yet by the time the tide turns, most victims have already lost their money.

Ponzi’s legacy is not the fortune he made and lost, but the warning his name now carries. Every time an “investment opportunity” promises the impossible, the lesson from 1920 should serve as an apt reminder of the perils of an impossible return that cannot be actually promised even by legible businesses. And every time it’s ignored, another group of investors learn their lessons the hard way.