Who Was Ponzi & What Was His Scheme?

What is a Ponzi scheme? And why does it bear this name? First, you need to know a little bit about its namesake, Charles Ponzi.

Anyone can work a simple swindle, but you have to be a special kind of con man to have your name become synonymous with "fraud." Ponzi pulled it off, though. After arriving in the U.S. from Italy in 1903, Ponzi knocked around in a variety of unskilled jobs that usually ended when he got into trouble for theft or cheating customers. A few years later, he moved to Canada, where he spent a hitch in prison for passing a forged check. When he eventually drifted back down to the U.S., he needed a way to make some quick cash.

Making Money via Mail

Ponzi eventually found his way to get rich quick using a vagary of the postal system. At the time, it was common for letters abroad to include an international reply coupon "“ a voucher that could be exchanged for minimum postage back to the country from which the letter was sent. Thus, if you sent your buddy in France a letter, you could include a coupon so he could respond. (This practice still exists but is less common.) As exchange and postal rates fluctuated, though, there was an opportunity to make a profit. You only had to purchase postal reply coupons cheaply in some foreign country, send them back to the U.S. to swap them out for American stamps of a higher value, then sell these stamps. This arrangement was perfectly legal; it was just cleverly gaming the system. Ponzi started buying and selling postal reply coupons using agents in his native Italy, and he was making a good living doing it.

Unfortunately, whatever defect made Ponzi steal from his employers and pass bad checks prompted him to get greedy here, too. He started to recruit investors into his system with the promise of 50% returns in just a few days. Investors would pay their cash in, and sure enough, Ponzi would get them the promised return. Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for this foolproof investment strategy.

Ponzi was pocketing millions, and he enjoyed a sumptuous life outside of Boston. At his peak, Ponzi was raking in $250,000 a day, which enabled him to collect such necessities as gold-handled canes. He became a celebrity investor, almost like the Warren Buffett of his day.

The Scheme

Why is it hard to think of Ponzi's name without affixing "scheme" to the end of it, then? Ponzi's underlying "business" — the arbitrage on the postal coupons — wasn't actually as sound as he claimed. In fact, there wasn't even really a business. However, since so much money was flowing in from new investors, he could just pay off the returns for the old ones from the new cash. In fact, Ponzi didn't even need to pay off the old investors, since many of them wanted to reinvest their returns in this wonderful business. Ponzi's charms made it easy for him to placate any worried customers, and his con looked unstoppable.

Fuzzy Math

Eventually, though, smarter financial heads started looking at Ponzi's business. Clarence Barron, owner of the Wall Street Journal and founder of the financial magazine that bears his name, realized Ponzi must have been a huckster and went on the offensive. While Barron conceded that there probably was a way for a person to make a small amount of quick cash on the postal reply coupon scheme, he figured that Ponzi would have to be moving 160 million coupons around to raise the cash he needed to support the business. Since there were only 27,000 postal reply coupons circulating in the world, Ponzi's story didn't check out. (Things only got worse when the Postal Service reported that there wasn't a huge flow of the coupons from one country to the other.)

On top of that, Barron noted that Ponzi told newspapers he invested his own cash in real estate, stocks, and bonds like any normal investor. Barron pointed out the obvious question here: if Ponzi had this failsafe scheme in which he could make a 50% profit, why was he putting his own money into plain old investment instruments that would give him (maybe) a 5% return? Those certainly didn't sound like the actions of a financial genius.

Barron's conclusions ran as front-page news in the Boston Post in July 1920, which would have been damning for most cons. Ponzi was such a charismatic force of nature, though, that many people chose not to believe the paper's report. Few believed that their hero, the man who had "tripled" their life savings, was anything less than 100% legitimate. In fact, the morning that the Post ran Barron's report, investors lined up around the block outside of his office in an attempt to give him more money "“ even after they'd been told that they'd been scammed. Ponzi later boasted that he'd taken in a million dollars in new investments the day the report ran.

The Unraveling

Things were starting to look less rosy for the scammer, though. Although he'd largely placated his investors after Barron's report, Ponzi must have realized his window of opportunity was closing. He hired a publicist, William McMasters, but the PR man saw through Ponzi's lies and renounced his client in the press. James Walsh reprints part of McMasters' slam of Ponzi in his book, You Can't Cheat An Honest Man. Of Ponzi, McMasters said, "The man is a financial idiot. He can hardly add"¦He sits with his feet on the desk smoking expensive cigars in a diamond holder and talking complete gibberish about postal coupons."

The next month, regulators raided Ponzi's office and discovered that he didn't have a huge quantity of postal reply coupons. Since Ponzi had used the mail to notify his marks of how their "investments" were performing, he faced serious mail fraud charges; in total, the government brought 86 charges against him in two separate indictments. Ponzi pled guilty to one of these charges in exchange for a light sentence of five years.

He served around three and a half years, then got his release to face state charges, for which he received a sentence of nine more years. But before he could go back to jail, he jumped bail and tried to start new scams in Florida and Texas. (You'd think the government would have learned their lesson about trusting this guy.) Eventually, though, his time on the lam ran out, and he served his whole sentence.

Upon his release, Ponzi was deported to Italy and spent the rest of his life in poverty before dying in 1949 in Rio de Janeiro, where he's buried in a pauper's grave.

Where Did the Term Brownie Points Come From?

bhofack2/iStock via Getty Images
bhofack2/iStock via Getty Images

In a Los Angeles Times column published on March 15, 1951, writer Marvin Miles observed a peculiar phrase spreading throughout his circle of friends and the social scene at large. While standing in an elevator, he overheard the man next to him lamenting “lost brownie points.” Later, in a bar, a friend of Miles's who had stayed out too late said he would never “catch up” on his brownie points.

Miles was perplexed. “What esoteric cult was this that immersed men in pixie mathematics?” he wrote. It was, his colleagues explained, a way of keeping “score” with their spouses, of tallying the goodwill they had accrued with the “little woman.”

Over the decades, the phrase brownie points has become synonymous with currying favor, often with authority figures such as teachers or employers. So where exactly did the term come from, and what happens when you “earn” them?

The most pervasive explanation is that the phrase originated with the Brownies, a subsect of the Girl Scouts who were encouraged to perform good deeds in their communities. The Brownies were often too young to be official Girl Scouts and were sometimes the siblings of older members. Originally called Rosebuds in the UK, they were renamed Brownies when the first troops were being organized in 1916. Sir Robert Baden-Powell, who had formed the Boy Scouts and was asked to name this new Girl Scout division, dubbed them Brownies after the magical creatures of Scottish folklore that materialized to selflessly help with household chores.

But the Brownies are not the only potential source. In the 1930s, kids who signed up to deliver magazines like The Saturday Evening Post and Ladies' Home Journal from Curtis Publishing were eligible for vouchers labeled greenies and brownies that they could redeem for merchandise. They were not explicitly dubbed brownie points, but it’s not hard to imagine kids applying a points system to the brownies they earned.

The term could also have been the result of wartime rationing in the 1940s, where red and brown ration points could be redeemed for meats.

The phrase didn’t really seem to pick up steam until Miles's column was published. In this context, the married men speaking to Miles believed brownie points could be collected by husbands who remembered birthdays and anniversaries, stopped to pick up the dry cleaning, mailed letters, and didn’t spend long nights in pubs speaking to newspaper columnists. The goal, these husbands explained, was never to get ahead; they merely wanted to be considered somewhat respectable in the eyes of their wives.

Later, possibly as a result of its usage in print, grade school students took the phrase to mean an unnecessary devotion to teachers in order to win them over. At a family and faculty meeting at Leon High in Tallahassee, Florida, in 1956, earning brownie points was said to be a serious problem. Also called apple polishing, it prompted other students in class to shame their peers for being friendly to teachers. As a result, some were “reluctant to be civil” for fear they would be harassed for sucking up.

In the decades since that time, the idiom has become attached to any act where goodwill can be expected in return, particularly if it’s from someone in a position to reward the act with good grades or a promotion. As for Miles: the columnist declared his understanding of brownie points came only after a long night of investigation. Arriving home late, he said, rendered him “pointless.”

Have you got a Big Question you'd like us to answer? If so, let us know by emailing us at bigquestions@mentalfloss.com.

Grocery Stores vs. Supermarkets: What’s the Difference?

gpointstudio/iStock via Getty Images
gpointstudio/iStock via Getty Images

These days, people across the country are constantly engaging in regional term debates like soda versus pop and fireflies versus lightning bugs. Since these inconsistencies are so common, you might have thought the only difference between a grocery store and a supermarket was whether the person who mentioned one was from Ohio or Texas. In reality, there are distinctions between the stores themselves.

To start, grocery stores have been around for much longer than supermarkets. Back when every town had a bakery, a butcher shop, a greengrocery, and more, the grocery store offered townspeople an efficient shopping experience with myriad food products in one place. John Stranger, vice president group supervisor of the food-related creative agency EvansHardy+Young, explained to Reader’s Digest that the grocer would usually collect the goods for the patron, too. This process might sound familiar if you’ve watched old films or television shows, in which characters often just hand over their shopping lists to the person behind the counter. While our grocery store runs may not be quite so personal today, the contents of grocery stores remain relatively similar: Food, drinks, and some household products.

Supermarkets, on the other hand, have taken the idea of a one-stop shop to another level, carrying a much more expansive array of foodstuffs as well as home goods, clothing, baby products, and even appliances. This is where it gets a little tricky—because supermarkets carry many of the same products as superstores, the next biggest fish in the food store chain, which are also sometimes referred to as hypermarkets.

According to The Houston Chronicle, supermarkets and superstores both order inventory in bulk and usually belong to large chains, whereas grocery stores order products on an as-needed basis and are often independently owned. Superstores, however, are significantly larger than either grocery stores or supermarkets, and they typically look more like warehouses. It’s not an exact science, and some people might have conflicting opinions about how to categorize specific stores. For example, Walmart has a line of Walmart Neighborhood Markets, which its website describes as “smaller-footprint option[s] for communities in need of a pharmacy, affordable groceries, and merchandise.” They’re not independently owned, but they do sound like grocery stores, especially compared to Walmart’s everything-under-the-sun superstore model.

Knowing the correct store terms might not always matter in casual conversation, but it could affect your credit card rewards earnings. American Express, for example, offers additional rewards on supermarket purchases, and it has a specific list of stores that qualify as supermarkets, including Gristedes, Shoprite, Stop & Shop, and Whole Foods. Target and Walmart, on the other hand, are both considered superstores, so you won’t earn bonuses on those purchases.

And, since grocery shopping at any type of store can sometimes seem like a competitive sport, here’s the ideal time to go.

Have you got a Big Question you'd like us to answer? If so, let us know by emailing us at bigquestions@mentalfloss.com.

SECTIONS

arrow
LIVE SMARTER