In Jan 2009, Larry DeWitt of the Social Security Administration Historian's Office wrote a "Research Note" called
"Ponzi Schemes vs. Social Security." DeWitt includes a prissy brusk history of what Charles Ponzi truly did.
"Charles Ponzi was a Boston investor broker who inwards the early on months of 1920 was momentarily famous equally a purveyor of unusual postal coupons who promised fabulous rates of furnish for his investors. Ponzi issued bonds which offered 50% involvement inwards 45 days, or a 100% net turn a profit if held for xc days....
Ponzi opened his company, "The Securities Exchange Company," at 27 School Street inwards Boston the 24-hour interval after Christmas 1919. He was penniless at the fourth dimension in addition to had to borrow $200 from a slice of furniture dealer inwards social club to furnish his novel office. Within days he was collecting coin from his initial rounds of investors. He in addition to then expanded the circle of investors yesteryear collecting coin from a larger circular of investors. When the bonds of the root investors came due he paid them, alongside their miraculous profit, using the coin collected from the 2nd circular of investors. The tidings of these extraordinary profits swept upwards in addition to downwardly the due east coast in addition to thousands of investors flocked to Ponzi's component subdivision for an chance to laissez passer on him their money. Using the coin from this novel surge of investors he paid off the side yesteryear side circular of bonds equally they came due, alongside their total profit, which excited fifty-fifty to a greater extent than frenzy. ...
Ponzi started his scheme on Dec 26th. Precisely 7 months later, on July 26th, at the insistence of the Massachusetts District Attorney, Ponzi quit accepting deposits from novel investors. It was estimated that Ponzi had been taking inwards $200,000 a 24-hour interval of novel investments prior to the halt. At that indicate he had already collected almost $10,000,000 from close 10,000 investors. As give-and-take got out close his legal troubles, worried investors swarmed his office. Ponzi confidently greeted them in addition to assured them all was well. ...
From July 26th until he was jailed on August 13th, Ponzi kept upwards this practice, appearing at the component subdivision each 24-hour interval in addition to redeeming bonds from worried investors. During this fourth dimension he truly redeemed $5,000,000 of his bonds inwards a futile travail to convince the government that he was on the upwards in addition to up. At his bankruptcy trial, it was discovered that Ponzi notwithstanding had bonds outstanding inwards the amount of $7,000,000 in addition to total assets of close $2,000,000. Indeed, the seemingly lucky investors who redeemed their bonds after July 26th had to furnish their windfalls to the bankruptcy courtroom to live distributed amidst Ponzi's larger circle of creditors. Ultimately, after close 7 years of litigation, Ponzi's disillusioned investors got dorsum 37 cents on the dollar of their principal, with, of course, no whiff of whatever profits from the nation's root in addition to most notorious Ponzi scheme."
How does Ponzi's organization differ from the Social Security system? As DeWitt points out, the U.S. of America Social Security scheme is a transfer computer programme betwixt generations, from those inwards working historic stream to those inwards retirement, non a pyramid scheme that relies on attracting continually increasing numbers of "investors" to pay off those who invested earlier. DeWitt writes:
"If the demographics of the population were stable, in addition to then a pay-as-you-go [Social Security] scheme would non stimulate got demographically-driven financing ups in addition to downs in addition to no thoughtful someone would live tempted to compare it to a Ponzi arrangement. However, since population demographics tend to ascension in addition to fall, the residual inwards pay-as-you-go systems tends to ascension in addition to autumn equally well. During periods when to a greater extent than novel participants are entering the scheme than are receiving benefits at that topographic point tends to live a surplus inwards funding (as inwards the early on years of Social Security). During periods when beneficiaries are growing faster than novel entrants (as volition hap when the infant boomers retire), at that topographic point tends to live a deficit. This vulnerability to demographic ups in addition to downs is 1 of the problems alongside pay-as-you-go financing. But this occupation has zip to create alongside Ponzi schemes, or whatever other fraudulent bird of financing, it is exactly the nature of pay-as-you-go systems....The root modern social insurance computer programme began inwards Federal Republic of Federal Republic of Germany inwards 1889 in addition to has been inwards continuous performance for to a greater extent than than 100 years. The American Social Security scheme has been inwards continuous successful performance since 1935. Charles Ponzi's scheme lasted barely 200 days."
Thanks to David Henderson at EconLog
for the pointer.