Part 4: Getting Started

It is 21 December 1920, and Ettore Gilberti, an Italian immigrant who owns a busy retail shop a few blocks away, visits Ponzi at his 27 School Street office. A friend has told him about Ponzi's investment scheme, and he wants to learn more about it.

International Reply Coupon

He explains that when the IPU introduced international reply coupons, it intended for their value to be the same across all member countries, but due to World War I, most European currencies fell against the dollar, making it easy to profit from foreign exchange differences.

"That's where the Securities Exchange Company comes in. I buy IRCs in Europe and redeem them in the United States, making a 400% profit," Ponzi brags.

"400% profit?" Gilberti wonders.

"Yes," Ponzi responds. "If you leave me $100 today, I'll convert it to Italian Liras or other European currencies and send it to my overseas agents."

"The agents," he continues, "will use the money to buy international reply coupons at the standard rate, redeem them at a higher rate in another country, reconvert the cash raised back to dollars, and send it back to me minus their commission."

He goes on to say, "When I receive it, I'll refund your $100 investment plus $50 in interest, and I'll keep the rest. The entire process takes 90 days."

Gilberti finds Ponzi's proposal appealing. He has $2,000 in his pockets he intends to deposit into his bank account, and he is debating whether or not to leave it with Ponzi. However, just as he is about to reach for it and hand it to him, a sixth sense asks him not to.

"Sorry," says Gilberti, "I'll not take it this time."

Ponzi is disappointed, but since he doesn't want to lose his first customer, he entices Giberti with the prospect of working as an agent. He has been to Giberti's shop many times and believes the large number of customers he serves daily holds a lot of promise.

"What will be my role as an agent?" asks Gilberti.

"It's simple. You tell your customers, family, and friends about the Securities Exchange Company and collect their investment on my behalf. I'll give you 10% of whatever you bring in," Ponzi responds.

Gilberti agrees, and Ponzi gives him a 15-minute lesson on selling psychology.

"Your success in selling Ponzi notes will depend on your understanding of human nature," says Ponzi.

He tells Gilberti that his first objective is to get people to have confidence in the concept.

"Ponzi notes are a great product, so you shouldn't pressure anyone to buy," he explains. "Any attempt to force them on a potential investor will create suspicion rather than confidence."

"How can I create confidence," asks Gilberti.

Ponzi replies: "By convincing them that their funds will be invested in a highly profitable activity that is taking place at the background. In this case, it is the international reply coupons,. People will not give you their hard-earned cash if they don't know where it is going."

"How can I explain it if I don't understand it myself?" asks Gilberti.

"They don't have to - The more complicated, the better. All investors need to know is that something is happening that generating a lot of profit. At the moment, anything to do with foreign exchange trade attracts more interest than gold, so don't forget to mention foreign exchange earnings in your explanation."

"Once you have created confidence," he continues, "the 50% interest proposition will do the rest."

"Why do you say so?" asks Gilberti.

Ponzi responds: "Because we are all gamblers. We all crave easy money. If we didn't, no get-rich-quick-scheme could be successful. While some may consider the 50% offer unsound as an investment, it is tremendously appealing as a gamble."

By the first week of January 2020, two weeks after his meeting with Ponzi, Ettori Gilberti has recruited 18 investors for $1,770.

Many thoughts run through Ponzi's mind as Gilberti sets the dollar bills on his desk and hands him a sheet of paper with the names of the 18 contributors.

Ponzi is ecstatic, but reality hits him only after Gilberti leaves. If he pays 50% interest on the $1,770 Gilberti has collected, his 18 investors expect $2,478 after 90 days. Where will the extra $708 come from?

He didn't expect things to move so quickly, so he hasn't had time to consider how he is going to obtain the international reply coupons from Europe. Obtaining $1,000 in coupons from across the Atlantic would be a logistical nightmare, with no guarantee that he would be able to redeem them or that there would be sufficient demand for them.

He knows he will find a solution to this dilemma someday, but it will take time. For the time being, he focuses on attracting more investors so that when the initial investors' payments are due, he will have enough money to pay them.

He figures out that shortening the time it takes to pay investors will make his wheel of fortune spin faster, so he promises to pay investors 50% interest in 45 days.

In mid-February, he pays $2,478 to Gilberti's 18 investors (the $1,770 they invested plus 50% interest). They're all so happy that they decide to reinvest it all.