Creation of the Ponzi scheme
Whilst in America, Charles got the idea of a Ponzi scheme when he received an international reply coupon (IRC) in the mail. Upon doing research about the coupons, Charles discovered a loophole in the system. There was a discrepancy in the IRC pricing as postage was priced in the country of purchase which could be exchanged for stamps to cover the cost of postage in the country where the IRC was redeemed. This difference in pricing created a profit opportunity. In particular, due to inflation the cost of postage in Italy had drastically decreased after World War I when expressed in U.S. dollars. This meant that an IRC purchased in Italy could be exchanged for U.S. stamps of higher value which could later be sold at a profit.
Charles quit his job to begin his new business exploiting the loophole with the IRCs. He would purchase IRCs in Italy, then exchange them for more stamps that could be sold at a higher value in America. By doing this, Charles was able to make profits of 400%. Although it was a great idea, he did not have enough capital to purchase as many IRCs as he would have liked. This is when he began looking for investors and offering a 50% return on their investment after a 45 day period. This was the beginning of the scheme that would take America by storm.
To further legitimize his business, Charles started the Securities Exchange Company in 1920. The Ponzi scheme grew in popularity and soon Charles was receiving millions in investment. He began to use the new investors money to pay the old investors. The monies invested into the company were held at the Hanover Trust Bank of Boston. People sold their homes to invest into the Ponzi scheme and most did not take their returns and chose to reinvest them back into the company.
The Ponzi scheme made Charles extremely rich. At one point he was reported as making over $250,000 a day. He was able to live the luxurious life he had envisioned all those years ago as a small boy in Italy. Charles was able to buy a large mansion in Lexington, Massachusetts and drove luxury vehicles. He also purchased other companies so as to utilize the profits from those to pay his investors their promised returns.
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