From The Desk Of:
Port Elizabeth, South Africa
"What it is and where it comes from."
Charles Ponzi was born on March 3, 1882 in Lugo, Italy - and died on January 18, 1949. According to what is known of him, he came from a very well-to-do Italian family.
After he arrived in Boston in 1903, he survived by doing odd-jobs around the East Coast - later becoming a dish-washer at a restaurant from which he was eventually fired.
In 1907, he moved to Montreal, Canada, where he found a job at a bank named "Banco Zarossi," where he got the initial idea for his scam.
How it works
Unlike chain letters, a Ponzi scheme has nothing to do with a pyramid - yet is still one of the most famous "pyramid schemes."
Basically, the initiator of the scheme (let's call him "John"), promises his "investors" interest of up to 50% within 45 days; or 100% within 90 days from their "investment."
When John finds his second "investor," he takes some of the money from him (or her) and pays it to the first. When he finds his third "investor," he takes money from their investment and gives it to the second - and so on.
The problem is that if he cannot find a fourth "investor," there will be no money to give to the third and the scheme could collapse.
Legal Ponzi schemes?
Ponzi first saw that banks operate in exactly the same way. At no time will all the investors of the bank walk in and withdraw all of their money... If you think about it, where do banks get the interest with which they pay their investors? The answer is: other people's money! However, they safe-guard themselves by offering much smaller returns than Ponzi did.
When people stop investing in a bank, do you think it will collapse?
I'll leave the answer up to you...